Anticipated Development Assistance, Temporary Relief Aid, and

Much debate about the effectiveness of foreign aid to developing countries focuses on the assumption that aid flows mainly enhance current consumption rather than being channeled into investment. This paper seeks to establish what proportion of foreign assistance is used to finance current consumption. The principal hypothesis to be tested is that aid transfers include very heterogeneous components with different marginal propensities to raise consumption. Estimating the average marginal propensity to consume of all the components of aid, as is commonly done, may lead to erroneous results. Copyright 1987 by Royal Economic Society.