Aid and growth regressions

This paper examines the relationship between foreign aid and growth in real GDP per capita as it emerges from simple augmentations of popular cross-co untry growth specifications. It is shown that aid in all likelihood increas es the growth rate, and this result is not conditional on 'good' policy. Th ere are, however, decreasing returns to aid, and the estimated effectivenes s of aid is highly sensitive to the choice of estimator and the set of cont rol variables. When investment and human capital are controlled for, no pos itive effect of aid is found. Yet, aid continues to impact on growth via in vestment. We conclude by stressing the need for more theoretical work befor e this kind of cross-country regression is used for policy purposes. (C) 20 01 Elsevier Science B.V. All rights reserved.