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About the Editor: Sajal Lahiri is the Vandeveer Professor of Economics at the Southern Illinois University – Carbondale; has worked as consultants to the FAO, IFAD, and the World Bank; has written extensively in top economics journals on issues related to development in general and to foreign aid in particular.

This series is aimed at economists and financial economists worldwide and will provide an in depth look at current global topics. Each volume in the series will focus on specialized topics for greater understanding of the chosen subject and provide a detailed discussion of emerging issues. The target audiences are professional researchers, graduate students, and policy makers. It will offer cutting-edge views on new horizons and deepen the understanding in these emerging topics.

The paper discusses various important issues of development aid in the context of the emerging new landscape for Official Development Assistance (ODA) and in particular how aid effectiveness issues are now perceived in a world of scaled-up aid. The paper also discusses the overall nexus between aid, growth and domestic policies in aid-recipient countries by reflecting on the relevant ongoing debate in this area. A substantial part of the paper is devoted to the discussion of the central issues involved in development aid, particularly in connection with recent calls in the international development community for scaling-up aid so that the Millennium Development Goals can be attained, as well as the challenging new policy agenda in this regard.

The effect of foreign aid on economic activity of a country can be dampened due to potentially adverse effects on exports through a real exchange rate appreciation. In this study we examine the long-term relationship between export performance and foreign aid in developing countries while accounting for other factors. The estimates of direct effect of foreign aid on exports are imprecise. However, the effect of the quadratic term of foreign aid on exports is negative and precise. This implies large amount of foreign aid does adversely affect export performance. The results are robust to the use of two different export performance measures and different sub-samples.

Applying the general question of aid effectiveness to the sector of education, this paper provides some evidence for a positive effect of development assistance on primary enrolment and completion. However, even the most optimistic estimates clearly show that at any realistic rate of growth, aid will never be able to move the world markedly closer towards the internationally agreed objective of “Education For All”. Universal primary education requires increased efficiency of educational spending by donors and national governments alike. Moreover, there is some evidence that the recipient countries' general political and institutional background matters. Under conditions of bad governance, the impact of aid on enrolment can actually turn negative.

Recent work focuses on long-run historical factors in promoting economic growth and raising income. Other work considers whether the inflow of foreign aid works better in countries having good policies or good institutions. A problem with the latter is the endogeneity of policies and institutions since these are mutable. This paper combines the two approaches and asks whether aid (representing an inflow of resources) is better at promoting economic growth in historically “advantaged” (as identified by the literature) as opposed to “disadvantaged” ones. It finds that history still does matter but understanding why is less clear.

The recent increase in aid to Africa, alongside increases in special-purpose aid, has revived interest in the question of the fungibility of aid – the notion that, if a donor gives aid for a project that the recipient government would have undertaken anyway, then the aid is financing some expenditure other than the intended project. That aid in this sense may be “fungible”, while long recognized, has recently been receiving some empirical support. This paper focuses on sub-Saharan Africa, the region with the largest GDP share of aid. It presents results indicating that aid may be partially fungible, and suggests some reasons why.