investment resources not otherwise available to recipient countries. As a result, incremental capital-output ratios (ICORs), growth targets and ‘investment gaps’ provided the pseudo-science behind initial aid allocation levels and targets –including the ex-post justification for a 0.7 percent target for official aid flows from donor countries.

The simple investment-to-growth model is no longer in favor among development economists, however. Most evidence appears to suggest that productive investment is caused by economic growth as much as it is a cause and that investment is not the barrier to growth in regions such as Sub-Saharan Africa.<sup>7</sup> (In a related literature, the evidence for investment-related poverty traps is also found to be weak.)<sup>8</sup> There is a further imperfect relationship between aid flows and investment, with some considerable amount of aid ‘lost’ in consumption. A recent metastudy of 43 papers examining the link between aid and accumulation found that, across the studies, aid had a small, statistically insignificant positive effect on investment and a small, statistically significant negative effect on savings.<sup>9</sup> In one much-cited example, Bill Easterly notes that if “Zambia had converted all the aid it received since 1960 to investment and all of that investment to growth [following the ICOR model], it would have had a per capita GDP of about $20,000 by the early 1990s. Instead, Zambia’s per capita GDP in the early 1990s was lower than it had been in 1960, hovering under $500.”<sup>10</sup> The second part of the original financing gap model justifying aid transfers involved inadequate private capital flows to cover the ‘investment gap’ between domestic savings and resources needed to promote rapid growth. Article III of the World Bank’s Articles of Agreement suggests that the Bank should only lend to countries where it is “satisfied that in the prevailing market conditions the borrower would be unable otherwise to obtain the loan under conditions which in the opinion of the Bank are reasonable for the borrower,” for example.

However, according to one recent analysis, the evidence is that the World Bank has neither stepped in to substitute for private international lending (providing more support to countries without access) nor ameliorated the failings of domestic markets (as measured by its failure to catalyze future private financing flows).<sup>11</sup> Many aid recipients keep in place policies that deter foreign private investment (such as maximum FDI percentages in ‘key sectors’), while most large middle income countries now have access to private markets at rates not outrageously higher those provided by the IBRD and at levels that dwarf available IBRD financing. One estimate is that the interest rate difference between IBRD and private loans to the World Bank’s middle income clients has fallen from 12% in 1999 to 2% in 2005, and the Bank represents less than one percent of the net flows to the 27 borrowers that receive 90% of its loans.<sup>12</sup> Furthermore, using the same model as used by the original academic justifications for the 0.7 percent figure but today’s numbers regarding savings rates and GDP in developing countries and the GDP of rich countries, the need for external finance (public and private) suggested by the model for low income countries amounts to 0.03 percent of rich country GDP –considerably _smaller_ than today’s public flows. Adding middle-income countries 4