In this paper I have challenged a widespread belief that aid should rapidly wither to an inglorious demise. I termed this the 'aid dependency school'. I addressed five propositions which underpin the belief. The first is that high aid has been the cause of slow growth in Africa. I summarised evidence that, subject to a satisfactory policy environment, aid raises growth and, until remarkably high levels of aid are reached, the more aid that is provided the faster is growth. The second is that aid has a disincentive effect analogous to welfare dependency. I showed that any disincentive effects of aid on national work effort are negligible and that indeed there might be positive incentive effects arising from the reduced distortionary effects of the tax system. The third, and most important, is that aid detracts from private investment. I argued that in economies in which policy had recently been reformed, aid has a vital role to play, both in sustaining growth until private investment increases and in leading-in private investment. The fourth is that aid flows are so fickle that they are too risky to include as a core component of the budget. I showed that aid has actually been less volatile than government revenue, and that the covariance between aid and revenue has been negative. Together, these imply that for a given overall deficit, the larger the share of aid in a budget the more secure will be the fiscal position. The fifth is that aid is doomed to decline because of continued contractions in donor budgets. I argued that such a view confused a step function with a trend: the end of the cold war and fiscal retrenchments in Europe and the USA were one-off events, which will gradually be overtaken by rapid growth.
