Aid Effectiveness, Governance and Public Investment

To analyze ways in which aid can be made more effective, we develop a growth model in which aid finances infrastructure investment and pro-poor spending. We assume that the recipient countries are aid-dependent in the early phase of development and ultimately become independent. In the model, donors can accelerate the independence of a recipient from aid by investing in infrastructure. We demonstrate that even a small increase in aid can improve aid effectiveness and that aid effectiveness depends more on growth rates than on the efficiency of government. This paper also evaluates Japan's aid, which has strength in economic infrastructure.