Mavrotas - Cap 02 - Aid_Growth_and_Development_1

Aid, Growth, and Development 1

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ForeignAidforDevelopment:Issues,Challenges,andtheNewAgendaGeorgeMavrotas

Printpublicationdate:2010PrintISBN-13:9780199580934PublishedtoOxfordScholarshipOnline:May2010DOI:10.1093/acprof:oso/9780199580934.001.0001

Aid,Growth,andDevelopment1

FinnTarp

DOI:10.1093/acprof:oso/9780199580934.003.0002

AbstractandKeywords

Foreignaidloomslargeinthepublicdiscourse;andinternationaldevelopmentassistanceremainssquarelyonmostpolicyagendasconcernedwithgrowth,poverty,andinequalityinAfricaandelsewhereinthedevelopingworld.ThepresentreviewtakesaretrospectivelookathowforeignaidhasevolvedsincetheSecondWorldWarinresponsetoadramaticallychangingglobalpoliticalandeconomiccontext.Ireviewtheaidprocessandassociatedtrendsinthevolumeanddistributionofaidandcategorizesomeofthekeygoals,principles,andinstitutionsoftheaidsystem.Theevidenceonwhetheraidhasbeeneffectiveinfurtheringeconomicgrowthanddevelopmentisdiscussedinsomedetail.Iaddperspectiveandidentifysomecriticalunresolvedissues.Ifinallyturntothecurrentdevelopmentdebateanddiscusssomekeyconcernsthatshouldbekeptinmindinformulatinganyagendaforaidinthefuture.


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Keywords:foreignaid,aidimpact

2.1.IntroductionForeignaidanditseffectivenessinpromotinggrowthanddevelopmentindevelopingcountrieshasbeenanareaofintensecontroversyeversinceRosenstein‐Rodan(1943)advocatedaidtoEasternandSouth‐EasternEurope.Earlyoptimismandconfidenceintheimpactofforeignaidhavebeentemperedwithtime.InthefirsteditionofhisLeadingIssuesinEconomicDevelopment,Meier(1964)dedicatedsomeeighteenpagestotheissueofforeignaid.Hestartedbyasking,‘Howmuchaid?’Bythetimeofthesixthedition(Meier1995),thetreatmentofforeignaidhadbeencutinhalfandthequestionsraisedwere:‘Whyofficialassistance?’and‘Doesaidwork?’Inthe2000edition(MeierandRauch2000)‘foreignaid’isnotlistedintheindex.

Meanwhilethedebateabouttheusefulnessanddesignofforeignaidhascontinuedunabated.Someinsistaidisawasteofresourcesandevenharmfultoaid‐receivingcountries(Dichter2005).TheypointinparticulartoAfricaandscoresoffailedprojectsandswiftlyconcludethataidhasbeenanoutrightdisaster.Othersaredisappointedandsceptical,aprominentexamplebeingEasterly(2001,2003,2008),whohighlightsaid'sinabilitytobuygrowth.(p.21) Birdsall,Rodrik,andSubramanian(2005)viewthepotentialimpactofaidasseriouslycircumscribed,butremainlargelysupportive.Acomplementaryapproachinthemiddlegroundisthataidhasworkedinthepastinfurtheringgrowthanddevelopment,butaidisnotequallyeffectiveeverywhereandmuchremainstobelearntabouthowaidimpactsintheoryandpractice(seeTarp2000).Giventhis,thefocusshouldbebothonwaysandmeanstoimprovetheeffectivenessofforeignaiddisbursementsandonincreasingthetotalflowofresources.Afinalapproachistoemphasizethatadoublingofworldwideaidflowsisourgeneration'schallenge,amoralobligationofrichcountriesthatwillsendforth‘mightycurrentsofhope’andleadto‘theendofpoverty’(seeSachs2005).

Theanalysisofaid'simpactongrowthbecamedominatedbymodernpaneldatamacroeconometricframeworksduringthesecondhalfofthe1990s.2Muchofthisdebatehasfocusedonwhethertheeffectivenessofaidisconditionalonpolicy,orwhetheraidcanbeexpectedtohaveaseparateandpositiveimpactindependentofpolicy.Thishasinvolvedamixtureofconcerns.Theyrangefromtechnicallydemandingeconometricmodellingissues,tofundamentallydifferentapproaches,tothedesignandimplementationofdevelopmentstrategyandpolicy.Overall,asubstantialbodyofliteraturehasemergedwhichsuggeststhataidworksinpromotinggrowthanddevelopment.3However,othersremainscepticalanddisagreementischaracteristicinassessmentsofthenecessaryandsufficientconditionsforaidtohaveapositivecontributiononthedevelopmentprocess.Thesamegoesinrelationto(i)differentviewsonwhatconstitutes‘good’economicpolicyandhoweconomicpolicyanddeeperstructuralcharacteristicsinteractwiththeefficiencyofforeignaid;and(ii)theinstitutionalframeworkthroughwhichaidischannelled.

Widespreadcallshavealsobeenmadefora‘bigpush’oraMarshallPlanforAfrica.Sachs(2005)isapassionatespokesmanforthisapproach,whichissetoutintheUNMillenniumProjectReport(2005).AlsotheWorldEconomicForum(2005)andtheCommissionfor


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Africa(2005)reportscanbeconsulted.TheCommissionforAfricawaslaunchedbytheformerBritishPrimeMinisterTonyBlairinFebruary2004,withtheaimoftakingafreshlookatAfrica'spastandpresentandtheinternationalcommunity'sroleinitsdevelopmentpath.Theseinitiativeshaveattractedbothpraiseandcriticism,withSachsandEasterlyappearingtooccupyopposingendsofthespectrum.Viewingtheirassessmentsfromtheperspectiveofhistoricaldevelopmentsinforeignaidontheone(p.22) hand,andtheanalyticalliteratureonaideffectivenessontheother,isageneralaimofthischapter.

Theremainderofthischapterisstructuredinsixparts.Insection2.2,Idefinewhatismeantbyforeignaid(ormorepreciselyOfficialDevelopmentAssistance(ODA))andprovideselecteddataonamountsandtrendsinvolved.Section2.3containsgeneralhistoricalbackground,whilesections2.4and2.5turntotheallocationandimpactofODA.Insection2.6,Idiscussthecurrentdebate,whilesection2.7concludes.

2.2.Whatisforeignaid?Whatisforeignaid?ForaprecisedefinitionitisusefultoturntotheDevelopmentAssistanceCommittee(DAC)oftheOrganisationforEconomicCo‐operationandDevelopment(OECD).TheDACistheprincipalbodythroughwhichtheOECDdealswithissuesrelatedtocooperationwithdevelopingcountries.AccordingtotheDAC,theterm‘developmentassistance’referstofinancialflowsthatqualifyasofficialdevelopmentassistance(ODA).ODAisdefinedasthesumofgrantsandloanstoaidrecipientsthatare(i)undertakenbytheofficialsectorofthedonorcountry;(ii)withpromotionofeconomicdevelopmentandwelfareinrecipientcountriesasthemainobjective;(iii)atconcessionalfinancialterms,wherethegrantelementisequaltoatleast25percent.4Inadditiontofinancialflows,technicalcooperationcostsareincludedinODA;but,grants,loans,andcreditsformilitarypurposesareexcluded,andtransferpaymentstoprivateindividualsareingeneralnotcounted.Thesamegoesfordonationsfromthepublic,commercialloans,andforeigndirectinvestment(FDI).

Onlyaidto‘traditional’developingcountriescountedasODAuntil2005.Forthese(PartI)countriesthereisalong‐standingUNtargetfrom1970thattheyshouldreceive0.7percentofdonors'grossnationalincome(GNI)asaid.Assistancetothe‘moreadvanced’EasternEuropeanand‘moreadvanced’developing(PartII)countrieswasrecordedseparatelybytheDACas‘officialaid’(OA),notincludedaspartofODA.DACcountrieshaveovertheyearsaccountedforsome95percentofallaidflows,butthedistinctionbetweenPartIandPartIIcountriesisnolongerused.5

(p.23) In2006thetotalamountofforeignaiddisbursedbydonorstodevelopingcountriesandmultilateralorganizationsreachedUS$113.6billion;seeTable2.1,whichalsoshowsthattheaveragecitizeninthedonorcountriescontributedlessthanUS$112asODAin2006.ThiscanbecomparedtoafigureofaroundUS$64in1960–73andUS$99in1992.ItisequallyclearfromthetablethattheUNtargetof0.7percentofGNIiswithfewexceptionsveryfarfrombeingreached.Inthisperspective,itishardlysurprisingthatSachs(2005)andmanyothersfindpresentlevelsofaidunacceptablylow.Itcanalsobenotedthatdonorsin2006disbursed25.7percentoftotalforeignaidtomultilateralorganizations.Some84percentofthisflowwasdisbursedtodeveloping


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countries,withtheEuropeanUnionandtheInternationalMonetaryFund(IMF)andWorldBank(includingtheInternationalDevelopmentAssociation(IDA))asthemainsourcesfollowedbytheUNandtheRegionalDevelopmentBanks(Table2.2).

Table2.3givesanoverviewofaidpercapitaandaidasapercentageofGNIinaid‐receivingcountrieswithapopulationofmorethantwomillion.Itisawidespreadperceptionthatforeignaidamountstoaverysignificantresource,inbothabsoluteandrelativeterms,andaidisindeednotaninsignificantflowmeasuredrelativetodevelopingcountryproductionandincome.Atthesametime,aiddoesnotappearthatsizeablewhenmeasuredinrelationtoGNIorgovernmentbudgetsinthedonorcountriesorincomparisonwith,forexample,populationsizeofaidreceivingcountries.Figure2.1presentsratiosoftotalODAtoGNIandpopulationinaid‐receivingcountries.ODApercapitaalmostdoubledinrealtermsfrom1970to1990;butperhapsthemostrevealingaspecthereisthedownturnfrom1991to1992afterthesteadyincreaseinthepreviousdecade.ItisalsoevidentthataidasashareofGNIinrecipientcountrieshasbeenonadecliningtrendsincetheearly1990s.

Figure2.2showsthattheallocationofaidfrom1996to2005,asmeasuredbytheaidtoGNIratioinaid‐receivingcountries,ishighlyskewed.Mostrecipientcountriesreceivedaidtotheorderof1.8percentoftheirGNIperyearwithamedianof3.2percent.ThiscorrespondstoadistributionofaidpercapitawithamodeofUS$17.9peryearandamedianofUS$31.5.IllustrativecountryexampleshavebeenaddedtoFigure2.2.TheydemonstratethattherelativesizeoftheaidinflowvariessignificantlyamongcountriessuchasVietnam,Bolivia,Tanzania,andMozambique.

