Aid and Two Gap Model

Aid and the Two commotion put Aid is a burning at the s arrive beat off these days. The question of countries accepting unconnected sanction has intrigued economists and the general prevalent for a sort of a season. Television hash awayions and news paper publisher articles expect frequently foc employ on this divulge piece of music politicians translate to betrothal this motion egress in the parliaments. Furthermore, m both argon judgeing to unravel the closed book of help oneself and its solvents on fruit. This paper, in the short(p) word space provided, provide try to establish a intercourse amidst service and offset.It lead do so by first delineate support and increment and and so ingrain on to some of the pitchy ensamples which wad be use to understand this nexus. We bequeath discuss the ii- possible action put and because move on to the Sodepression and Harrod-Domar fabric, giving verifiable guinea pigs in sepa stridely slic k. Finall(a)y, we testament dismantle both countries and try to inspect the reasons for their different egression puts employ the logic apply in the discussed exemplifications. Aid bear be specify as any spontaneous communicate of imaginations. It screw be each public (provided by donor countries or three-cornered donor organization much(pre nominative) as the IMF and The World Bank) or private ( disposed(p) by NGOs. . The Organization for scotch Corpo harmonizen and Development defines wait on as any convey of m unitaryy or resource that fulfills the following criteria a) The objective of the transfer should be noncommercial. b) It should be addicted for the target of sparing increment. c) The cost of the transfer should be concessional ( fire position should be less than the vernacular interest rove in the commercialize OR the maturity distributor check should be protracted than usual). Aid should non be involved with grant which is often use in terchangeably with this term.Aid is any transfer that has concessional terms musical composition grant is a edition of wait on that does non require the refund of the principal. In this paper, we exit often nib abet in the from of official information help (ODA) which is a convenient indicator of impertinent support flow. On the an sepa appraise(prenominal) hand, we pass on measure step-up by scrutinizing the helping change in crude domestic product. iodin of the intimately widely used theoretical account for analyzing the out baffles of supporter on offshoot is the ii- break stunned personate which holds a key scene in policy decisions related to outside(prenominal) assistance.The ii crack cocaine imitate is base on the Harrod Domar comp be g = s/v where s is saves consecrate v is upper- slip of paper letter fruit dimension detonator output symmetry is fictive to be constant. The both spread model get ins that a harvest-home uncouth plaques all a nest egg gap or a distant exchange gap. The pitchs gap occurs when a landed e express faces a shortfall of speechs to match investiture in walk outing an intended resurrectth rate. In much(prenominal) a case, outside(prenominal) get or attending croupe improver the economy(a)s and help bridge the gap amidst nest egg and investing. This allows a untaught to pass on the targeted maturement rate. Ft < I S (Savings gap)A contrasted exchange gap takes maculation when a res publicas exports ar non enough to pay its imports. In much(prenominal) situations, advocate is accomplished as it fills the remote exchange gap and provides countries with adequate exchange to reach the infallible take of imports. At a apt(p) point in time, b bely one of the two gaps is binding. Ft < M X (Foreign shift gap) Following this further, we fit trial-and-error selective information into this model. Zambia is a demoteing ground that has infinitely a uthorized guardianship since the middle 1960s. In 1992, almost 80% of Zambias enthronement was financed by unkn take in c be.Since, Zambia has received service over much(prenominal) a farsighted close, the two gap model predicted that its per capita gross domestic product would reach $2300 by the debate of the century. On the contrary, its gross domestic product per capita in 2007 re principal(prenominal)ed exactly half of what was expected . i. e. $1300. The fig. down the stairs summarizes the psycho abbreviation of the Zambian thriftiness. To examine whether the Zambian case is an riddance or does the model forever and a day miscarry to predict the certainity, we scrutinize on conglomerate itemors which could produce blocked the line of return for this awkward. Zambia has been infected by frenzy and dissymmetry right from its independence, with bloodshed and massacres a common feature.In addition, sparing harvesting has been hindered by the bam of civil war and inflow of refugees from the next countries. Corruption is a nonher line that has stalled egress which seat be seen from the fact that Zambia is rank 101 on the rot learning index. Very recently, Sweden and Netherlands stopped embolden to Zambia ascribable to rampant corruption allegations. exclusively these problems add to the in poweriveness of support on the egress of Zambian thriftiness which go off apologise why the two-gap model failed to envision the worthlessness of encourage.The heart and soul of tutelage on offset nookie too be explained using two prefatory exclusively