AID's incomplete trial : reconsidering the aid-growth paradigm in the macro aid effectiveness literature

The Macroeconomic Aid Effectiveness Literature (Macro AEL) has had a resounding effect both within the academic community and within the policy arena where its policy recommendations carry substantial weight. Although the empirical aspect of this literature has received substantial scrutiny, the fundamental practice of assessing the effectiveness of aid by measurement against its impact on macroeconomic growth, referred to here as the Aid-Growth Paradigm, has escaped a similar fate. Consequently this paper will focus on an analysis of the theoretical foundations upon which the empirically dominated Aid-Growth Paradigm is constructed and show that the lack of consensus that plagues the Macro-AEL could be a symptom of the underlying underdeveloped theoretical framework. Through an analysis of the theoretical growth models and the implicit assumptions on the causal channels connecting aid and growth this paper illustrates that the Aid-Growth Paradigm suffers from two correlated oversimplifications. The first is the implicit assumption that the only causal channel that connects aid to growth is simply and directly through consumption and investment and the second is the reduction of the purpose of aid, namely development, to the promotion of macroeconomic growth. A more comprehensive approach, Rigorous Impact Evaluation, is then outlined based on the shortcomings of the Aid-Growth Paradigm that will allow a more multidimensional and exhaustive evaluation of aid’s effectiveness.