The13.2percentsizeoftheaidtoGNIratioin,forexample,Tanzaniamayseemhigh.Itshouldbekeptinmind,however,thatthissharereflectsnotonlythesizeoftheaidflowbutalsotheverylowlevelofincome.IncomepercapitainTanzaniahasonlyrecentlygrowntomorethanUS$300percapita,andTanzaniareceivedaboutUS$35percapitaperyearinforeignaidfrom1996to2005.Withthisbackground,modestexpectationsareadvisablewhenanalysingtheoverallimpactofpastaidongrowth.ManyconstraintshavehamperedgrowthinTanzaniaandelsewhere,andaidhasbeenusedforamultitudeofpurposes.Theseare,inmanycases,onlyindirectlyrelatedtogeneratingeconomicreturn.

(p.24)

Table2.1.NetODAdisbursementsbydonorODA2006prices(US$billion)(ODAaspercentageoftotal)

1960–731 1992 1998 2002 2006USA 16.3 15.8 10.6 14.9 23.5

(42.2) (20.0) (15.8) (18.6) (21.5)Japan 2.6 10.8 10.8 9.5 11.2


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(6.9) (13.7) (16.0) (11.9) (10.2)France 5.7 10.3 7.4 7.9 10.6

(14.7) (13.1) (11.0) (9.8) (9.7)Germany 3.8 8.8 6.7 7.3 10.4

(9.9) (11.2) (10.0) (9.2) (9.5)UK 4.3 4.8 5.2 6.7 12.5

(11.2) (6.1) (7.8) (8.4) (11.4)DK,L,NL,NO,andSE 1.93 10.3 11.0 12.8 14.9

(4.9)3 (13.1) (16.5) (16.0) (13.6)OtherDAC 4.0 16.2 13.9 16.6 21.3

(10.3) (20.5) (20.7) (20.8) (19.5)Non‐DAC — 1.8 1.4 4.3 5.2

— (2.3) (2.1) (5.3) (4.7)Total4 38.6 78.9 67.0 80.0 109.6ofwhich: (100) (100) (100) (100) (100)Bilateral 32.9 53.7 44.9 56.1 81.4

(85.2) (68.0) (67.0) (70.0) (74.3)Multilateral5 6.2 24.7 22.1 24.0 28.1

(16.0) (31.3) (33.0) (30.0) (25.7)ODApercapita(2006prices,US$)(ODAaspercentageofGNI)

1960–731 1992 1998 2002 2006USA 83.2 62.0 39.2 51.6 78.6

(0.4) (0.2) (0.1) (0.1) (0.2)Japan 25.9 87.2 85.0 74.6 87.6

(0.2) (0.3) (0.3) (0.2) (0.3)France 116.3 179.6 126.6 132.4 167.2

(0.8) (0.6) (0.4) (0.4) (0.5)Germany 64.5 109.7 81.5 89.1 126.6

(0.4) (0.4) (0.3) (0.3) (0.4)UK 79.4 83.1 87.7 113.7 207.0

(0.5) (0.3) (0.3) (0.3) (0.5)DK,L,NL,NO,andSE2

59.53 306.5 370.0 432.8 488.2

(0.3)3 (0.9) (0.8) (0.9) (0.9)OtherDAC2 38.7 87.9 75.6 93.1 124.1


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(0.2) (0.3) (0.3) (0.3) (0.3)Non‐DAC — — — 89.3 56.1

— (0.3) (0.1) (0.3) (0.2)Total 64.1 99.0 80.2 88.0 111.9

(0.4) (0.3) (0.2) (0.2) (0.3)Notes:

(1)Averageovertheyears.

(2)Averageoverthecountries.

(3)ExcludingLuxembourg.

(4)SumofDAC‐andnon‐DACcountries,total.Discrepanciesduetoaveragingandrounding.

(5)Disbursementsbydonorcountriestomultilateralaidorganizations.Denmark(DK)since1978;Luxembourg(L)since2000;Netherlands(NL)since1975;Norway(NO)since1976;andSweden(SE)since1975haveallhadODAaspercentageofGNIabove0.7.

Source:OECD(2008:table1);ODAbydonor:<http://webnet.oecd.org/wbos/Index.aspx?DataSetCode=ODA_DONOR#>.

(p.25)

Table2.2.Aiddisbursementsbymultilateralorganizations2006prices(US$billion) Percentageofmultilateral(total)

1960–731

1992 1998 2002 2006 19732 1992 1998 2002 2006

Multilateral,totalofwhich:

3.5 20.4 19.2 22.8 23.6 100.0 100.0 100.0 100.0 100.0

UnitedNations 1.0 6.1 3.2 4.1 3.3 28.9 29.7 16.5 17.9 14.2IMFandWB 1.0 6.9 6.6 8.7 6.4 29.6 33.7 34.2 38.0 27.0EuropeanCommission

0.9 5.4 6.7 7.4 9.5 26.2 26.4 34.8 32.6 40.2

RegionalDevelopmentBanks

0.5 2.1 2.5 2.3 2.9 15.2 10.3 12.8 10.2 12.2

OtherMultilateralInstitutions

0.0 0.0 0.3 0.3 1.5 0.0 0.0 1.6 1.2 6.5


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Notes:

(1)Annualaverageover14years.

(2)Inpercentageofthetotalperiod'sdisbursements.

Source:OECD(2008:tableDAC2a);ODAdisbursements:<http://stats.oecd.org/wbos/Index.aspx?DataSetCode=ODA_RECIPIENT_REGION>.

(p.26)

Table2.3.Averageannual(1996–2005)aidsharesforcountrieswithpopulationslargerthan2millionAidaspercentageofGNI,increasingbycountry

Aidpercapita,increasingbycountry

Korea,Rep. −0.03 Azerbaijan 3.59 Korea,Rep. −3.1 Egypt,ArabRepublic

22.3

HongKong,China

0.00 Kenya 3.65 Malaysia 0.7 Burundi 24.0

Singapore 0.01 Zimbabwe 4.05 SaudiArabia 0.8 Azerbaijan 24.5UnitedArabEmirates

0.01 Vietnam 4.31 HongKong,China

0.9 Hungary 24.5

SaudiArabia 0.01 Côted'Ivoire 4.35 Mexico 1.0 Moldova 25.0Kuwait 0.01 Yemen,Rep. 4.45 UnitedArab

Emirates1.2 Tajikistan 25.1

Mexico 0.02 Macedonia,FYR

5.19 Singapore 1.2 SriLanka 25.2

Malaysia 0.04 Cameroon 5.22 Brazil 1.2 CentralAfricanRepublic

25.5

Brazil 0.04 Angola 5.23 India 1.4 CzechRepublic

26.8

CostaRica 0.04 Togo 5.46 China 1.5 Tunisia 26.8Libya 0.05 Moldova 5.71 Libya 1.6 Niger 27.3Venezuela,Republicof

0.05 Jordan 6.38 Kuwait 1.7 Chad 28.0

Argentina 0.05 SerbiaandMontenegro

6.75 CostaRica 1.8 Poland 29.1

Turkey 0.10 Georgia 7.08 Venezuela,RepublicBolivarian

2.0 Côted'Ivoire

30.2

Chile 0.11 Nepal 7.27 Myanmar 2.0 SlovakRepublic

30.3


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Uruguay 0.12 Albania 7.35 Iran,IslamicRepublic

2.3 Guinea 31.5

Iran,IslamicRepublic

0.13 PapuaNewGuinea

7.66 Argentina 2.6 Angola 32.3

China 0.16 Guinea 7.74 Turkey 3.1 Cambodia 32.5Panama 0.25 Haiti 8.00 Belarus 4.7 Uganda 33.5Oman 0.25 Bolivia 8.66 Thailand 5.6 Tanzania 34.7Thailand 0.27 Honduras 8.81 Chile 5.8 Madagascar 34.8Belarus 0.30 Central

AfricanRepublic

8.87 Korea,DemocraticRepublic

6.0 ElSalvador 35.0

India 0.31 Benin 9.76 Cuba 6.1 Cameroon 36.1

SouthAfrica 0.36 Armenia 9.98 Uruguay 6.4 Haiti 36.1Croatia 0.40 Senegal 10.27 Uzbekistan 6.7 Benin 36.3Colombia 0.42 Cambodia 10.55 Indonesia 6.7 Ghana 38.2CzechRepublic

0.42 Ghana 10.92 Nigeria 6.8 Mali 38.5

RussianFederation

0.43 Congo,Republic

10.96 Turkmenistan 7.0 Liberia 38.6

Jamaica 0.44 Chad 11.63 Iraq 8.2 Malawi 39.0Hungary 0.48 Tajikistan 12.17 Philippines 8.4 BurkinaFaso 39.2Algeria 0.50 Ethiopia 13.08 Colombia 8.5 Bulgaria 40.8DominicanRepublic

0.60 Tanzania 13.22 Pakistan 8.6 Latvia 42.2

Poland 0.61 Uganda 13.27 Ukraine 8.8 Lithuania 45.9SlovakRepublic

0.69 BurkinaFaso 13.69 RussianFederation

8.9 KyrgyzRepublic

47.0

Philippines 0.76 Madagascar 13.94 SyrianArabRepublic

8.9 SierraLeone 48.8

Peru 0.77 KyrgyzRepublic

14.24 Algeria 9.1 Rwanda 49.4

Kazakhstan 0.80 Niger 14.33 Bangladesh 9.1 PapuaNewGuinea

51.9

Ecuador 0.82 BosniaandHerzegovin

14.62 Panama 9.2 Senegal 52.2

Indonesia 0.83 Mali 14.74 SouthAfrica 12.0 LaoPeople'sDemocraticRepublic

54.7


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Israel 0.88 LaoPeople'sDemocraticRepublic

16.47 DominicanRepublic

12.3 Georgia 56.3

SyrianArabRepublic

0.89 Zambia 17.31 Paraguay 12.7 Eritrea 58.8

Turkmenistan 0.90 Mauritania 17.64 Jamaica 12.9 Zambia 61.1Paraguay 0.97 Mongolia 19.71 Kazakhstan 13.0 Mozambique 61.9Romania 1.03 Congo,

DemocraticRepublic

19.80 Sudan 14.4 Armenia 73.5

Ukraine 1.05 Nicaragua 19.91 Ecuador 14.6 Lebanon 74.4Guatemala 1.18 Rwanda 21.44 Nepal 16.2 Congo,

Republicof74.8

Lithuania 1.20 WestBankandGaza

22.07 Togo 16.3 Honduras 78.0

Latvia 1.21 Burundi 23.96 Kenya 16.3 Bolivia 82.2Tunisia 1.22 Malawi 24.16 Peru 16.7 Mauritania 87.0Nigeria 1.28 SierraLeone 27.06 Ethiopia 16.8 Mongolia 92.5Uzbekistan 1.35 Liberia 28.34 Oman 17.3 Albania 97.6Lebanon 1.44 Mozambique 28.62 Vietnam 18.2 Macedonia,

Republicof104.5

Morocco 1.50 Afghanistan 31.61 Somalia 19.2 SerbiaandMontenegro

107.5

Pakistan 1.65 Eritrea 32.60 Yemen,Republicof

19.5 Jordan 117.5

ElSalvador 1.72 Myanmar — Zimbabwe 19.8 Israel 147.4Egypt,ArabRepublic

1.78 Korea,DemocraticRepublic

— Morocco 20.0 Nicaragua 150.9

Bulgaria 2.21 Cuba — Congo,DemocraticRepublic

20.7 BosniaandHerzegovina

197.1

Bangladesh 2.37 Iraq — Croatia 21.0 WestBankandGaza

276.4

SriLanka 2.77 Somalia — Romania 21.2 Afghanistan —Sudan 3.08 Guatemala 21.6Notes:Aidpercapitaisconstant(pricesinyear2000)US$andaidaspercentageofGNIareaveragesofannualobservations.

