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The Macroeconomic Effects of Foreign Aid:
A Survey
Philipp Harms and Matthias Lutz
September 2004 Discussion Paper no. 2004-11
Department of Economics University of St. Gallen
Editor: Prof. Jörg Baumberger
University of St. Gallen
Department of Economics
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an der Universität St. Gallen
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The Macroeconomic Effects of Foreign Aid:
A Survey*
Philipp Harms
Matthias Lutz
Authors’ addresses: Philipp Harms Matthias Lutz
Study Center Gerzensee Institute of Economics
. Box 21 Bodanstrasse 1
3115 Gerzensee 9000 St. Gallen
Switzerland Switzerland
Tel.: +41 31 780 31 08 Tel.: +41 71 224 2303
Fax: +41 31 780 31 00 Fax: +41 71 224 2874
Email: philipp.******@ Email: matthias.******@
Abstract
Research on the macroeconomic effects of aid has expanded rapidly in recent years. In
this paper, we provide a survey of this literature. We start by reviewing some theoreti-
cal models that suggest a positive impact of aid on investment and growth. We then
discuss the empirical evidence, giving particular attention to the role of institutions and
policies in determining aid effectiveness. As a general conclusion, we suggest adopting
a more disaggregate perspective with respect both to different types of aid and to vari-
ous aspects of governance.
Keywords
foreign aid, economic growth, institutions, governance
JEL Classifications
F35, F43, O16, O19
1. Introduction
Foreign aid flows from DAC countries to the developing world stagnated during the 1990s,
reaching a low point in 1997 at $48