Foreign Aid and Growth

I. Aid has no Effect on Growth

One of the earliest papers that examined the impact of foreign aid on economic growth was Boone (1995). Boon used a neoclassical model, and his time frame was 4 samples of 5-year average from 1971-1990. He focused on the effect of policy on the effectiveness of aid by comparing three political regime scenarios in developing countries. The first scenario, was egalitarian regime where the government maximize welfare of a fixed group of citizens utility; the second, was elitist regime where the government maximize welfare to their fellow tribe members utility; and last, laissez-faire regime where the government maximize welfare of a small fraction of its citizens. He found that the model that best capture the effectiveness of foreign aid is the elitist regime. He found no impact of aid on growth in all different regimes. Concluded that this is because aid effects government consumption not investment, which will not result in elevating poverty in receiving countries. However, he found that a laissez-faire government has the lowest infant death rate. So that aid targeting laissez-faire government might be more efficient. More over, the study found that failure of aid to alleviate poverty is that poverty is not caused by a shortage of capital which aid provides.

In her controversial book ”Dead Aid”, Dambisa Moyo argues that aid is not only ineffective but also have disastrous outcome. Billions of dollars of development assistance to African countries over the past years have not succeeded to alleviate poverty and reach sustained growth levels. In fact these countries witnessed a rise in poverty and a slow growth. Comparing between African countries that rejected aid and grown such as Rwanda, South Af...

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