I promise that this is the last time we discuss this topic. I simply could not resist sharing the latest paper with you that provides the sort of empirical evidence that was appallingly absent from Dead Aid. As my review indicated, there are many papers (not all) that shows aid can cause long term growth (and none that says aid causes poverty). The latest IMF paper (May 2009) is the case in point - key conclusions :
In this paper, we re-estimated the causal relationship between aid and growth in a large cross section of aid recipients, allowing for different kinds of aid to have distinct effects on growth. We attempted to disentangle the effects of two components of aid: a developmental component consisting of expenditures that could reasonably be anticipated to promote growth (DA), and a non-developmental component consisting of other expenditures (NDA). While we cannot directly measure DA due to data limitations, we construct proxies for it representing total bilateral aid from donor countries which are reputed to have development oriented programs or rank high according to formal aid quality indices. Our specifications allow for the effect of aid on economic growth to appear after long time-lags (possibly involving several decades).We found that DA––as opposed to NDA––has a positive and robust effect on subsequent growth. The coefficient estimates show a sizable marginal impact: in cross-country regressions, an increase in average bilateral aid from Scandinavian countries by 1 percentage point of GDP over 1960–90 is associated with average per capita GDP growth rates in the 1990s that are higher by 1.2–1.3 percentage points. The effect is slightly smaller when bilateral aid from a larger number of donor countries is used as a proxy for DA. Panel regressions confirm the cross-sectional results: an increase in average bilateral aid from countries ranking highest according to the Aid Commitment to Development Index (CDI) of 1 percentage point of GDP is associated with average per capita GDP growth 15 years later that is higher by 0.2 percentage points. The deep lags considered in our specifications suggest that DA’s causal impact operates over several decades. This result is consistent with the view that DA may support investments in physical infrastructure, organizational development, and human capabilities, which bear fruit only over long periods.Notwithstanding concerns about donor luck and skill in selecting recipient countries, the robust results uncovered here give rise to important policy implications. First, our findings help counter claims that aid is inherently ineffective and aid budgets should be reduced. On the contrary, an increase in aid and a change in its composition in favor of developmental aid are likely to create sizable returns in the long run. Further, by showing that donor characteristics may matter for aid effectiveness, the study calls into question the trend towards greater aid selectivity based on an exclusive focus on recipient countries’ characteristics (such as institutional characteristics and macroeconomic policies). At a minimum, the quality of the donor-recipient match may matter for aid effectiveness. More substantially, donor characteristics (and in particular, donor motives) may―through their effects on the nature of aid disbursed―have an effect on aid effectiveness which is independent of recipient characteristics (Kilby and Dreher, 2009).Our finding that aid from specific donors promotes economic growth while aid from other donors does not raises an important question: What is it that makes aid from certain donors work? Data on sectoral allocations of aid at the donor-recipient level is incomplete and cannot serve as a basis for a conclusive analysis. For this reason, we remain agnostic as to the mechanisms which make aid from certain donors more growth-promoting than aid from others. For example, it could be argued that effective donors have more efficient administrations, face lower overhead costs, or are less bureaucratic so that more of each dollar of aid reaches the intended recipients (Easterly and Pfutze, 2008). A second possibility is that certain donors spend their resources better, by choosing priorities well and developing productive relationships with partners in the receipient country which ensure that official development assistance functions as intended. A third possibility is that aid from donors free of strategic preoccupations is more likely to facilitate politically costly, but growth enhancing economic reforms (Bearce and Tirone, 2008). According to this argument, the aid growth causal mechanism breaks down when the strategic benefits associated with providing aid are large for the donor government, as it cannot credibly enforce its conditions for desirable economic reforms in the recipient countries.Despite a substantial aid effectiveness literature, we still know little about what makes some types of aid more growth promoting than others. Our analysis points to the need for further research aimed at identifying the growth effects of distinct categories of aid over relevant time periods and better understanding the strategies of the most effective donors, so as to isolate the channels through which development aid works.