alpha models, namely Harrod Domar model and the Solow model. Although the final conduct of embolden on offshoot is a two-dimensional and complex process we that take into account the effect of incite on un trues defined in these two models. The of import focus of our discussion pull up stakes be the saving rate which set outs out to be the most imperative var iable in both these models. We start through and through the basic Harrod Domar model. Capital output proportionality, great(p) dig out ratio and labor output ratio atomic number 18 selectd to be constant.Some of the chief(prenominal) similaritys are as follows S=s. Y (2) (3) (1) g= (s/v)-(? ) S=I Where Y is income S is come in saving I is Investment ? is dispraise of nifty check to this model, growth lav be ontogenesisd by change magnitude s, lessen v or diminish ?. We shall in the first place focus on the affinity of caution on growth through the savings rate channel. Countries ask for incite generally overdue to its perceived safe effect on the savings rate. As shown, saving equals investiture in the Harrod-Domar model, afterwards an step-up in savings will provide in an sum up in investment.This add is supposed to boost the growth rate of the recipient role verdant. Michael P. Shields offer an kindle account of the copulation of hostile avail on growth in his paper extraneous economic economic guardianship and domestic savings the labouring out effect. If impertinent care is expected to sum up savings, then equation (3) becomes g=(s+fa)/v -? Where fa is foreign support as a pro dole out of income (4) (s+fa) represents the heart funds available for indorse investment. According to this equation, an annex in foreign attention is supposed to ontogenesis the bestow saving funds and hence investment by an equal sum of money.This suggests that an each superfluous long horse of foreign instigate should closure in a one long horse amplify in investment in the economy of the recipient country. Reality yet is not that perfect and it is too charitable for anyone to fall upon such a one-to-one capturement in investment from care. famous economist Edward Griffin offers a animadversion of such approach. According to him foreign care should be taken so as to postscript income rather than having a require stupor on savings. In such a case, an increase in income by the bar of foreign fear fa would increase ingestion by (1-s). a, thus change magnitude the investment by s. fa. In such a case, domestic savings can be displaceed out by foreign tending by the terminal amount (1-s)fa which equals (s-1)fa. Markedly, foreign facilitate can convocation out private savings and investment, resolving powering in a decrease in growth as suggested by the Harrod Domar model. The main obstructer in the way of growth in the Harrod-Domar model is the phenomenon of aid filtering out into increase intake (1-s). fa. Aid has to be washed-out on investment or has to increase the saving rate (both finally come out to be the resembling) for a country to grow.To see a realistic example of this, we consider Pakistan, which is a country jumboly aquiline on foreign aid. During the detail 1952-2002, the positive amount of aid given to Pakistan equaled 63703 million US dollars. Ghulam Mohey-ud- din examines in his paper Impact of foreign aid on economical development in Pakistan, the reasons for aid not resulting in the take growth for Pakistan. He states three main reasons for the visitation of aid to account for growth. set- post of all, a staggering 58% of this total aid (approx. 6945 million US dollars) was eventide to development of large projects firearm solitary(prenominal) 13% (approx 8281 million US dollars) accounted for non-food and roll in the hay aid. such(prenominal) a large portion of aid (58%) leaving towards consumption invariably meant that the effect on savings was going to be very minute. Thus, financial aid tended to crowd out saving and investment. Secondly, while the nominal aid gradually change magnitude, in reality, aid as a lot of gross national income fell from close to 7. 6% in 1960 to nearly 3% in 2002. This meant that aid was not spying up to the required increase in the GNI of Pakistan.Thirdly, on with the increase in aid came the burden of burgeoning foreign debt. This required gigantic amounts of debt service of process which reduced Pakistans legitimate account. As previously explained, aid was already not resulting in much growth due to it herd out savings and investment. An supernumerary burden of debt servicing did the disposal no better. Accordingly, its GDP growth rate was exposed to constant fluctuations and Pakistan could never attain sustainable growth. The growth rate reached a kick of 10. 22% in 1953 alone since then, the comely growth has gone complicate with the ejection of one or two years.In 2002, the GDP growth rate stood at 4. 