New data, new doubts: revisiting “aid, policies, and growth”

The authors of this paper revisit and update the data used by Burnside and Dollar in 2000 to check whether their influential conclusion that aid promotes growth in countries with sound policies continues to be supported by more data now available.The authors differentiate their paper from others that test Burnside and Dollar's conclusions by NOT deviating from the Burnside-Dollar methodology. The main results of incorporating new data in the original methodology are:new data creates new doubts about the Burnside-Dollar (BD) conclusionby extending the sample forward to 1997 the authors find that aid no longer promotes growth in good policy environmentssimilarly when the authors expand the BD data by using the full set of data available over the original BD period, they no longer find that aid promotes growth in good policy environmentsthe findings regarding the fragility of the aid-policy-growth nexus are unaffected by excluding or including outliersThis paper reduces the confidence that one can have in the conclusion that aid promotes growth in countries with sound policies. The paper does not argue that aid is ineffective. Instead the authors argue that adding additional data to the BD study of aid effectiveness suggests that economists and policy makers should be less sanguine about concluding that foreign aid will boost growth in countries with good policies. The authors hope that the BD study be treated as a seminal paper that stimulates additional work on aid effectiveness, but not yet the final answer on this critical issue.Further research is needed to continue to explore pressing macroeconomic and microeconomic questions surrounding foreign aid, such as whether aid can lead to reforms in policies and institutions that in turn foster economic growth, whether some foreign aid delivery mechanisms work better than others, and what is the political economy of aid in both the donor and the recipient.