The $138.5 Billion Question: When Does Foreign Aid Work (and When Doesn’t It)?

This paper focuses on aid effectiveness. The paper considers peer-reviewed, cross-country, econometric studies, published over the last decade in order to propose areas with policy implications related to the conditions under which aid is more likely to be effective. The paper is intended for a nontechnical audience. We discuss the nature of evidence on aid and why assessing its impact is so difficult. We attempt to make some global-level generalisations, with caveats, on when aid is most likely to work, as opposed to just whether aid works or not. We review aid’s impacts on economic growth and social development in general before focusing on conditions identified in the aid and growth literature under which aid is more likely to be effective. We suggest that there are four broad areas where the evidence reviewed shows signs of convergence that have direct relevance for policy decisions on aid effectiveness. These areas are: (i) aid levels; (ii) domestic political institutions; (iii) aid composition, and (iv) aid volatility and fragmentation.