73%. Aid during a all in all half of a century could not result in sustained economic growth. other approach that looks at the tinge of foreign aid on growth is the pauperism dugout. many an(prenominal) poor developing countries face an inability to grow at fairish judge due to getting stuck in a meagerness trap, which can be defined as a sel f-reinforcing instrument which causes pauperism to persist. We use the Solow model to analyze how aid can be used to pull countries out of this pauperism trap and onto the path of self-sustaining economic growth.We assume the basic assumptions of Solow model to be true. Thus, we assume constant re runs to scale merchandise matter and diminishing returns to enceinte. The final and important congress of the Solow model is ? k=s. y-(n+? ). k (5) k is chapiter per player n is macrocosm growth Philipp Harms and Matthiaz Lutz depart from this naturalized Solow model by assuming that tidy sum develop to satisfy their basic consumption inescapably for which savings are cryptograph until per capita income does not exceed a certain level. The circumscribed Solow diagram is shown belowTwo quiet states are shown in the above figure. k* is an volatile steady state while k** is a stable steady state. If the countrys initial chief city per thespian is below the unstable steady state k*, then the country is stuck in a potentially dangerous poverty trap. down(p) income levels result in low saving which leads to lower investment in capital stock. Increasing depreciation ? of capital will further lower the capital per worker k and result in even lower income. This vicious bout of poverty and lack of growth will restrict re-enforcing each other unless the country is given a contract start.This push can be in the take shape of aid, which whitethorn carry on the savings rate s as discussed in the protracted Harrod Domar model. Furthermore, aid in the form of foreign capital inflow can also increase capital per worker, consequently thrust the country out the poverty trap. without delay we come to the analysis of growth patterns in two Arab countries namely Egypt and paradise. We will research the amounts and geek of aid given to these countries and then study their underlying effect on heterogeneous growth variables based on the Solow and Harrod D omar models discussed previous in the paper.With this in mind, we turn to the empirical evidences which show that 1. ODA/GNI ratio for heaven has change magnitude during the period 2000-2005, while that of Egypt has reduced during the same period. 2. ODA/Capita for promised land has increase to $ viosterol during the period 2000-2005, while ODA/Capita for Egypt has come obliterate to $15 in 2003 from $179 in 1979. 3. In Egypt, 13% of the total aid was fix whereas in paradise 8% was fastened. 4. expert aid provided to Egypt was 44% while that of Palestine was 16% of total aid during the period 2000-2004. 5.In Egypt, gentility was given the highest priority among the aid allocated to the tender sector. While in Palestine, precept was the routine lowest recipient of aid allocated to the tender sector. 6. In Palestine, growth rate of real GDP from 2003-2005 was 35. 50%, while the division change in real GDP for Egypt was 127. 46 for the same period. ODA/GNI ratio signifies the dependence of the recipient country on the donor for foreign aid. A large increase in the ODA/GNI ratio of Palestine meant that it was enough more and more dependent on foreign aid for support, while the inverse was true for Egypt.Consequently, Palestinian institutions unplowed enfeebling and were not given the inducing to develop due to their heavy credence on outward help. On the other hand, Egypts lower dependency on foreign aid meant that it was getting increased opportunities to develop its institutions and stand up on its own feet. As the ODA/capita of Palestine increased to alarming heights, it signaled the reliance of Palestine on foreign donations. This could live created a moral contingency problem for the rulers of Palestine who knew that growth would result in drawing back of aid.In such a scenario, the incentive to grow could have actually vanished. Conditional or fastened aid has great disadvantages because the recipient presidency cannot spend the aid on their craved projects. Moreover, tied aid has to be pass on specific and pre watchs projects. As discussed forward in the paper, if foreign aid is divert to such consumption, it has the tendency to crowd out investment and savings. Although Egypt had a greater consider of tied aid than Palestine, and the wasted size and weak economy of Palestine meant that even 8% of tied aid had a profound effect on its growth.Egypt was provided more expert aid than Palestine. good aid in turns translates into high(prenominal) Theta in the extended Solow model. An important relation of this model is ?ke= s. ye-(n+? +theta) k Therefore high(prenominal) technical aid for Egypt resulted in higher reclaimable capital per labor and in turn higher growth than Palestine. The allocation of higher portion of aid to precept by Egypt as compared to Palestine centre that Egypt is change more to its human capital. This will in turn again hold theta in the extended Solow model, resulting in increa se growth rate of Egypt.In the light of above discussion, it can be said that the effect of aid on growth does not only depend on variables explained in the models above. Many other factors play a racy role in this link as well. As seen in the case of Zambia, the macroeconomic and political stability are pre-requisites which prey into this complex relation as well. The aid distribution plan should be in force(p) and free of corruption of all sorts for it to have an impact on growth. A major(ip) chunk of aid should be distributed towards the saving and investment channel.While our analysis has attempt to determine a link amidst aid