Source:WorldBank(2007).

(p.27)


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(p.28)

Notes:ODAandGNIinconstant2000US$,andsharesnormalizedto1in1970.


Figure2.1 ODApercapita,andasapercentageofGNIintherecipientcountry

Notes:KerneldensityusingGaussiankernel.Theheightofthegraphreflectsthe(weighted)averagenumberofobservationsinanintervalaroundthemidpoint.


Figure2.2 Densityofaverageannual(1996–2005)ODAshares

2.3.HistoricalbackgroundForeignaidinitsmodernformdatesbacktotheearly1940sandintensifiedafterthedisruptionthatfollowedtheSecondWorldWar.Theinternational(p.29) economicsystemhadcollapsed,andwar‐ravagedEuropefacedacriticalshortageofcapitalandan


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acuteneedforphysicalreconstruction.TheresponsewastheEuropeanRecoveryProgramme,commonlyknownastheMarshallPlan.DuringthepeakyearstheUSAtransferredsome2to3percentofitsnationalincometohelprestoreEurope.ThemotivesbehindUSaidweremultifaceted,rangingfromtheselfishtothegenerous.ContainingcommunismaroundtheSovietblocandtryingtosecureaccesstorawmaterialsandgainaleadingroleintheglobaltradeandinvestmentsystemwerecriticallyimportantnationalisticconcerns.Altruisticaims,ontheotherhand,helpedmobilizesupportfromawidespectrumofpoliticalopinion.TheMarshallPlan,whichwasadministeredbytheOrganisationforEuropeanEconomicCo‐operation(OEEC),thepredecessoroftheOECD,wasimplementedonschedule,anditssuccessfuelledhighlyoptimisticexpectationsaboutthefutureeffectivenessofforeignaid.

AfterthesuccessoftheMarshallPlan,theattentionofindustrializednationsturnedtothedevelopingcountries,manyofwhichbecameindependentaround1960.Economicgrowthinastate‐ledplanningtraditionbecameakeyobjectiveduringthe1950sand1960s,anditwaswidelybelievedthatpovertyandinequalitywouldbequicklyeliminatedthroughgrowthandmodernization(‘trickle‐down’).Themajorpartoftherapidlyincreasingbilateralflowsduringthe1950scamefromtheUSA.Newbilateraldonoragencies(otherthantheUSA)weremainlyestablishedinthe1960s,withtheCommonwealth‐inspiredColomboPlanfrom1950beinganexception.6Atransitiontowardmoreindependent,multilateralrelationsalsobegantoemergeduringthe1960s.Thiscreatedaconstituencyforforeignaid,andthenon‐alignedmovementgaveforsometimeanarticulateddevelopingcountryfocustothisvoice,7asdidthevariousorgansoftheUN.Theyaccountedforcloseto30percentofmultilateralassistanceduring1960to1973asshowninTable2.2.TheUKresistedtheideaofinstitutionalizingtheseflowsuntilnearlythemid‐1960s,evenafterthecreationoftheOECD‐DACin1961.TheInternationalBankforReconstructionandDevelopment(IBRD),establishedattheBrettonWoodsConferencein1944,cametoplayacentralroleinmultilateraldevelopmentassistance,especiallyfollowingthecreationoftheInternationalDevelopmentAssociationin1960.IDAchannelsresourcestothepoorestcountrieson‘soft’conditionsalongsidetheregionaldevelopmentbanks,formedduring1959to1966.

(p.30) TheoriginalMarshallPlanwasbuiltaroundsupporttofinancegeneralcategoriesofimportsandstrengthenthebalanceofpayments(thatis,programmeaid),butfromtheearly1950sprojectaidbecamethedominatingaidmodality.Somedonorscontinuedtosupplyprogrammeaid,butaidwasincreasinglydisbursedfortheimplementationofspecificcapitalinvestmentprojectsandassociatedtechnicalassistance.

Themultilateralismofaidbecamesomewhatmorepronouncedafterthemid‐1970s.Multilateralchannelswereatthetimeseenasmoreefficientandlesspoliticalthanbilateralaid,sotheUN,WorldBank,andothermultilateralagenciesexpandedtheiractivitiesquiteconsiderably.The1970salsosawanincreasedfocusonemployment,incomedistribution,andpovertyalleviationasessentialobjectivesofdevelopmentandforeignaid.Theeffectivenessoftrickle‐downwaswidelyquestioned,andnewstrategiesreferredtoas‘basichumanneeds’and‘redistributionwithgrowth’wereformulated.


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Nevertheless,thetypicalprojectaidmodalityremainedlargelyunchanged;andmicroeconomicprojectevaluation,alsoreferredtoascost–benefitanalysis(CBA),wasexpandedandwidelyreliedonintheaiddebate.Afterthefirstoilcrisisin1973,commercialbanksstartedplayingalargeroleininternationallendingbyrecyclingOPECpetro‐dollarsandissuinggeneralpurposeloanstodevelopingcountriestoprovidebalanceofpaymentsupportandexpandexports.Theoilcountriesbilaterallyandmultilaterallyprovidedupto30percentofallODAatthepeakoftheoilpricerises,sobilateralDACdonorsandtheinternationalfinancialinstitutions(IFIs)werenolongeraloneonthelendingscene.Internationallendingsurged,andthispermittedhighgrowthwithlittledebtservicingdifficulty.

The‘goldenera’ofthe1960sand1970scametoanabruptendatthebeginningofthe1980s.Thesecondoilshockin1979reversedeconomicconditions,andtherewasahugeincreaseininterestratesduetotheeconomicstabilizationpoliciesinthedevelopedcountries.Developingcountrieswerefacedwithacombinationofhigheroilprices,importcompression,andasignificantdecreaseinexportopportunitiesduetosloweroverallglobalgrowth.Theinternationaldebtcrisiserupted,andmacroeconomicimbalancebecamecharacteristic.OnthepoliticalsceneRonaldReaganandMargaretThatchercametopowerintheUSAandtheUKrespectively,andattheWorldBankAnneKruegerbecameVicePresidentandChiefEconomist,replacingHollisChenery.Thischangewasbothsymbolicandsubstantive(Kanbur2003).EconomiccircumstancesinthedevelopingcountriesandtherelationsbetweentheNorthandSouthchangedradically.Thecrisishithard,especiallyinmanyAfricancountries.Focusondevelopmentstrategyandpolicyshiftedtointernaldomesticpolicyfailure,andachievingmacroeconomicbalance(externallyandinternally)becamewidelyperceivedasanessentialprerequisiteforreneweddevelopment.

‘Rollingbackthestate’turnedintoarallyingcallinthesubsequentstructuraladjustmentefforts,andrelianceonmarketforces,outwardorientation,andthe(p.31) roleoftheprivatesector,includingnon‐governmentalorganizations(NGOs),wereemphasizedbytheWorldBankandothers.Inparallel,povertyalleviationslippedoutofviewinmainstreamagendasforeconomicreform,butremainedatthecentreofattentioninmoreunorthodoxthinkingsuchasthe‘adjustmentwithahumanface’approachofUNICEF(Cornia,Jolly,andStewart1987).Atthesametime,bilateraldonorsandinternationalagenciesstruggledwithhowtochannelresourcestothedevelopingworld.Quick‐disbursingmacroeconomicprogrammeassistance,suchasbalanceofpaymentssupportandsectorbudgetsupport(whichwerenottiedtoinvestmentprojects,andwhichcouldbejustifiedundertheheadingsofstabilizationandadjustment),appearedanidealsolutiontothedilemmaofmaintainingtheresourceflowandthedesiretopromotepolicyreform.Financialprogrammeaidandadjustmentloans(andeventuallydebtrelief)becamefashionableandpolicyconditionalitymorewidespread.Inotherwords,arationale,whichcorrespondedwellwiththeorthodoxguidelinesforgoodpolicysummarizedbythe‘WashingtonConsensus’(Williamson1997),hadbeenfoundformaintainingtheaidflow.8


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Totalaidcontinuedtogrowsteadilyinrealtermsuntiltheearly1990s,butafter1992totalaidflowsstartedtodeclineinabsolutetermsuntiltheturnofthemillennium.Manyreasonsaccountforthefallinaggregateflowsafter1992,includingfirstofalltheendoftheColdWar.Thesamecanbesaidfortheweakeningpatron–clientrelationshipsamongthedevelopingcountriesandtheformercolonialpowers.Thetraditionalsupportofforeignaidbyvocalinterestgroupsintheindustrialcountriesreceded.Bilateralandmultilateralaidinstitutionsweresubjectedtocriticism,andattimescharacterizedasbluntinstrumentsofcommercialinterestsintheindustrialworldorasself‐interested,inefficient,rent‐seekingbureaucracies.Moreover,acuteawarenessindonorcountriesofcasesofbadgovernance,corruption,and‘cronycapitalism’ledtoscepticismaboutthecredibilityofgovernmentsreceivingaid.

Thepotentialroleofforeignaidinallthisattractedattention,andthefearthataidcangenerateundesirabledependencyrelationshipsbecameclearduringthesecondpartofthe1990sandpersistedintothetwenty‐firstcentury.Inparallel,theperceptionthatpolicyconditionalitywasfailingtopromotepolicyreformstartedtoassertitself(seeKillick1995;Mosley,Harrigan,andToye1995;Kanbur2000;andSvensson2003).ThisassessmentpromptedWorldBankandindependentacademicresearcherstostartdiggingintotheaid–growthrelationshipusingmodernpaneldataanalyticaltechniquesand,evenmorerecently,attemptstodeveloprandomizedprogrammeevaluationalsoappearedonthescene(seeDuflo2004).9

Finally,whenreviewingtheroleandimpactofforeignaid,itshouldbekeptinmindthattheworldeconomyhasseenmajorchangesininternational(p.32)

Notes:Allvariablesareexpressedasanindexequaltoonein1970andconstructedfromseriesofconstant2000pricesinUS$.FDIisconstructedfromnetFDIinflowsandtradeisbasedonthesumofexportsandimports.


