New IMF research on aid and growth

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IMF Chief Economist Raghuram Rajan and Arvind Subramanian, IMF Head of Macroeconomic Studies, just released a working paper returning to the contentious question of whether or not aid leads to growth. Entitled Aid and Growth: What Does the Cross-Country Evidence Really Show?, the paper finds no robust evidence linking the two. Additionally, the authors challenge the Burnside and Dollar claim that aid works best in good policy environments.

" We find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings, which relate to the past, do not imply that aid cannot be beneficial in the future. But they do suggest that for aid to be effective in the future, the aid apparatus will have to be rethought.."

An article from yesterday’s Financial Times points out that the timing of the release of the papers - just a week before the G8 summit - serves as a reminder that increasing dollar amounts alone will not save Africa. A reconfiguration of aid modalities must occur in order for dollar flows to be an effective tool for poverty alleviation.

Readers interested in the subject should check out the Rapid Response page or reading list on aid effectiveness.

Finally, Carol Adelman has just released a new paper examining U.S. bilateral aid policies.

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