Does foreign aid help

Recently, Sachs et al. (2004) have argued in favor of a massive increase in foreign aid to Africa in order to escape from a supposed poverty trap. They propose to increase the capital stock in one step, through a large, well-targeted infusion of foreign assistance.1 In their proposal “the flow of aid is targeted to a particular set of investments, and specifically public sector investments, so that the aid cannot be used for consumption ” (pp. 144–45). This large amount of aid should be given in the form of grants rather than loans. They believe that such a commitment can be enforced through “improved monitoring of budget processes and expenditures, perhaps with the help of local nongovernmental organizations ” (p. 145). “Un-constrained aid flows would probably be consumed rather than in-vested. The strategy needs to be designed to ensure that the aid is properly invested, and there must be a credible mechanism for en-forcing the strategy over a relatively long period ” (p. 146). However, the empirical evidence on the effectiveness of foreign aid is discouraging. Recent literature on the topic provides ambiguous results on whether foreign aid helps or hinders developing countries. Foreign aid, however, may affect economic growth through indirec