Figure2.3 Macroeconomicindicatorsinaid‐receivingcountries

relationsthatgofarbeyondchangesinforeignaid.Figure2.3showshowglobaltradeaswellasODA,GNI,remittance,andFDIflowstoaid‐receivingcountriesevolvedfrom


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1970onwards.Thisfigurereflectsonlytherelativechangesinflows,nottheirrelativemagnitudes,10butitisevidentthatglobaltradehasbeengrowingfasterthanbothGNIandaidflowstopoorcountries.Thisisespeciallysofromaroundthemid‐1980s,andtheimportanceofFDIstartedchangingveryconsiderablyintheearly1990s.However,themostimpressivechangeisthatofremittanceflows.Lastly,aidfundsfromprivatefoundationshavealsoincreasedverysignificantlyinrecentyears(notshown).Insum,globalizationhasmodifiedthecontextinwhichforeignaidisimplemented.Thissuggests,ontheonehand,thatabroaderandmorerefinedawarenessoftheimplicationsofcoexistencebetweenpublicandprivateinvestmentindevelopingcountrieswouldbebeneficial.Itimplies,ontheotherhand,thataid'sroleingeneratingforeignexchangehaschangedsignificantlyrelativetootherflows.11

(p.33) 2.4.AidallocationForeignaidhasbeenjustifiedinpublicpolicypronouncementsinwidelydifferingways,rangingfrompurealtruismtothesharedbenefitsofeconomicdevelopmentinpoorcountriesandpoliticalideology,andtheforeignpolicyandcommercialinterestsofthedonorcountry.Fewdisputethathumanitariansentimentshavealsomotivateddonors.Actionfollowingseverenaturalcalamities,whichcontinuetobeendemicinpoorcountries,isanexample.Foodandemergencyreliefremainsanimportantformofaid.Moreover,thedataavailableinTable2.3suggestthatdonorsallocaterelativelymoreODAtothepoorestcountries.Thebroadervalidityofthiscasualobservationisconfirmedincross‐countryeconometricwork,ausefuloverviewoftheliteraturebeingMcGillivray(2003).Considerablevariationamongdonorscanalsobenoted.

Emphasisontheneedsofpoorcountrieswasaparticularlyprominentcharacteristic—andtheunderlyingeconomicrationale—inmuchofthepolicyliteratureonforeignaidinthe1950sand1960s.Herethefocuswasonestimatingaidrequirementsinthetraditionofthetwo‐gapmodel(CheneryandStrout1966).Thetwo‐gapmodelhasbeensubjectedtocriticism,12andinparalleltheroleofaidhaschangedtoamuchmoremultidimensionalsetofconcerns(Thorbecke2000).Economicreturnisbynomeanstheonlygoalofaid.Nevertheless,growthandeconomicdevelopmentinaid‐receivingcountrieshavecontinuedasyardsticksfortheeffectivenessofaidbothintheirownrightandasnecessaryconditionsfortherealizationofotherdevelopmentaims.Itisfromthisperspectivethatthediscussioninsection2.5onaid'simpactongrowthshouldbeseen.

Itisnotnewthatselfishmotivesarecriticalinbilateraldonordecisions,andbilateraldonorsdoindeedbehaveverydifferently.Uptoabout1990,theColdWarwasusedasapowerfuljustificationforprovidingaidtodevelopingcountriestostemthespreadofcommunism.Similarly,aidfromsocialistgovernmentswasmotivatedtopromotesocialistpoliticalandeconomicsystems.Otherstrategicinterestsplayaroleaswell:theUSAhasovertheyearsearmarkedverysubstantialamountsofaidtoEgyptandIsrael;13beingaformercolonyisanimportantdeterminantingettingaccesstoFrenchaid;andvotingbehaviourintheUNcanaffectaidallocationbothbilaterally(AlesinaandDollar2000)andthroughthemultilateralsystem(Andersen,Harr,andTarp2006).BerthélemyandTichit(2004)andBerthélemy(2006)offerfurthervaluableinsightonhowbilateraldonorsare


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influencedinaidallocationsbytheirownstrategicandcommercialinterestversusthedevelopmentmotivesofaidrecipients,andonthefactthatnotalldonorsbehaveinthesameway.

(p.34) Insum,thedonorcommunityhasfailedtomeettheestablishedinternationaltargetofcontributing0.7percentofnationalincomeasODA.Thisisthecasedespitewidespreadendorsementoftherecommendationsforalargescaling‐upinthecontextoftheMillenniumDevelopmentGoals(MDGs);seeAnderson2007andSachs2005.AsshowninTable2.1,onlytheScandinaviancountriesandtheNetherlandshaveconsistentlymetthistargetsincethemid‐1970s,whiletheUSAcontributedaround0.2percentofitsGNIin2006.

2.5.TheimpactofforeignaidVariousapproacheshavebeentriedtodealwiththechallengeofmeasuringthe‘true’impactofaidondevelopment,asreflectedforexamplebygrowthorprogressinsocialindicators.14Oneistocompareimplicitorexplicittargetswithactualoutcomes,andanotherquitecommonapproachistorelyonbeforeandaftercomparisons.Theselinesofanalysissufferfromtheirinherentinabilitytoattributechangesinobservedoutcomestoforeignaid.Inotherwords,itisnotsatisfactoryinassessingtheimpactofaidtoarguecasuallythatsincegrowthinAfricaisfarfromsatisfactoryaid‘doesnotwork’.Similarly,thefactthatsomeaidprojectshavefaileddoesnotinanywayprovethataidasawholeisafiasco.Unsuccessfulinvestmentprojectsandpublicsectoractivitiesaboundineventhebestpolitical,social,andeconomiccircumstances.Infact,mostwouldprobablyagreethatifinvestmentsarealwayssuccessfultheninvestorbehaviourislikelytobetooriskaverse.Developmentisandwillalwaysbeaparticularlyriskybusiness.Anyseriousanalysismusteither(i)trytodigdeeperinanattempttouncoverwhetherforeignaidhasonaveragehadapositiveimpactondevelopmentinaid‐receivingcountriesornot;or(ii)aimatidentifyingthemechanismsthroughwhichaidimpactson,forexample,growth,includingthepotentialpositiveandnegativeeffects(orreturns)associatedwithforeignaid.

Tobeabletomeasuretheeffectofaid,theresearchermustinprinciplebeabletocomparethevalueofachosenindicator(suchasgrowthorpovertyreduction)intwostrictlyindependentsituations—withandwithoutaid.Toestablishthe‘true’measureofaidimpact,theimportanceofallothercircumstancesthathaveaffectedagivencountryovertimeneedstobeproperlyaccountedfor.15Alternatively,ifagroupofcountriesiscompared(withandwithoutaid)theanalystneedstoaccountfortheimpactonthechosenindicatoroftheotherdifferencesthatexistamongtheunitsofobservation,likeinacontrolledexperiment.Thisisthefundamentalevaluationchallenge,(p.35) andthereisinsocialsciencenowayofaddressingthisproblem(thatis,thechallengeofestablishinganappropriatecounterfactual)inabroadlyacceptablewaywithoutmakingassumptionsthatareboundtobedebatable,intheoryandinpractice.16

Insection2.4,itwaspointedoutthataidhasbeengivenformanyreasonsthathavelittletodowithsocio‐economicadvancementinaid‐receivingcountries.Thishasundoubtedlyconstrainedtheimpactofaidongrowthanddevelopment.Thetargetsforaidhavealso


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variedconsiderablyfromonedecadetothenext.Thesamegoesforthegeneralpolitical,social,andeconomiccircumstancesasdiscussedinsection2.3,andthemodalitiesandsourcesofaidhavechangedaswell.Asaresult,theconditionsunderwhichaidhashadtooperatehavechangeddramaticallyfromonedecadetothenext.Thereis,tobesure,nosimplewayofaccountingproperlyforallthemanyvariedandcomplexfactorswhichhaveplayedaroleindevelopmentoverthepastthirtyyears—alongsideforeignaidamountingtoaroundUS$35percapitaperyear.

Despitethechallenges,agreatnumberofstudieshavebeenproducedinrecentyearsontheeffectivenessofforeignaid.Thistopichasbeenacentralandrecurringthemewithwhichmanydevelopmenteconomists,subscribingtothedifferentparadigmsofdevelopmentthinking,havegrappled,andmethodologieshavevaried.Morespecifically(i)theimpactofaidhasbeenevaluatedatthemicro‐andmacroeconomiclevels;(ii)cross‐countrycomparisonsaswellassingle‐countrycasestudieshavebeenused;and(iii)aideffectivenessresearchincludesbroadsurveysofaqualitativeandinterdisciplinarynatureaswellasmorequantitativeeconometricwork.17Asapointofdeparturefortheremainderofthischapter,itisrelevanttostressthatthereiswidespreadagreementintheliteraturethataidhasinmanycasesbeenhighlysuccessfulatthemicroeconomiclevel.ThemostrigorousprojectevaluationsaredonebytheWorldBank,andreportsfromtheIndependentEvaluationGroupoftheWorldBankaregenerallyencouraging.Fortheperiod1993to2002anaveragerateofreturnof22percenthasbeennotedanddecentprojectratesofreturnhaveovertheyearsbeenreportedregularlyinonesurveyaftertheother,includingforexampleMosley1987andCassen1994.Overall,amassofprojectevidencehasbeencollected.Fewdisputethataidinterventionshaveworkedinhelpingimprovesocialoutcomesthroughbetterhealth,helpingpromotedevelopappropriatetechnology(suchasthegreenrevolution),andsoon.Yet,doubtsaboutaid's(p.36) overallimpactongrowthanddevelopmentlingeron,andthequestionisregularlyraisedwhetherallthisaddsupatthemacrolevel.

Itisthereforerelevanttoturntohowtheempiricalliteratureonaid'smacroeconomicimpactongrowthhasevolved.Thischoiceoffocuscanbejustifiedonseveralgrounds.First,asanextensionofthemicroeconomicevidence,numerouscasestudiessupport—accordingtotheWorldBank(1998)—theobservationthataidhas,attimes,beenaspectacularsuccess.Inestablishingcausallinks,thecriticalchallengeisasnotedabovetopinpointacrediblecounterfactual,anditisneverstraightforwardtogeneralizefromcasestudies.Anotherreasonforthepopularityinthepasttentofifteenyearsofthecross‐countrypaneldataapproachisthatitmakesitpossibletomovewellbeyondsimplisticaid–growthcorrelationanalysis,wheretheanalysisofcausaleffectsisindeedratherprimitive.Itshould,infact,comeasnosurprisetotheinformedobserverthatthesimplecorrelationcoefficientbetweengrowthandaidcaneasilyturnouttobeinsignificant,ornegative.Donorsallocate,asalreadydiscussed,moreaidtopoorercountries,whicharesubjecttodifficultiesandshocksofmanykinds,includingnaturalandman‐madecalamities.Whencountrieshavedonewellforawhile,donorstendtotransferlessaid,especiallywhenmeasuredasapercentageofGDP,andeventuallytheywillwithdraw(ashappenedinthecaseofKorea).Whilesuch‘graduation’maytakeawhile,simple


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correlationsarelikelytoshowanegativerelationshipandwilldefinitelynotrevealthe‘true’impactofaid.

