Aid Effectiveness on Accumulation

The AEL (aid effectiveness literature) studies the macroeconomic effect of development aid using cross-country or panel data econometrics. It contains about 100 papers of which 43 study whether development aid increases accumulation in the recipient country. Taking all 43 aid-accumulation studies together, the results show that aid has a small insignificant positive effect on investment, and a (fairly) small significant negative effect on domestic savings. The aggregate result is thus an unclear effect on accumulation, but with regional differences. When only studies of Latin American or Asian economies are considered, a small positive and statistically significant investment effect is found, together with a small negative effect on domestic savings. We conclude that in Asia and Latin America, aid is a substitute to domestic savings, but has a net positive impact on investment