The Macro-economic Effects of Foreign Aid: Issues and Evidence

The early literature on the macro-economics of foreign aid, founded on the Harrod-Domar growth model, viewed investment shortage as the major bottleneck to developing countries' achievement of self sustaining growth. When it became increasingly clear that import substituting industrialisation had a greater import content than expected, foreign exchange shortage came to be viewed as the major bottleneck. The resulting two-gap models provided a strong rationale for foreign assistance. ¹