Inthemodernaid–growthwork,theanalystcanattempttocontrolfortheimpactofalargerangeofvariables,andbecomesinthiswayabletomoveclosertotheidealofhavingareliablecounterfactual.18Theanalystis,atleastinprinciple,capableofaddressingissuessuchastheidentificationprobleminherentinhavingaidallocatedendogenouslyintheforeignaidsystem.Second,afocusongrowthmakesitpossibleinawiderperspectivetodrawonbothtraditionalgrowththeoryandnewgrowthmodelstoillustratehowaidcanpotentiallyimpactthroughahighlydiversesetofchannels.19Third,macroeconomicstudiesarerequiredinordertohelpgeneralizeabouttheoverallimpactofaidongrowthandeconomicdevelopment.Fourth,theaid–growthliteraturecontinuestobehighlyinfluentialinshapingcommonperceptionsaboutthesignificanceandimpactofforeignaid.Fifth,whetheraidhelpsgrowthornotisessentiallyanempiricalquestion.

Thequantitativecross‐countryanalysesofthemacroeconomicimpactofforeignaidongrowth,whichspansalmostfourdecades,canbeclassifiedintothreegenerations(seeHansenandTarp2000).Workinthefirsttwogenerations(whereaid'simpactongrowthviasavingsandinvestmentwasthefocus)was(p.37) inspiredbythesimpleHarrod–Domarmodelandthetwo‐gapChenery–Stroutextension.Thisframeworkwas,asmentionedinsection2.4,usedextensivelyinthepastastheanalyticalframeworkofchoiceforassessingaidimpact;butfromtheearly1990sathirdgenerationofpanel‐basedeconometricstudiescametodominatetheacademicandpublicdiscourses.Thisworkwasmotivatedinpartbytheavailabilityofmuchbetter(panel)dataacrossarangeofcountriesandinpartbyinsightsemergingfromnewgrowththeoryandtherapidlyincreasingnumberofgeneralempiricalstudiesofgrowth.Inaddition,theendogeneityofaidandothervariablesisaddressedmoreconsistentlythanbefore,20andtheaid–growthrelationshipisappropriatelyperceivedasnon‐linear.TheunderlyingideabehindtheHarrod–Domarmodelwasindeedsimple.Assumethatphysicalcapitalistheonlyfactorofproduction(soinvestmentisthekeyconstraintongrowth)andassumeaswellthatallaidisinvested.Thenitisstraightforwardtocalculatethegrowthimpactofadditionalaid.Ifaidcorrespondsto6percentoftheGNPandthecapital–outputratioisestimatedat3.0,21whichisatypicalestimate,thenaidaddstwopercentagepointsayeartothegrowthrate.Theimpactofaidisclearlypositive,andaidworksbyhelpingtofilleitherasavingsoraforeignexchangegap.Thelattergaprelatestotheargumentthataidrepresentsforeigncurrencyandassuchcanfacilitateimportsofgoodsandservicesthatmayinsomecasesbecriticallyimportantinoutputproductionoverandaboveaid'simpactonrelievingthesavingsconstraint.Thiskindofreasoninghas,however,ledtowildlyover‐optimisticexpectationsaboutaid'spotentialimpact.22

First,itisatallordertoexpectbothalinearrelationshipbetweenoutputandcapitalandthatallaidisinvested.Aidis,asdiscussedinsection2.4,providedformanyreasons.Forexample,foodaidinfaminesituationsisnotintendedasinvestment.Inaddition,theshareofaidthatendsupbeinginvested(ratherthanconsumed)will,ineventheverybestcircumstances,dependonthedegreeoffungibilityoftheforeignaidtransfer.23Onthe


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otherhand,evenif(p.38) aidaddstodomesticsavingsandinvestmentonlessthanaone‐to‐onebasis,aiddoescontinuetohaveapositiveimpactongrowthinthetraditionallineofthinking—aslongastotalsavingsandinvestmentgoup.24

AsecondlineofcritiqueoftheHarrod–Domarandtwo‐gapapproachhasbeentheargumentthatgrowthislessrelatedtophysicalcapitalinvestment(includingaid)thanoftenassumed(Easterly2001).Ifthekeydriveroftheproductiveimpactofaidisrelatedmoretoincentivesandrelativepricesandmoregenerallytothepolicyenvironmentthenitbecomesimportanttoconsiderpotentiallydistortionaryeffectsofaidonincentivesandeconomicpoliciesintheaid‐receivingsystemandviceversa.Anexampleis‘Dutchdisease’,anddomesticdemandandresourceallocationmaybetwistedinundesirabledirectionsfollowingalargeaidinflow,especiallyifmacroeconomicmanagementisweak.Oneconcreteexampleisthataiddonorsoftenpaymuchhigherwagesthanequallyimportantand,inmanycases,moreimportantnationalinstitutions.25

Third,alargeandgrowingliteratureonthepoliticaleconomyofaid,withrootsbacktoBauer(1971)—see,forexample,Svensson(2000)andKanbur(2003);Gunning(2005);—hasarguedthatifaidallowsarecipientgovernment(localelites)topursuebehaviourthatisinanywayanti‐developmentalthenthepotentialpositiveimpactofaidcanbeundermined.Therearemanysuchexamplesavailableinpracticerangingfromoutrightmisuseofaidbycorruptgovernmentstomoresubtleissuessuchasthepotentialnegativeimpactofaidondomestictaxation(AdamandO'Connell1999).

Thethirdgenerationdebateaboutaid'simpactongrowthisrootedintheabovekindsofobservationsaswellasinMosley's(1987)micro–macroparadox.Hesuggestedthatwhileaidseemstobeeffectiveatthemicroeconomiclevel,26identifyinganypositiveimpactofaidatthemacroeconomiclevelisharder,orevenimpossible.Infact,themicro–macroparadoxseemedself‐evidenttomanyatthetimeitwasformulatedwherethegeneralatmospherewasoneofaidfatigueandlackofbeliefinapositiveimpactofaidongrowth.Anotherexplanation,sometimesreferredtoasthe‘IronLawofEconometrics’,inthe(p.39) terminologyofHausman(2001),receivedlessattention.27Itmustneverbeoverlookedthatoncewetrytoexplaina‘dirty’dependentvariablewithnoisydataandweakproxiesitshouldcomeasnosurprisethattheresultisbiasedtowardszero,orinthiscaseeventowardsthenegativegiventheaidallocationbehaviourofdonors.WhatMosleyandmanyafterhimhavestruggledwithishowtocontrolforthewildlychangingcircumstancesunderwhichaidhasbeenimplemented.Wecan(andshould)looktohistoryandtrytotreatitasacontrolledexperiment,butweareattheendofthedaylimitedbytheextenttowhichourproxiescapturethemassivechangesincircumstancesunderwhichaidisimplementedovertimeandacrosscountries.

Boone(1994)managedtostiruptheaid–growthdebateagainintheearly‐to‐mid‐1990s.HisworkwascitedinTheEconomiston10December1994underthecolourfulheading‘DowntheRathole’,andBoonedidindeedsuggestthataiddoesnotcreate,norcorrelatewith,thoseunderlyingfactorswhichcausegrowth.Boonedidnot,however,occupycentrestageforlong.HisunderlyingtheoreticalmodelwasqualifiedbyObstfelt(1999).Moreover,Boonetreatedtheaid–growthrelationshipaslinearand,asisthecasewith


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manyotheraidpapers,didnotaccountconvincinglyforthepotentialendogeneityofaid.28Finally,andmuchmoreimportantly,ahighlyinfluentialideaspread,inpartduetoeffectivebackingbytheWorldBank.Thisistheideathatwhileaidhas,onaverage,noimpactongrowth,aidmaystillworkinsomecountriesortimeperiods.BurnsideandDollar(1997,2000)pursuedthisandarguedthat‘aidhasapositiveimpactongrowthindevelopingcountrieswithgoodfiscal,monetaryandtradepolicies’,andtheyaddedthatin‘thepresenceofpoorpolicies,aidhasnopositiveeffectongrowth’.Inotherwords,aidworks,butonlyincountrieswith‘goodpolicy’.Theybasedthisconclusiononanaid–policyinteractionterm,introducedtocapturethenon‐linearitybetweenaidandgrowthwhichemergedasstatisticallysignificantintheirpaneldataanalysis.Insum,BurnsideandDollarprovidedanattractiveandveryelegantsolutiontothemicro–macroparadoxwithclear‐cutandeasytointerpretpolicyimplications.Theyare,inaddition,verymuchinlinewithorthodoxdevelopmentthinking.

BurnsideandDollar,andmorerecentlyCollierandDollar(2001,2002),haveusedtheforegoingframeworkasabasisforsuggestingthataidshouldbedirectedto‘goodpolicy’countriestoimproveaid'simpactonpovertyalleviation.Theindexmeanttocapture‘goodpolicy’hasgraduallybeenexpandedfromtheBurnside–Dollarfocusonbudgetsurplus,inflation,andopennessto(p.40) theWorldBank'sCountryPolicyandInstitutionalAssessment(CPIA)index29(forarelatedcritiqueoftheCPIAseesections4.2and4.3inMachikoNissanke'schapterinthisvolume).Theargumentforallocatingaidselectivelyisalso,atleastpartly,justifiedwithreferencetothefindingthattheamountofaidcountriesreceivehasnoimpactonthequalityoftheirmacroeconomicpolicies,afindingthatalsoappearedtoemergefromBank‐fundedresearch(Devarajan,Dollar,andHolmgren2001).30WhiletheBank'sMonterreydocument(WorldBank2002)toneddowntheserecommendations,andtheWorldBank(2005)strikesaverydifferentlineofargumentinitsinterpretationofthepolicyreformprocessduringthe1990s,thebasicthrustinmuchoftheinternationalaiddebateremainsthatmacroeconomicperformanceevaluationandpolicycriteriashouldplayakeyroleinaidallocation.

Thereis,however,anacademicdilemmaaroundthisissue:(i)HansenandTarp(2001)foundthattheBurnside–Dollarresultisfarfromrobust.Infact,itappearedatthetimethatdiminishingreturnswhereaidsquaredisintroducedintotheanalysistocapturenon‐lineareffectsbetweenaidandgrowthwastheempiricalspecificationwithmostsupportinthedata.Incontrast,thedatadidnotsupporttheBurnside–Dollaraid–policyinteractionterm;31(ii)DalgaardandHansen(2001)showedthesamewiththeBurnsideandDollardataset,onceithadbeenmadeavailabletoresearchersoutsidetheWorldBank,performingageneral‐to‐specifictest;(iii)Easterly,Levine,andRoodman(2004)foundtheBurnside–Dollaraid–policystorytobefragileinthefaceofanexpansionofthedatasetinyearsandcountries;32andfinally(iv)Roodman(2004)offeredacomparativeassessmentofthelargenumberofstoriesontherelationshipbetweenhowmuchforeignaidacountryreceivesandhowitgrows,whichthecontemporaryeconometricliteraturehasgenerated.He(p.41) originallyconcludedthattheaid–policylink(identifiedbyBurnside–Dollar)provestheweakest,whiletheaid–tropicslink(identifiedbyDalgaard,Hansen,andTarp2004)ismostrobust.Roodmansubsequentlymodifiedhisstudyto


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focuspurelyontheissueoffragility.

