How sustainable is the macroeconomic impact of foreign aid?

This paper examines how long the impact of foreign aid on growth lasts in recipient countries. An econometric technique is adopted which recognises that the impact of aid in the current year is a function not just of the current aid received but also of the aid received in previous years. Results indicate that foreign aid has a half-life of two years. In other words, half of the total impact of aid on growth is experienced within two years of its disbursement. Aid loans are found to have longer half-lives than their grant counterparts. Policy implications are discussed.