Rethinking Foreign Aid

Document Type


Publication Date

Fall 2002


Recent years have witnessed escalating criticism of the industrialized world for declining levels of foreign aid, especially the official development assistance (ODA) that is expressly supposed to facilitate prosperity in the developing world. Criticism of the alleged foreign aid shortfall is striking because critics fail to ask a more profound question: Do ODA and other forms of transfers to poor nations actually help them prosper? The increasingly loud controversy over inadequate “foreign aid,” in turn, hinges on whether it is effective in reducing poverty compared to other things rich and poor countries might do to achieve that aim.

This paper details the substantial changes that have occurred during the past 30 years in trade and aid patterns between the developed and developing worlds. It then provides a statistical analysis of the effects of foreign aid on growth compared to the effects of foreign trade, market-friendly policies, and other considerations. It also augments the findings of the body of economic literature known as “new growth theory” by testing whether its results are robust when developing countries are examined alone. Finally, in light of the findings, it reassesses the relative contribution to development of the Western European nations, the United States, and Japan.

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