Is free aid free?1

Abstract

An important factor that needs to be taken into account in analyzing development aid is opportunity cost. This complicates the impact of development aid, compared to, for example, humanitarian aid. Opportunity cost for a donor is a small cut in its national income which could have been used for something else like improving schools or providing support to the poor at home. The question remains, what then about costs to the recipient? Taking account of such costs, including the direct transaction costs of absorbing aid and indirect/“systemic” costs may provide a very different picture.

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