Abstract

This paper investigates the effect of official development aid (ODA) and microfinance (MF) on economic growth and compares the results. We identify and analyse the transmission mechanisms from ODA and microfinance to growth. We then study the effects of ODA and microfinance on growth, using an unbalanced panel of 67 countries for the period 2001-2011. Accounting for country and time effects, our results show that microfinance has a positive and statistically significant effect on economic growth through private investment, while ODA has no effect on growth. This suggests that deploying resources in the microfinance industry will foster economic development in poor countries.