Economic Growth

Does foreign aid have a positive effect on growth?

This article is published in collaboration with NBER Digest.
Indigenous Miskitos carry food aid distributed by the World Food Program in the village of Siksayari in Nicaragua, about 625 miles (1005.8 km) north of Managua, December 4,2005. The World Food Program is distributing food aid in indigenous communities after a plague of rats devoured their crops and food stores.

People carry food aids. Image: REUTERS/Antonio Aragon

Laurent Belsie
Economics Editor, The Christian Science Monitor
Share:
Our Impact
What's the World Economic Forum doing to accelerate action on Economic Growth?
The Big Picture
Explore and monitor how Economic Progress is affecting economies, industries and global issues
A hand holding a looking glass by a lake
Crowdsource Innovation
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:

New Growth Models

The effect of foreign aid on growth is the subject of ongoing debate. It is difficult to determine the effect of aid on growth when aid is an integral part of an economy; there are few "experiments" in the level of foreign aid.

Changes in aid and growth
Image: NBER

Sebastian Galiani, Stephen Knack, Lixin Colin Xu, and Ben Zou, the authors of The Effect of Aid on Growth: Evidence from a Quasi-Experiment(NBER Working Paper No. 22164), argue that there are points on a nation's growth trajectory at which aid inflows drop because of the rules donors use to select recipient countries. They use the substantial changes in aid around this point to evaluate how aid affects growth, and they conclude that aid has a substantial positive effect.

Since 1987, the World Bank's International Development Association (IDA) has defined income thresholds above which countries are generally deemed less needy than poor nations. Other large donors tend to follow the World Bank's lead, and they also reduce funding when nations reach the IDA income threshold. Recipient nations' foreign aid as a share of gross national income (GNI) falls an average 59 percent once they cross the threshold.

The researchers posit that if per capita gross domestic product (GDP) falls after aid is withdrawn, the decline can be used to infer the boost in GDP that the nations received while aid was still flowing in. For the 35 countries that crossed the IDA threshold between 1987 and 2010—a group that ranges from China to Peru and India to Turkmenistan—they calculate that a one percentage point increase in the ratio of aid to GNI is associated with an increase of about 0.35 percentage points in per capita GDP. They are careful to point out that this is a short-run effect, and that longer-run effects of aid on growth are difficult to measure.

Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Share:
World Economic Forum logo
Global Agenda

The Agenda Weekly

A weekly update of the most important issues driving the global agenda

Subscribe today

You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.

What can employers do to combat STEM talent shortages?

Timo Lehne

May 21, 2024

About Us

Events

Media

Partners & Members

  • Join Us

Language Editions

Privacy Policy & Terms of Service

© 2024 World Economic Forum