Are There Negative Returns to Aid?

Abstract

The World Bank report Assessing Aid assumes that aid is more effective when it is given to countries where polices are sound. Moreover, it assumes that an inflow of aid, above a certain level, starts to have negative effects. In this paper we empirically test both assumptions. We do not find evidence for the fact that aid becomes more effective when it is given to countries with good policies. On the other hand, we find some evidence for negative returns to aid at high levels of aid inflows. However, the results are sensitive to the countries considered as well as the exact specification. Moreover, the turning point above which aid starts to have a negative effect on growth seems to be much higher than assumed in the background calculations for Assessing Aid