Aid Effectiveness : Can Aid Agencies Be Smarter Than the Invisible Hand?

Abstract

Private financial flows such as foreign direct investment seem toencourage economic growth and relieve poverty in part because theycreate excellent incentives for transferring know-how and in partbecause they are subject to a stern market test that ensures they areallocated and monitored carefully. For aid flows, not automaticallysubject to these disciplines, it is difficult to be as effective. ThisNote argues that aid agencies, by learning what makes private flowsso effective, can bring better aid to the poorest.