Dalgaard,Hansen,andTarp(2004)arguethataidandpolicybothdependontheaveragerateofgrowtheventhoughtheyarepredeterminedintheoriginalsystem.Theythereforetakeaccountofthisintheirempiricaltesting,whichalsocontrolsforthepotentialendogeneityofinstitutions.Intheirattemptatassessingtheimportanceofstructuralcharacteristicsonaideffectivenesstheyaddthefractionoflandintropicalareasasaproxyforclimaterelatedvariables.Thisvariableanditsinteractionwithaidoutperformboththe‘goodpolicy’and‘thediminishingreturns’model.Inconcluding,Dalgaard,Hansen,andTarp(2004)makethepointthatitdoesappearfromthedataasifaidhasbeenfarlesseffectiveintropicalareasoverthelastthirtyyears.Theyalsostressthatitishardtobelievethataidshould,inherently,belesspotentinthetropics.Therealexplanationfortheaid–tropicslinkis,intheirassessment,likelytolieelsewhere;andtheycallforfurtherresearchtohelpdisentanglethechannelsthroughwhichaidmattersforproductivityandefficiency.Theirresultalsohighlightsthatwhilethereismeritinmoresophisticatedversionsofargumentsforselectivity,macroeconomicallocationrulesdependcriticallyonunderstandingthecomplexlinksinparticularcountrycircumstancesbetweenaid,growth,anddevelopmentobjectivessuchaspovertyreduction.Whatthis(andthemanyotherstudieslistedin,forexample,Clemens,Radelet,andBhavnani2004)addsuptocanbesummarizedasfollows:

•Itishighlylikelythat‘aidpaysagrowthprice’asgrowthregularlygiveswaytootherconcernsasthemostimportantcriterionforaid.33Yet,thataidhasapositiveimpactonpercapitagrowthissupportedbyasignificantbodyofempiricalaid–growthstudies.34Atthesametime,aidisbynomeansapanaceaforgrowthandpovertyreduction,andtheaid–growthlinkremainscontentious.35(p.42)•Thewayinwhichdataaredealtwithtoaddressthecomplexissueofidentifyingtheimpactofaidongrowthiscriticallyimportantfortheconclusionsdrawn.Methodologicalchoicesmatter.•Theimpactofaidongrowthisnotthesameacrossaidrecipients.Therearedifferencesinaidefficiencyfromcountrytocountry(seeMavrotasandNunnenkamp2007);anditremainsunclearwhatdrivesthesedifferences.Inparticular,theimportanceof‘deep’structuralcharacteristicsinaffectinghowaidimpactsongrowthisnotyetfullyunderstood.

Furthermore,using‘goodpolicy’(intheformoftheCPIAindex)asabasisforallocatingaidselectivelyisquestionable.Thereareatleastthreereasons:

(1)AnattractionoftheoriginalBurnside–Dollarindexwasitssimplicity.Itwascontroversialbuteasytointerpret.Itismuchhardertoderiveclear‐cutpolicyadvicebasedonanypositiveinteractionbetweenaidandtheCPIA.TheCPIAisacompositeindexofsixteendifferentvariablesgroupedintofourcategories(seeTable4.1inChapter4ofthisvolume).InspiteofthedescriptivevalueoftheCPIAindex,whichIdonotquestion,itisfromananalyticalpointofviewfarfromeasy


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todecipherwhatdrivesaidefficiencywhenindicatorsof‘economicmanagement’,‘structuralpolicies’,‘socialpolicies’,and‘publicsectormanagementandinstitutions’areaggregatedintoonemeasure.Inaddition,trade‐offsbetweentheelementsoftheindexareboundtoariseinpractice.Forexample,placinggreateremphasisonbudgetbalance(anelementin‘economicmanagement’)maywellbeinconflictwithimprovinghealthcare,education,andsoon,belongingtothecomponent‘buildinghumanresources’whichformspartof‘policiesforsocialinclusion/equity’.Improvedbudgetbalancemayalsoleadtoalower‘pro‐poorexpenditureindex’showntobepovertyreducingbyMosley,Hudson,andVerschoor(2004).(2)ThechangesintheCPIAindexmaybecausedbythegrowthperformance,inwhichcasetheCPIAshouldnotbeusedasanexogenousvariable.36Moreover,Mauro(1995)highlightsthatusingexpertevaluationsmaybeproblematic.Theargumentisthatevaluatorsarelikelytoconcludethataparticularsetofinstitutionsisgoodifthecountryinquestionisgrowingrapidly.(3)Theuseof‘goodpolicy’mayleadustopunishcountrieswithunfavourableconditionsinsteadofhelpingthem.ThereisaveryhighprobabilitythatacountrywithalowCPIAisinthetropicalregion.Ifthe(p.43) variationinaideffectivenessacrosscountriesisnotpolicyinduced,butratheraresultofpoorinitialconditions,adifferentapproachtoallocatingaidhastobeestablished.Atthesametime,everyefforthasofcoursetobemadetohelpputinplaceimprovedpolicy,whichhelpsgrowthandpovertyreduction.

Insum,itisadvisabletobealertaboutwhatisinfactunknown.Thisimplies,forexample,thatmoreattentionshouldbepaidinfutureresearchonforeignaidanddevelopmenttodifferentmodalitiesofaid(suchasprojectversusprogrammeassistance)andtheirdesignandapplicationindifferenttypesofaid‐receivingcountries.

2.6.DiscussionofthecurrentaidanddevelopmentdebateHasforeignaidbeenasuccessorfailureinpromotingdevelopment?Basedonsomeofthecontributionstotheforeignaidliteratureoverthepastdecade,including,forexample,theworksofBoone,BurnsideandDollar,Sachs,andEasterly,itmightappearthat‘Theanswer,myfriend,isblowin’inthewind'.37Boone(2006)hasrecentlyreiteratedthat‘thehistoryoflargeaidflowsis,todate,amajorfailure’,whileBurnsideandDollar(2000)foundthataidpromotesgrowth,butonlywhenpolicyis‘good’.

Nevertheless,Sachs(2005)andtheUNMillenniumProject(2005)argueemphaticallythataidhasworkedandshouldbe‘scaledup’.SachshasplayedakeyroleasspecialadvisertotheUNSecretaryGeneralontheMDGs,andhemakesaconcertedefforttoreinstatemanyofthetraditionalargumentswithindevelopmenteconomicsforbelievingaidworksinhelpingpoorcountriesbreakoutofpovertytraps.Hereferstoinvestmentsattunedtolocalneedsandusesavocabulary,whichisphrasedalonggap‐fillinglinesofthinking.Healsodismissescorruptionanddomesticpolicyfailureasthefundamental‘cause’ofAfrica'sproblems,andarguesinsteadthatthecausallinksoriginateinpovertyandthelackofgrowth.Sachsfurthermoreprovides‘tendramaticexamplesthatprove


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thenaysayerswrong’(Sachs2005:259).Theseexamples,whicharereferredtoas‘clearaidtriumphs’,rangefromaid'scontributiontotheGreenRevolutionofAsiatotheeradicationofsmallpoxandpolioandontothemobilephonerevolutioninBangladesh.Theydemonstrate,inSachs'words,somecommonthemes(ibid.265).‘Firstandforemost,scalingupispossiblewhenitisbackedbyappropriateandwidelyapplicabletechnology,organizationalleadership,andappropriatefinancing’;andhegoesontostatethatin‘thecaseoftheMillenniumDevelopmentGoals,thepromisingtechnologiesexist,buthavenotbeenscaledup’.

(p.44) Cornia(2005)pointedlynotesthatSachsdeservesalotofcreditforhis‘passionateadvocacy’.Moreover,Sachsdoesmanagetocallattentiontoatleastsomeofthewaysinwhichaidhashelpedpoorpeopleinthepast.Hissuggestionthatmuchmorecanandshouldbedonedeservesinmyassessmentattentiontogetherwithhismenuofinitiatives.38Atthesametime,asarguedbyCornia,itisproblematicthatsomuchofthepresentdevelopmentdebateisbeingcastintermsofincreasesinaidflowsfortheachievementoftheMDGs.Thisis,toquoteCornia,‘reductionist’.Inaddition,evenifitisacceptedthataidworks,andworkswell,itisunlikelythattheMDGscanbereachedifaidisincreasedto0.7percentofdonorGNIasarguedbySachs.Thereturnwillnot,eveninthebestcircumstances,bebigenough.Iamafraidthatmobilizingsuchoptimisticexpectationsmayinthefinalanalysisleadinafewyearstofrustrationandanundesiredbacklash.

Easterlyhasovertheyearsauthoredanimpressivenumberofbooksandpapers,afewofwhicharelistedinthereferences.Heisasharpandarticulatecriticofforeignaid,andhiscontributionstotheacademicandbroaderpolicyliteratureareinfluential.Intworecentstudies(2005,2006),Easterlyattacks,headon,theUNMillenniumProjectandtheworkofSachs.Easterlyreferstothe‘whiteman'sburden’andponders‘WhytheWest'seffortstoaidtheresthavedonesomuchillandsolittlegood’.Easterlydeservesalotofcreditfordemonstratinginhismanywritingsthatmuchwentwrongwithaidinthepast,andheisspotonwhenhearguesthatalotofindividualinitiativehasbeenstifledundertheburdenofdogmaticandcentralizedplanningpracticesandbureaucraticincompetenceinthepastdecades.IbelievethathumaninitiativeandappropriateincentivesarecorrectlyidentifiedbyEasterlyastwocriticallyimportantelementsinmakingdevelopmenthappen.Muchcan,andshould,begainedinthinkingaboutdevelopmentandtheappropriateroleofforeignaidinthefuturefromtakingthistoheart.

