Donor policy rules and aid effectiveness

The present paper examines the macroeconomic impact of aid, by introducing endogenous aid allocations into a neoclassical growth framework. On this basis it is shown that donor policies can have important implications for the trajectory of recipients' GDP per capita. Depending on specific donor policy choices, aid disbursements may lead to faster transitional growth, stagnation or cyclical growth. Moreover, the analysis also suggests that donor policies may be part of the reason why foreign aid is not found to be uniformly effective in raising long-run productivity across recipients.