The debate on the effectiveness of foreign aid has intensified in recent years as aid
has come under increasing budgetary pressures in donor countries. Whatever the
merits of the opposing arguments, the fundamental issue arises of whether
conventionally-used measures of aid such as ODA, that lump together grants and
loans, accurately reflect true aid flows. In this paper we analyze the
methodological shortcomings of conventional aid measures, and propose a new
valuation approach that measures official aid flows as the sum of grants and the
grant equivalents of official loans. We show how this conceptually-superior aid
measure can diverge significantly from the conventional aggregates and provide a
quite different view on major aid trends. We include a companion data set with
this paper to provide estimates of our new aid measure - Effective Development
Assistance - for a set of 133 developing countries from 1975 to 1995.