Does foreign aid help?

ABC News argues that food and financial aid often only enrich the corrupt, not reaching the poor they are meant to help. See this great six minute video with John Stossel on the story, where he sees for himself how hard it is to register a business in some countries and has some tough questions for Sachs and Bono on the benefit of giving more aid. The paper that flashes across the screen at one point is ‘Does Foreign Aid Help?’, by Djankov, Montalvo, and Reynal-Querol:*

In this article we show that foreign aid has a negative impact on the democratic stance of developing countries, and on economic growth by reducing investment and increasing government consumption. Therefore, our empirical findings do not support the democratization effect of foreign aid nor the development effect. Because of these findings we propose and analyze other forms of helping poor countries. For example, the way in which aid is disbursed can also affect the effectiveness of aid. Maybe the mechanism to successfully encourage the government to invest rather than to consume has something to do with the way in which aid is disbursed.

*Disclaimer: I work with Simeon, and used to work with Marta.

Update: More from CIPE Blog, with some good quotes.