Sen(2006)has,inasimilarvein,notedthatthereismuchinEasterly'sbookthatoffers‘alineofanalysisthatcouldserveasthebasisforareasonedcritiqueoftheformulaicthinkingandpolicytriumphalismofsomeoftheliteratureoneconomicdevelopment’;andCornia(2005)arguesthatEasterlyisrightontargetinarguingthat‘poverty,mortalityandsoonareinfactmuchmoresensitivetomacroeconomic,financialandtechnologicalchanges(ortheirlackthereof)thantotheaggregatevolumeofaidflows’.Atthesametime,bothSenandCorniaraiseaseriesofcriticalpoints.TheyrangefromwhatCorniacallsthe‘demonizationofworld“planning”’toSenstatingthat‘Perhapstheweakestlinkin


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Easterly'sreasoningishisalmostcompleteneglectofthedistinctionsbetweendifferenttypesofeconomicproblems’.Inanycase,myexperienceandreadingoftheexistinganalyticalevidencedoesnotsuggestthat(p.45) aidhasonbalancebeenasineffectiveasEasterlyseemstosuggest.Finally,IdosensethatEasterly'ssarcasticstyle,andhisrejectionofanytypeof‘planning’andcoordination,getsinthewayofmuchneededdialogue.39

Summingup,EasterlyandSachshavedoneacommendablejobinenergizingthecurrentdebateaboutforeignaid.But,lookingahead,itisinmyassessmentimportantthattheirrespectiveconflictingapproachesdonotendupconfiningaconstructiveandforward‐lookingsearchforhowbestdesignandimplementaidinthefuture(seealsoChapter13ofthisvolumeonthe‘“bigpush”versusabsorptivecapacity’debate).Againstthisbackground,Iwouldsummarizetheexistingsituationofthecurrentaidanddevelopmentdebatebyhighlightingthattheredoesseemtobeconsensusaboutatleastthefollowingthreepoints:

(1)Muchhasbeenlearntfrombothsuccessesandfailuresaboutdevelopmentanddevelopmentpolicyoverthepastfiftyyears,andlotsofdisagreementremainsaswell.Onmanyquestionsourprofessionisstillsearchingforappropriateanswers.(2)Themorethanonebillionpeopleintheworldwhoarelivinginextremepovertyshouldnotbelefttothemselves.Birdsall,Rodrik,andSubramanian(2005)state‘developedcountriesshouldnotabandonthepoortotheirplight’;Easterly(2005)notes‘aidcanstilldomuchforthepoor’;andevenBoone(2006)arguesthat‘theaidsuccesseswithwhichweareallfamiliar…areimportant’.Muchofthecontroversyintheacademicandpolicydebateisaboutaid'sperformanceinthepast.Theneedandrelevanceofsuchactioninthefutureis(ignoringthe‘pure’ideologists)notdisputed,40butwhethersuchactionisjustifiedbypolitical,economic,ormoralconsiderationsvaries.(3)Therearemanyexampleswhereaidhasworkedatthemicroleveltothebenefitofdevelopingcountriesandtheirpopulations.Itisalsotruethataidisfarfromflawless.Therearemanycaseswhereaidhasnotworkedtohelpthepoor,assuggestedbySachs(2006).Whetherallthisaddsuptoapositiveaverageimpactongrowthatthemacroleveliscontentious.

2.7.ConclusionControversyisrampantinthedebateaboutaid,growth,anddevelopment.Thisisnotparticularlysurprising.Evenacursorylookathistoryshowsthatdevelopmentoverthepastthirtytofiftyyearshasbeenacomplexandvariegatedprocess.Therehavebeeninterrelatedchangesinresourceaccumulation,(p.46) populationgrowth,growthinknowledge,andimprovementsinproductiontechnology,alloperatinginanenvironmentcharacterizedbyfrequentanddramatictransformationsinpoliticsandinstitutions.41Socialsciencehastorelyoninterpretationsofhistoryintryingtocometogripswiththeseprocesses,andtheanalystmustbeawareofthedangersofover‐simplification.Single‐causetheorieshavenotfaredwellindevelopmenteconomics.Thisreflectsthat


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simplepolicyrecommendationsareofteninappropriateinacomplexworld,andthisissowhethersuchrecommendationshaveemanatedfromtheplanningtraditionofthe1960sand1970sorfromthefree‐marketthinkingofthe1980s.

Ihavetriedtohighlightinthischapterthatonecannotconcludethataidhasbeenafailurejustbecausegrowth,in,forexample,Africa,hasbeenlessthandesired,orbecauseprojectshavefailed.Itisexceedinglyeasytoarriveatanegativeassociationbetweenaidandgrowth,butsuchcorrelationsdonotprovideadefinitivecausalanswer.Thereisnologicalinconsistencyindevelopmenttermsbetweenlittlegrowthandaidinflowsofthesizeexperiencedinthepast.Aidallocationmattersfortheanalysis;andcomplexdevelopmentproblemsandissuesareloominginthebackground.Majorchangeshavetakenplaceintheglobaleconomyandaffectedtheenvironmentinwhichaidisimplemented,andtargetsforaidhavebeenchangingfromonedecadetothenext.Simplecorrelationanalysisorstorytellingcannot,andshouldnot,beallowedtosettlethecausalitydebateontheirown.Ialsorecognize,asshouldbeclearfromthischapter,thatcross‐countryeconometricstudiesareassociatedwithcriticalmethodologicalchoices.Comingupwiththe‘true’aid–growthrelationshipisfarfromeasy,andaidisofmuchtoolimitedsizetoturnthewheelsofhistory.Yet,thisdoesnotmakeitjustifiedtorejectaidasausefulinstrumentinthefightagainstpoverty.Ifweareagreedthataidworksatleastsomewhereandsometimes,thenaidmustbeoutrightharmfulelsewherefortheaverageimpacttobenil.Icanfollowthatsomeaidhasnotdoneallthatmuchgood,andthisisashame.Yet,thereisasignificantdifferencebetweendoinglittlegoodanddoingoutrightharm.Ifailtoseethattheempiricalevidenceaddsuptoasuggestionthatalotofillhasactuallybeendoneacrossanimportantsampleofcountries.Similarly,itisonethingtocallattentiontoproblemsthatshoulddefinitelybeaddressed,itisquiteanothertodismissforeignaidasharmful.Myoverallconclusionisthatnuancedandsubtleassessmentsareadvisablewiththeempiricalevidenceinhandatpresent.

BurnsideandDollaraddedwelcomeanalyticalnuancetoBoone,ashaveothers.ButtheBurnside–Dollarsolutiontothemicro–macroparadoxhasbeencounteredintheliteratureandshowntobehighlydelicate.Methodologicalchoicesdomatter,andasubstantialpartofthemodernaid–growth(p.47) literaturedoessuggestthataidhasapositiveimpactonpercapitagrowth.Noexcessiveclaimsaboutparametersizesandtotalaidimpactshouldbemadeonthisbasis.Yet,thisshouldnotovershadowthepositiveresultsathand.InthiscontextIampuzzledthatcriticssuchasEasterlysooftenignoretheseandinsteadusecross‐countryworkasabasisforquestioningforeignaid.42Attenuationsuggeststhatwithnoisydata,a‘dirty’dependentvariable,andweakproxiesresultswillbebiasedtowardszero.Giventhis,thechallengeistoclarifywhetherthedatastillhaveanythingmeaningfultosay.43

Turningtothedebateabouttheallocationofaid,thereismeritinmoresophisticatedversionsofargumentsforselectivity.Forexample,itmakeslittlesensetodostructuraladjustmentlendingwhenthemacro‐policyenvironmentis‘bad’andthereislittlepossibilityforpolicyreform.However,basedontheempiricalworkonaideffectivenessduringthepastdecade,Iamconvincedthatmacrocriteriacannotandshouldnotstand


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aloneinevaluatingtheeffectivenessofmostdevelopmentassistanceanddeterminingitsallocation.‘Goodpolicy’canbedangerouslymisleadingasthefundamentalcriterionforaidallocation,andsimplisticmacrorules‐of‐thumbmayreinforcetheadversityofthoselivingundersubstandardgovernance.Itisaregrettablefactthatmanyoftheworld'spoorestpeopleliveinconditionsofsubstandardnational,regional,and/orlocalgovernanceandlackanytenablemeansofchangingtheseinstitutions.Itwouldbegravelyironicforaidagenciestocompoundthemisfortunesofthesepeoplewithdiscriminatoryaidallocation.

Overall,itisjustifiedtoargueforincreasedaid,butexpectationsaboutitsimpactongrowthshouldbekeptatreasonablelevels.ThisiswherethemanyclaimsofSachsandtheMillenniumProjectcanattimescauseconcern.Itwouldbeunfortunateifunrealisticexpectationsaboutaidimpactarebuiltupmuchalongthelinesofwhathappenedbackinthe1950sand1960s,intheearlystagesofaid.Atthesametime,assertingthat(i)aidhasapositiveimpact;(ii)shouldbe‘scaledup’;and(iii)thatitsimpactdoesnotappeartobeconditionalon‘goodpolicy’,isnotinanywayincontradictionwithsuggestingthatfutureaidshouldbecarefullyredesigned.Inthisweshoulddrawonthemanyinsightsofferedbyaidcritiques;butitmustnotbeoverlookedthatmuchisindeedalreadyhappeningontheforeignaidscene.MajorshiftshavetakenplaceinaidmodalitiesoverthepastfifteenyearsasnotedbyAdam(2005).Healsoarguesthatthegeneralriseofacultureoftransparencyandaccountabilityismorethansuperficial,andgoesontopointoutthattheMarch2005ParisDeclaration(p.48) ofAidEffectivenessisanattempttocodifysomeofthebestpracticedevelopmentsobservedinanumberofcountries.44

Trying,insummary,toidentifythreesetsofcore,butunresolved,issuesandindicatewherefurtherresearchisneeded,theyinclude:45

(1)Foreignaidisassociatedwithdevelopmentsuccessesandfailures,andthefundamentalanalyticalprobleminassessingitsimpactisthatnobodyhas,todate,identifiedtheunderlyingdevelopmentmodel.Wearethereforenecessarilyworkingwithreducedformmodels,whichareboundtobedebatable.Inparallel,existingdatasuggestthatforeignaidisfarfromequallyeffectiveeverywhere.Thenecessaryandsufficientconditionsforaidtohaveapositivecontributiononthedevelopmentprocessremaincontroversial.Inotherwords,howbettertocometogripswithwhatactually‘drives’existingdifferencesintheimpactofforeignaidremainsachallenge.Thisisso,forexample,inrelationtopotentialinteractionwitheconomicpolicybutthesamegoesfordeeperstructuralcharacteristics,whichplayakeyrole.(2)Wedonotatpresenthavethenecessarycompleteandgeneralizedunderstandingofthecomplexlinksinparticularcountrycircumstancesbetweenaid,growth,anddevelopmentobjectivessuchaspovertyreductiontojustifyselectivityasthebasicapproachinaidallocation.Thisdoesnotmeanthatold‐fashionedconditionalityshouldbebroughtbackbutthatabetterunderstandingoftheintricaciesofthedonor–recipientrelationshipintheoryandinpractice(includingtopicssuchasownershipandassociatedconcepts)wouldbevaluable.


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Keyelementsincludeaddressingissuessuchas(i)howbesttochannelresourcestothepoorwhennationalgovernmentsarenotcapableoftakingon(and/orarenotwillingtotakeon)thistask;(ii)howtoensurethataiddelivereddirectlytonationalgovernmentsdoesnotunderminelocalaccountability;and(iii)establishingtheappropriatebalancebetweenaidgoingtothegovernmentvis‐à‐visindividualsandothersintheprivatesector.Accordingly,howbesttostrengthenincentivesinsupportofgenuinedomesticpolicyleadership(includingthecommitmenttothelearning‐by‐doingofdevelopmentpolicy)isachallenge.Thesamegoesforthefundamentaltaskoffurtheringaccountabilityandtransparencyvis‐à‐vislocalpopulations.(3)Inthepresentdrivetoscaleupaid,itiscriticallyimportanttoavoidmakingthepastmistakeofpromisingtoomuch;thatis,ofcontributingtothemisconceptionthataidcanonitsownturnhistory.Basedonhistory,aidhasmuchtooffer,butmanagingexpectationsisfarfromeasy.Makingsurethatpromisesmadeareactuallykeptisdemanding.Therearemanyunresolvedissueshere,includinghowbesttodesignincentivesinaidagenciestomeet(p.49) thischallengealongsidetopicssuchastheroleofindependentevaluation,ofcoordinationamongmultipledonors,andoftheneedtosharpentheincentivesforrecipientstomaximize‘reformeffort’,whichareallalludedtobyAdam(2005).

