The paper re-examines the effectiveness of foreign aid theoretically and empirically. Using a standard overlapping generations (OLG) model, it shows that aid inflows can affect long-run productivity, with the size and direction of the impact depending on policies, structural characteristics, and the size of the inflow. Empirical analysis finds that aid has been effective in spurring growth, but its magnitude depends on climate-related circumstances. The authors argue that the Collier-Dollar allocation rule should be reconsidered if aid effectiveness is related to climate. The effectiveness of foreign aid in promoting growth in developing countries has been a topic of debate since Rosenstein-Rodan's 1943 advocacy. Textbooks in development economics have shown a decline in confidence in aid effectiveness over time. Recent studies suggest that aid "works," but its effectiveness varies across regions. A key question is what causes these differences in the return to aid. From a policy perspective, this issue is important for allocating aid effectively. Inspired by Burnside and Dollar (2000) and Collier and Dollar (2001, 2002), some donors allocate aid to countries with good policies. However, if aid effectiveness is due to poor initial conditions, a different allocation rule would maximize its impact on productivity and poverty. The paper begins by outlining theoretical foundations for aid effectiveness. Foreign aid is modeled as an exogenous transfer, and the OLG framework is used to examine conditions under which aid enhances productivity. The impact of aid on steady-state productivity is ambiguous, but deep structural characteristics (like institutions and climate) can compensate for poor policies. If aid has a positive effect, diminishing returns may prevail. Empirically, the paper finds that aid is less effective in the tropics, a result robust to estimation techniques and data. This is interpreted as climate affecting productivity directly or influencing other structural characteristics. The paper also discusses the implications for the Collier-Dollar allocation rule, which is questioned due to a negative correlation between climatic conditions and CPIA ratings. The paper concludes that aid effectiveness is influenced by structural characteristics, and the allocation of aid should consider these factors. Theoretical and empirical analyses suggest that aid can have a positive impact on productivity, but its effectiveness varies based on policies and structural conditions. The findings highlight the importance of considering climate and other structural factors in aid allocation.The paper re-examines the effectiveness of foreign aid theoretically and empirically. Using a standard overlapping generations (OLG) model, it shows that aid inflows can affect long-run productivity, with the size and direction of the impact depending on policies, structural characteristics, and the size of the inflow. Empirical analysis finds that aid has been effective in spurring growth, but its magnitude depends on climate-related circumstances. The authors argue that the Collier-Dollar allocation rule should be reconsidered if aid effectiveness is related to climate. The effectiveness of foreign aid in promoting growth in developing countries has been a topic of debate since Rosenstein-Rodan's 1943 advocacy. Textbooks in development economics have shown a decline in confidence in aid effectiveness over time. Recent studies suggest that aid "works," but its effectiveness varies across regions. A key question is what causes these differences in the return to aid. From a policy perspective, this issue is important for allocating aid effectively. Inspired by Burnside and Dollar (2000) and Collier and Dollar (2001, 2002), some donors allocate aid to countries with good policies. However, if aid effectiveness is due to poor initial conditions, a different allocation rule would maximize its impact on productivity and poverty. The paper begins by outlining theoretical foundations for aid effectiveness. Foreign aid is modeled as an exogenous transfer, and the OLG framework is used to examine conditions under which aid enhances productivity. The impact of aid on steady-state productivity is ambiguous, but deep structural characteristics (like institutions and climate) can compensate for poor policies. If aid has a positive effect, diminishing returns may prevail. Empirically, the paper finds that aid is less effective in the tropics, a result robust to estimation techniques and data. This is interpreted as climate affecting productivity directly or influencing other structural characteristics. The paper also discusses the implications for the Collier-Dollar allocation rule, which is questioned due to a negative correlation between climatic conditions and CPIA ratings. The paper concludes that aid effectiveness is influenced by structural characteristics, and the allocation of aid should consider these factors. Theoretical and empirical analyses suggest that aid can have a positive impact on productivity, but its effectiveness varies based on policies and structural conditions. The findings highlight the importance of considering climate and other structural factors in aid allocation.