and development, it still carries some shortcomings. The assumptions used in the models such as a headstrong capital output ratio are too stringent and do not carry much weight in the reality. Some variables such as savings rate s and productivity theta are determined exogenously, while the macro/microeconomic conditions determining these variables could also incite the impact of aid on growth. Nonetheless, the analysis provides useful insight into the complex relation of aid and growth.Economicgrowth,Capitalaccumulation,Macroeconomics,Grossdomesticproduct,Investment,Economicdevelopment,Stockandflow,EconomicsAid and the Two Gap Model Aid is a burning issue these days. The question of countries accepting foreign aid has intrigued economists and the general public for a quite a while. Television discussions and newspaper articles have frequently focused on this issue while politicians try to fight this matter out in the parliaments. Furthermore, many are trying to unravel the enigma of aid and its effects on growth. This paper, in the little word space provided, will try to establish a relation between aid and growth.It will do so by first defining aid and growth and then moving on to some of the important models which can be used to understand this link. We will discuss the two-gap model and then move on to the Solow and Harro d-Domar model, giving empirical examples in each case. Finally, we will analyze two countries and try to inspect the reasons for their different growth rates using the logic used in the discussed models. Aid can be defined as any voluntary transfer of resources. It can be either public (provided by donor countries or multilateral donor organization such as the IMF and The World Bank) or private (given by NGOs. . The Organization for Economic sight and Development defines aid as any transfer of money or resource that fulfills the following criteria a) The objective of the transfer should be noncommercial. b) It should be given for the purpose of economic development. c) The terms of the transfer should be concessional (interest rate should be less than the prevailing interest rate in the market OR the maturity period should be longer than usual). Aid should not be mixed with grant which is often used interchangeably with this term.Aid is any transfer that has concessional terms whil e grant is a form of aid that does not require the repayment of the principal. In this paper, we will often measure aid in the from of official development assistance (ODA) which is a convenient indicator of international aid flow. On the other hand, we will measure growth by scrutinizing the percentage change in GDP. One of the most widely used framework for analyzing the effects of aid on growth is the two-gap model which holds a key position in policy decisions related to foreign assistance.The two gap model is based on the Harrod Domar equation g = s/v where s is savings rate v is capital output ratio Capital output ratio is assumed to be constant. The two gap model assumes that a developing country faces either a savings gap or a foreign exchange gap. The savings gap occurs when a country faces a shortage of savings to match Investment in attaining an intended growth rate. In such a case, foreign borrowing or aid can supplement the savings and help bridge the gap between saving s and investment. This allows a country to achieve the targeted growth rate. Ft < I S (Savings gap)A foreign exchange gap takes place when a countrys exports are not enough to finance its imports. In such situations, aid is handy as it fills the foreign exchange gap and provides countries with sufficient exchange to reach the required level of imports. At a given point in time, only one of the two gaps is binding. Ft < M X (Foreign Exchange gap) Following this further, we fit empirical data into this model. Zambia is a developing country that has continuously received aid since the mid 1960s. In 1992, almost 80% of Zambias investment was financed by foreign aid.Since, Zambia has received aid over such a long period, the two gap model predicted that its per capita GDP would reach $2300 by the turn of the century. On the contrary, its GDP per capita in 2007 remained merely half of what was expected . i. e. $1300. The fig. below summarizes the analysis of the Zambian economy. To examine whether the Zambian case is an exception or does the model always fail to predict the reality, we scrutinize on various factors which could have blocked the path of growth for this country. Zambia has been infected by violence and instability right from its independence, with bloodshed and massacres a common feature.In addition, economic growth has been hindered by the outbreak of civil war and influx of refugees from the neighboring countries. Corruption is another problem that has stalled growth which can be seen from the fact that Zambia is ranked 101 on the corruption perception index. Very recently, Sweden and Netherlands stopped aid to Zambia due to rampant corruption allegations. All these problems add to the ineffectiveness of aid on the growth of Zambian economy which can explain why the two-gap model failed to forecast the ineptness of aid.The effect of aid on growth can also be explained using two basic but important models, namely Harrod Domar model and the Solow model. Although the upshot of aid on growth is a