Aid policies and growth: in search of the holy grail

TLDR

The paper examines the hypothesis that aid effectiveness is linked to “good policies”, a concept the authors support but note limited empirical support when “good policies” are defined as free‑market reforms. The study aims to test whether directing aid toward countries with good policies maximizes its impact. The authors analyze a simultaneous system of equations, treating growth as one of several interrelated variables. Results show that while good policies stimulate growth, they do not enhance aid effectiveness, and the interaction with macroeconomic variables suggests the need to broaden the definition of good policies. © 2001 John Wiley & Sons, Ltd.

Abstract

Abstract In this paper we consider the hypothesis that aid effectiveness can be linked to ‘good policies’ and thus that aid, if it is to have maximum impact, should be directed at countries following good policies. This is an idea which we have considerable sympathy with in principle and have built upon in the past. Indeed at one level it is almost a truism and yet in practice we find little empirical evidence in support of it when we restrict good policies to mean free market policies. ‘Good policies’ appear to matter in stimulating growth, but they do not appear to impact on aid effectiveness. Unlike much of other recent work the analysis is of a simultaneous system of equations of which growth is just one. The results suggest a complex interaction between macroeconomic variables and good policies, but it also suggests the need to widen our definition of good policies to increase both the theoretical and empirical relevance of the hypothesis. Copyright © 2001 John Wiley & Sons, Ltd.