Does Foreign Aid Address Business Bottlenecks That Companies Care About?

Foreign aid, for the most part, does target the areas identified as obstacles for growth by firms in developing countries, according to a new working paper by Esteban Ferro and John S. Wilson.

In particular, aid that funds trade-related projects effectively targets the right countries, or countries where firms are more likely to identify trade as an obstacle for their operation and growth. But aid doesn’t do much to improve firms’ perception of the areas that aid was set out to improve, unless it is focused on the finance and business environment of the country.

Using World Bank enterprise survey data and OECD aid-flow data, the authors also find that for each targeted area, smaller aid disbursements, rather than large ones, appear to be more effective in improving firm perceptions. In the aftermath of the global financial crisis, these findings suggest the need to further examine the effectiveness of aid for trade aligned with private sector interests in business expansion and other priorities that enhance trade.