Explain why aid is expected to positively influence economic growth

1. Introduction
The success of the Marshall plan [officially the European Recovery program (ERP)] in improving economic conditions post World-War II in Western Europe gave birth to the idea that economic aid can improve conditions in developing and poor countries Hogan (1987). The rationale for expecting Aid to positively influence economic growth stemmed from the fact that aid was seen as an exogenous net increment to the capital stock of the recipient country. Inherent in this perception is the assumption that each dollar of aid will result in one dollar total savings and investment. However, aid to developing and low income countries have been fiercely criticised for not yielding the desired economic growth. Unlike its predecessor ERP which existed for only four years, after which the economy of every participating state had surpassed pre-war levels, aid has been in existence for more than three decades.

There is plenty of evidence of effectiveness of aid in many specific projects. But literatures reviews conducted on the macro-economic impact of aid covering the period up to the end of eighties tell a less optimistic story compared to microeconomic project evaluations. This has given rise to the macro-micro paradox.

The aim of this essay is to first, outline the pathways in which aid is understood to impact on growth, then discuss some of the prevalent reasons offered as explanations for disappointing results of aid and conclude.

2. Theoretical underpinnings of the aid and growth relationship
Aid is exists in a variety of forms and is given for various purposes. Therefore it can potentially impact on economic growth through a variety of complex channels. However, for the purposes of this essay I will focus on the impact of aid on selected macroeconomic variables namely; savings, investment and growth. This approach is in line with Hansen and Tarp (2000). In the first