Evaluation of the impact of foreign aid on growth and development

Abstract

Foreign aid is publicly motivated by a moral obligation to help the poor and develop underdeveloped countries. Donors have invested more than US$2.3 trillion in foreign aid, but despite this significant investment, 3 billion people are still living on less than $2 a day, 840 million are hungry, 10 million children die from preventable disease, and 1 billion adults are illiterate. This study focuses on the impact of foreign aid on economic growth and development of underdeveloped countries. It was found that many variables influence growth and development and that cross-country regression analysis is an inappropriate method to measure the effectiveness of aid. The methodology is too generalist, and treats foreign aid as a homogenous entity that works equally in all countries in all types of environment and across all times. There is an urgent need to develop a new methodology for measuring the effectiveness of foreign aid.