The paper by Hansen and Tarp (1999) re-examines the literature on the effectiveness of foreign aid, particularly focusing on the relationship between aid, savings, investment, and growth. The authors argue that existing studies often fail to find a significant link between aid flows and economic growth, but this conclusion is not robust when evaluated using a coherent analytical framework. They review three generations of empirical cross-country studies on aid effectiveness: 1. **First Generation Studies (Aid and Savings)**: Early studies, such as those based on the Harrod-Domar model, often assumed that each dollar of aid would increase one dollar in total savings and investment. However, these studies generally found that aid does not significantly increase total savings, and in some cases, it may decrease savings. This suggests that the initial optimistic view of aid's impact on savings is not supported by empirical evidence. 2. **Second Generation Studies (Aid and Investment)**: These studies focused on the link between aid and investment, finding a significant positive impact of aid on investment. The authors note that this positive impact on investment is consistent with the Harrod-Domar model and other growth models, suggesting that aid can indeed spur growth. 3. **Third Generation Studies (Aid, Policy, and Growth)**: Recent studies, including those by Boone (1996), Burnside and Dollar (1997), Hadjimichael et al. (1995), Durberry et al. (1998), and Hansen and Tarp (1999), have incorporated new theoretical insights and econometric techniques. These studies find a significant positive impact of aid on growth, provided that the aid-to-GDP ratio is not excessively high. The effectiveness of aid is also found to depend on the quality of economic policies and institutional environment. The authors conclude that aid works, even in countries with poor policy environments, and that the perceived micro-macro paradox is not valid. Overall, the paper provides a comprehensive review of the literature and concludes that aid is effective in improving economic performance, contrary to the widespread perception that aid is ineffective or harmful.The paper by Hansen and Tarp (1999) re-examines the literature on the effectiveness of foreign aid, particularly focusing on the relationship between aid, savings, investment, and growth. The authors argue that existing studies often fail to find a significant link between aid flows and economic growth, but this conclusion is not robust when evaluated using a coherent analytical framework. They review three generations of empirical cross-country studies on aid effectiveness: 1. **First Generation Studies (Aid and Savings)**: Early studies, such as those based on the Harrod-Domar model, often assumed that each dollar of aid would increase one dollar in total savings and investment. However, these studies generally found that aid does not significantly increase total savings, and in some cases, it may decrease savings. This suggests that the initial optimistic view of aid's impact on savings is not supported by empirical evidence. 2. **Second Generation Studies (Aid and Investment)**: These studies focused on the link between aid and investment, finding a significant positive impact of aid on investment. The authors note that this positive impact on investment is consistent with the Harrod-Domar model and other growth models, suggesting that aid can indeed spur growth. 3. **Third Generation Studies (Aid, Policy, and Growth)**: Recent studies, including those by Boone (1996), Burnside and Dollar (1997), Hadjimichael et al. (1995), Durberry et al. (1998), and Hansen and Tarp (1999), have incorporated new theoretical insights and econometric techniques. These studies find a significant positive impact of aid on growth, provided that the aid-to-GDP ratio is not excessively high. The effectiveness of aid is also found to depend on the quality of economic policies and institutional environment. The authors conclude that aid works, even in countries with poor policy environments, and that the perceived micro-macro paradox is not valid. Overall, the paper provides a comprehensive review of the literature and concludes that aid is effective in improving economic performance, contrary to the widespread perception that aid is ineffective or harmful.