The paper re-examines the effectiveness of foreign aid both theoretically and empirically. Using an overlapping generations (OLG) model, the authors show that aid inflows generally affect long-run productivity, with the size and direction of the impact depending on policies, structural characteristics, and the magnitude of the inflow. Empirically, they find that aid has been effective in stimulating growth, but the magnitude of the effect varies with climate-related circumstances. They argue that the Collier-Dollar allocation rule, which suggests aid should be directed towards countries with good policies, should be reconsidered if aid effectiveness is related to climate. The paper discusses the theoretical foundations of aid effectiveness and presents new empirical evidence, including the importance of underlying structural characteristics and the interaction between aid and climate-related variables. The findings suggest that aid is more effective in places with stronger, slow-moving structural characteristics, such as institutions and climate-related circumstances. The authors conclude by discussing the implications for aid allocation rules and the need to consider the complex interplay between aid, policies, and structural characteristics.The paper re-examines the effectiveness of foreign aid both theoretically and empirically. Using an overlapping generations (OLG) model, the authors show that aid inflows generally affect long-run productivity, with the size and direction of the impact depending on policies, structural characteristics, and the magnitude of the inflow. Empirically, they find that aid has been effective in stimulating growth, but the magnitude of the effect varies with climate-related circumstances. They argue that the Collier-Dollar allocation rule, which suggests aid should be directed towards countries with good policies, should be reconsidered if aid effectiveness is related to climate. The paper discusses the theoretical foundations of aid effectiveness and presents new empirical evidence, including the importance of underlying structural characteristics and the interaction between aid and climate-related variables. The findings suggest that aid is more effective in places with stronger, slow-moving structural characteristics, such as institutions and climate-related circumstances. The authors conclude by discussing the implications for aid allocation rules and the need to consider the complex interplay between aid, policies, and structural characteristics.