The countrywide effects of aid
There are three main approaches to
            analyzing the effects of aid money and aid-supported reform:
            before-and-after comparison; control group (simple and
            modified) studies; and modeling. All three approaches have
            been used to carry out macroeconomic analysis of policy
            reform. But before-and-after and simple control group
            approaches are not valid explanatory techniques, say the
            authors; the results may be used to describe what happened,
            but not why it happened. Theoretically, the modified control
            group is the strongest approach. In practice, it has many
            shortcomings - in particular, its failure to allow for the
            effects of aid and other capital flows as an explanatory
            variable. The macroeconomic impact of aid inflows is best
            understood within the context of an accounting framework,
            say the authors. The literature on the macroeconomic effects
            of aid funds has relied almost entirely on modeling. But
            much work has used only single equations, so that many
            potentially important relationships - notably aid's
            effects on output and income - are excluded from the
            analysis. Even the simultaneous models used are mostly
            partial, not general, equilibrium models - which makes the
            findings doubtful. And much of the empirical work suffers
            from methodological shortcomings. Much research is needed on
            how aid affects the private sector macroeconomically; more
            is known about how to analyze the public sector's
            response to aid inflows. The analysis of aid money and
            aid-supported policy reform can be incorporated into a
            single framework - but with the effects of each clearly
            separable. The authors favor a country-specific modeling
            approach because it allows the separate analysis of policies
            and money as well as the separate analysis of different
            policies. Country-specific analysis can capture local
            factors that may be omitted from cross-country analyses.
            They argue that counterfactual analysis using econometric or
            general equilibrium models may be the most legitimate
            approach to analyzing the relationship between poverty and
            economic reform. Modeling has yielded results quite
            different from the common view about the social impact of
            reform policies, they say, but existing models fail to
            incorporate aid as an important macroeconomic variable.
            Project aid, program aid, commodity (mainly food) aid, and
            technical assistance are the four main types of aid. One
            problem in much of the literature is that an aggregate aid
            figure is used, even though the macroeconomic repercussions
            of these different types of aid will differ. Much analysis
            is also flawed by considering the effects of a program
            (despite different intensities and compliance rates) rather
            than the policies implemented.