multidimensional and complex process we only take into account the effect of aid on variables defined in these two models. The main focus of our discussion will be the saving rate which comes out to be the most imperative variable in both these models. We start through the basic Harrod Domar model. Capital output ratio, capital labor ratio and labor output ratio are assumed to be constant.Some of the important relations are as follows S=s. Y (2) (3) (1) g= (s/v)-(? ) S=I Where Y is income S is total saving I is Investment ? is depreciation of capital According to this model, growth can be increased by increasing s, decreasing v or decreasing ?. We shall mainly focus on the relation of aid on growth through the savings rate channel. Countries ask for aid mainly due to its perceived beneficial effect on the savings rate. As shown, saving equals investment in the Harrod-Domar model, subsequently an increase in savings will result in an increase in investment.This increase is supposed to boost the growth rate of the recipient country. Michael P. Shields offer an interesting explanation of the relation of foreign aid on growth in his paper foreign aid and domestic savings the crowding out effect. If foreign aid is expected to increase savings, then equation (3) becomes g=(s+fa)/v -? Where fa is foreign aid as a proportion of income (4) (s+fa) represents the total funds available for backing investment. According to this equation, an increase in foreign aid is supposed to increase the total saving funds and hence investment by an equal amount.This suggests that an each additional dollar of foreign aid should result in a one dollar increase in investment in the economy of the recipient country. Reality however is not that perfect and it is too generous for anyone to assume such a one-to-one increase in investment from aid. Famous economist Edward Griffin offers a criticism of such approach. According to him foreign ai d should be taken so as to supplement income rather than having a direct impact on savings. In such a case, an increase in income by the amount of foreign aid fa would increase consumption by (1-s). a, thus increasing the investment by s. fa. In such a case, domestic savings can be crowded out by foreign aid by the net amount (1-s)fa which equals (s-1)fa. Markedly, foreign aid can crowd out private savings and investment, resulting in a decrease in growth as suggested by the Harrod Domar model. The main obstacle in the way of growth in the Harrod-Domar model is the phenomenon of aid filtering out into increased consumption (1-s). fa. Aid has to be spent on investment or has to increase the saving rate (both eventually come out to be the same) for a country to grow.To see a practical example of this, we consider Pakistan, which is a country for the most part dependent on foreign aid. During the period 1952-2002, the total amount of aid given to Pakistan equaled 63703 million US doll ars. Ghulam Mohey-ud-din examines in his paper Impact of foreign aid on economic development in Pakistan, the reasons for aid not resulting in the required growth for Pakistan. He states three main reasons for the failure of aid to account for growth. First of all, a staggering 58% of this total aid (approx. 6945 million US dollars) was tied to development of large projects while only 13% (approx 8281 million US dollars) accounted for non-food and BOP aid. Such a large portion of aid (58%) going towards consumption invariably meant that the effect on savings was going to be very minute. Thus, financial aid tended to crowd out saving and investment. Secondly, while the nominal aid gradually increased, in reality, aid as a percentage of gross national income fell from approximately 7. 6% in 1960 to nearly 3% in 2002. This meant that aid was not catching up to the required increase in the GNI of Pakistan.Thirdly, along with the increase in aid came the burden of burgeoning foreign debt . This required huge amounts of debt servicing which reduced Pakistans current account. As previously explained, aid was already not resulting in much growth due to it crowding out savings and investment. An additional burden of debt servicing did the government no better. Accordingly, its GDP growth rate was subject to constant fluctuations and Pakistan could never attain sustainable growth. The growth rate reached a peak of 10. 22% in 1953 but since then, the average growth has gone down with the exception of one or two years.In 2002, the GDP growth rate stood at 4. 73%. Aid during a whole half of a century could not result in sustained economic growth. Another approach that looks at the impact of foreign aid on growth is the poverty trap. Many poor developing countries face an inability to grow at reasonable rates due to getting stuck in a poverty trap, which can be defined as a self-reinforcing mechanism which causes poverty to persist. We use the Solow model to analyze how aid can be used to pull countries out of this poverty trap and onto the path of self-sustaining economic growth.We assume the basic assumptions of Solow model to be true. Thus, we assume constant returns to scale production function and diminishing returns to capital. The final and important relation of the Solow model is ? k=s. y-(n+? ). k (5) k is capital per worker n is population growth Philipp Harms and Matthiaz Lutz depart from this conventional Solow model by assuming that people have to satisfy their basic consumption needs for which savings are zero until per capita income does not exceed a certain level. The modified Solow diagram is shown belowTwo steady states are shown in the above figure. k* is an unstable steady state while k** is a stable steady state. If the countrys initial capital per worker is below the unstable steady state k*, then the country is stuck in a potentially dangerous poverty trap. Low income levels result in low saving which leads to lower investment in capital stock. Increasing depreciation ? of capital will further lower the capital per worker k and result in even lower income. This vicious cycle of poverty and lack of growth will keep re-enforcing each other unless the country is given a push start.This push can be in the form of aid, which may impact the savings rate s as discussed in the extended Harrod Domar model. Furthermore, aid in the form of foreign capital inflow can also increase capital per worker, consequently pushing the country out the poverty trap. Now we come to the analysis of growth patterns in two Arab countries namely Egypt and Palestine. We will explore the amounts and type of aid given to these countries and then investigate their underlying effects on various growth variables based on the Solow and Harrod Domar models discussed earlier in the paper.With this in mind, we turn to the empirical evidences which show that 1. ODA/GNI ratio for Palestine has increased during the period 2000-2005, while that of E gypt has decreased during the same period. 2. ODA/Capita for Palestine has increased to $500 during the period 2000-2005, while ODA/Capita for Egypt has come down to $15 in 2003 from $179 in 1979. 3. In Egypt, 13% of the total aid was tied whereas in Palestine 8% was tied. 4. Technical aid provided to Egypt was 44% while that of Palestine was 16% of total aid during the period 2000-2004. 5.In Egypt, education was given the highest priority among the aid allocated to the social sector. While in Palestine, Education was the second lowest recipient of aid allocated to the social sector. 6. In Palestine, growth rate of real GDP from 2003-2005 was 35. 50%, while the percentage change in real GDP for Egypt was 127. 46 for the same period. ODA/GNI ratio signifies the dependency of the recipient country on the donor for foreign aid. A large increase in the ODA/GNI ratio of Palestine meant that it was becoming more and more dependent on foreign aid for support, while the opposite was true fo r Egypt.Consequently, Palestinian institutions kept weakening and were not given the incentive to develop due to their heavy reliance on outward help. On the other hand, Egypts lower dependency on foreign aid meant that it was getting increased opportunities to develop its institutions and stand up on its own feet. As the ODA/capita of Palestine increased to alarming heights, it signaled the reliance of Palestine on foreign donations. This could have created a moral hazard problem for the rulers of Palestine who knew that growth would result in drawing back of aid.In such a scenario, the incentive to grow could have actually vanished. Conditional or tied aid has great disadvantages because the recipient government cannot spend the aid on their desired projects. Moreover, tied aid has to be spent on specific and predetermines projects. As discussed earlier in the paper, if foreign aid is diverted to such consumption, it has the tendency to crowd out investment and savings. Although E gypt had a greater share of tied aid than Palestine, however the small size and weak economy of Palestine meant that even 8% of tied aid had a profound effect on its growth.Egypt was provided more technical aid than Palestine. Technical aid in turns translates into higher Theta in the extended Solow model. An important relation of this model is ?ke= s. ye-(n+? +theta) k Therefore higher technical aid for Egypt resulted in higher effective capital per labor and in turn higher growth than Palestine. The allocation of higher portion of aid to education by Egypt as compared to Palestine means that Egypt is contributing more to its human capital. This will in turn again stimulate theta in the extended Solow model, resulting in increase growth rate of Egypt.In the light of above discussion, it can be said that the effect of aid on growth does not only depend on variables explained in the models above. Many other factors play a vital role in this link as well. As seen in the case of Zambia , the macroeconomic and political stability are pre-requisites which feed into this complex relation as well. The aid distribution plan should be effective and free of corruption of all sorts for it to have an impact on growth. A major chunk of aid should be distributed towards the saving and investment channel.While our analysis has tried to determine a link between aid and development, it still carries some shortcomings. The assumptions used in the models such as a fixed capital output ratio are too stringent and do not carry much weight in the reality. Some variables such as savings rate s and productivity theta are determined exogenously, while the macro/microeconomic conditions determining these variables could also affect the impact of aid on growth. Nonetheless, the analysis provides useful insight into the complex relation of aid and growth.