Inconclusion,Iwouldstress,first,thatitwouldbegravelyironicifweletdisagreementaboutoveralldevelopmentstrategyandthemacroeconomicimpactofaidgetinthewayofpursuingpracticalandusefulaid‐fundedactivitiesinpoorcountries.Thereismuchtocriticizeinforeignaid,butpossibilitiesforconstructiveandforward‐lookingactionshouldbekeptinmindthroughout.Thereare,inmyexperience,lotsofexamplesinpractice.Thesedeservetobeuncoveredmorepreciselyandimplementedeffectivelyforthebenefitofthoseinneed.

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Notes:

(1)Thischapterisashortened,revised,andupdatedversionofapaperoriginallypublishedbytheSwedishEconomicPolicyReview(seeTarp2006).IamgratefultoChristofferSonne‐SchmidtforresearchassistanceandtocolleaguesfromtheUniversityofCopenhagen,especiallyChanningArndtandSamJones,forcommentsandcollaboration.ThanksforgoodcommentsarealsoduetoPhilAbbottandtoparticipantsattheUNU‐WIDERDevelopmentConferenceonAid,‘Aid:Principles,Policies,andPerformance’,heldon16–17June2006inHelsinki.Finally,Iwouldliketoacknowledgeexpertadvicefromthreeanonymousreferees.Theusualcaveatsapply.Inpreparingthischapter,Irelyonbothfieldexperienceandavarietyofacademicoutputs.TheyincludeTarp2000andseveralarticlespublishedoverthepastsevenyears,includinginparticularworkwithDalgaard,Hansen,andRoland‐Holst.PleaseseeArndt,Jones,andTarp(2006)foracompanionpapertothepresentstudy,focusingonwhatcanbesaidaboutaidanddevelopmentinaspecificcountrycontext,thatofMozambique.

(2)Tobesure,generalmacroeconometricanalysisofaidimpacthasbeenveryinfluentialsincethe1970s,aprominentcontributorbeingProf.PaulMosleyandhisco‐authors;seeHansenandTarp(2000)andsect.2.5whereIdiscusshowtheliteratureevolvedinthe1990s.

(3)SeeClemens,Radelet,andBhavnani(2004).Iwillrevertinwhatfollowstoselectedcontributionstothisliterature,whichisignoredbyEasterly(2008).AccordingtohisGoogleScholarcountingmethodology(seehisnn.15and16),positiveinterpretationsoftheaid–growthlinkhavebeenmoreextensivelycitedthanEasterlyleadsthereadertobelieve.


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(4)Conventionallythemarketrateofinterestusedtoassessaloanistakenas10percent.Thus,whilethegrantelementisnilforaloancarryinganinterestrateof10percent,itis100percentforapuregrant,andliesbetweenthesetwolimitsforasoftloan.IncalculatingtotalODA,noadjustmentismadetotakeaccountofthesmallergrantelementofloans.Thevalueofgrantsandthenominalvalueofloansthatqualifyaresimplyaddedup.

(5)ThepresentDACclassificationofcountriesiswithafewexceptionsconsistentwithWorldBankpractice,distinguishingbetweentheleast‐developedcountries(LDCs),otherlow‐income,lower‐middle‐income,andupper‐middle‐incomerecipientsofODA.

(6)See<http://en.wikipedia.org/wiki/Colombo_Plan>.

(7)Thefirstofficialnon‐alignedmovement(NAM)summitwasheldinSept.1961.AmongtheprominentdevelopingcountryleaderswhohelpedNAMgetoffthegroundwereTitoofYugoslavia,NehruofIndia,NasserofEgypt,andSukarnoofIndonesia.Formallyspeaking,thenon‐alignedmovementisaninternationalorganizationofover100developingcountries,whichconsiderthemselvesnotformallyalignedwithoragainstanymajorpowerbloc.Whileinfluentialduringthe1960sand1970s,NAMstartedlosinginfluenceinthe1970s.

(8)SeeRodrik(2006)foracriticalup‐to‐datereview.

(9)Iwillnotpursuethesetofissuesrelatedtothisapproachtoaidimpactevaluationhere.SeeBigsten,Gunning,andTarp(2006);andThorbecke(2007)forelaboration.

(10)FDIaccountedforonly2.3percentofGDPinlow‐andmiddle‐incomecountriesin2003,and0.6percentin1990.Tradewas41percentin1990,and60percentin2003.

(11)SeeRoland‐HolstandTarp(2004)forfurtherdiscussion.

(12)SeeJones(1995);andEasterly(1999).

(13)TothislistcanbeaddedIraqandAfghanistan.Forexample,USaidtoIraqamountedin2005toUS$3.5billion.

(14)SeeBigsten,Gunning,andTarp(2006)forfurtherelaborationofthispoint.

(15)Thisincludeschoosingthelengthofindividualtimeunitsandanappropriateoveralltimehorizon,whicharebynomeanssimplechoices.

(16)Thisdoesnotofcoursemeanthateconomicsignoresthepossibilityofusingbothlaboratoryandfieldexperimentstogenerateknowledge.Experimentaleconomicsisasub‐disciplinethathasbeenadvancingsignificantlyinrecentyears.

(17)Thereadermaywishtoconsult,forexample,CassenandAssociates(1994)forausefulsurveywithabroaderscopethanthepresentstudy.Otherreferencesinclude


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WorldBank(1998).

(18)Thesamecanbesaidabouttheuseofrandomizedprogrammeevaluation,whichIdonotpursue,asalreadynotedabove.Forperspective,seeThorbecke(2007).

(19)Forapertinentcautioningsetofobservations,seeSolow(2001).

(20)Thewiderrangingandcomplexeconometricendogeneityproblemsinherentinrelyingontimeaveragesforaidandgrowth,typicallyusedinpaneldatagrowthregressions,arelaidoutinDalgaard;Hansen,andTarp(2004).Theypointoutthatnotonlyaidbutalsopolicyislikelytobeendogenous.

(21)NotefromFigure2.1thattheannualmedianaidtoGNIratioamountedto6.8percentfrom1993to2002.

(22)Whetherthisdiscreditsthetwo‐gapmodelasarguedbyEasterly(1999),orwhetheritcanserveausefulpurposeasanadmittedlysimpleanalyticalframework,ifappliedwithduecare,remainsinmyviewtobeestablished.Inanycase,thefactisthatthismodelcontinuestobewidelyusedinpractice,and,whetheronebelievesthetwo‐gapmodelshouldbediscardedaltogetherornot,thenotionthataidmaycontributetogrowthviainvestmentandcapitalaccumulationremainsrelevant.

(23)Fungibilityariseswhentherecipientcanreallocateitsownresourcestootherendswhenaidisprovided.Thereislimitedandconflictingevidenceonthedegreeoffungibilityofforeignaid;see,forexample,Feyzioglu,Swaroop,andZhu(1998).AmorebalancedandcriticalassessmentcanbefoundinMcGillivrayandMorrissey(2004).

(24)ThisobservationgoesbacktoPapanek(1972,1973)andinspiredHansenandTarp(2000),whoreviewed131crosscountryregressionsproducedoverthreedecades.Theychallengedthewidespreadperceptionamongacademicresearchersandaidpractitionersthatthereisnosignificantmacroeconomiclinksassociatedwithforeignaidasstatedby,forexample,MichalopoulosandSukhatme(1989);andWhite(1992).Are‐examinationofthethenexistingliteraturerevealedthat(i)aidincreasessavings,althoughnotbyasmuchastheaidinflow;(ii)aidincreasesinvestment;and(iii)aidhasonaverageapositiveeffectonthegrowthratewhenevergrowthisdrivenbycapitalaccumulation.HansenandTarpthereforesuggestedthatthemicro–macroparadoxidentifiedbyMosley(1987),towhichIshallreturnbelow,isnon‐existenteveninthecontextofthetraditionalaid‐growthliterature.

(25)SeeRajanandSubramanian(2005)foracontributiononthis.

(26)DalgaardandHansen(2005)alsodiscussthemicro‐economicevidenceonpositiveex‐postratesofreturnofWorldBankaidprojects,referredtoabove.Medianreturnsrangebetween10percentand30percentfortheperiod1996–2001.

(27)Hausman(2001:58)notes:‘AtMITIhavecalledthis“TheIronLawofEconometrics”—themagnitudeoftheestimateisusuallylowerthanexpected.Itisalso


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called“attenuation”inthestatisticalliterature’.InwhatfollowsIwillusethetechnicalterm,‘attenuationbias’.

(28)InBoone's(1994)aid–growthregressions,hedidnotinstrumentforaid,buthedidincludecountryfixedeffects.

(29)TheCPIAindexassessesthequalityofacountry'spresentpolicyandinstitutionalframeworkintwentydifferentdimensions,assessedbyWorldBankexpertsonascalefromonetosix.Eachitemhasa5percentweightintheoverallrating.Theitemsaregroupedintofourcategories:‘economicmanagement’,‘structuralpolicies’,‘policiesforsocialinclusion/equity’,and‘public‐sectormanagementandinstitutions’.

(30)ThisvolumewasreviewedbyTarp(2001).

(31)Theturning‐pointatwhichincreasedaidwillstarthavinganegativeimpactongrowthwasoriginallyestimatedaround25–40percent.Thisis,asisclearfromFigure2.1,veryfarabovethetypicalaidcountry,andHansenandTarp(2000)warnedthattheempiricalidentificationoftheturning‐pointshouldinanycasebeinterpretedwithgreatcare.Thediminishingreturns'thesiswasnotputforwardasadefinitivestatementabouthowaidimpacts,orwhatwouldhappenifaidwasincreased,moreasawayofcharacterizingthedataandputtingthefragilityoftheBurnside–Dollarpolicystoryintoperspective.Whentryingtocapturenon‐linearitiesintheaid–growthrelationitisadvisabletotestallrespectablealternativeeconomicallyandstatisticallymeaningfulspecificationsbeforeconclusionsaredrawn.Insum,thediminishingreturnsstoryshouldnotbeinterpretedasanargumentagainstmoreaidperse.

(32)Easterly(2008)seemstosuggestthatheandhisco‐authorshavebeenthemaincriticsoftheBurnside–Dollarstudy.IencouragethereadertocarryouttheGoogleScholarsearchestowhichherefersinhisnn.15and16andtoreviewhisreferencelistinthislight.

(33)Foodaidinfaminesituationsgearedtowardincreasedconsumptionisaspecificcaseinpoint,asis,moregenerally,aidforconsumptionthatisnotinvestmenttargeted.

(34)SeetheliteraturealreadycitedandnotethatDalgaardandHansen(2005)estimatethattheaggregaterealrateofreturnonforeign‐aid‐financedinvestmentsisintherangeof20–25percent.RajanandSubramanian(2008)aremorecritical,andtheirapproachtotheuseofexternalinstrumentsincross‐sectionanalysisisinteresting.Yet,itshouldbekeptinmindthattheirinstrumentationstrategyimpliesthattheyprovideanestimateoftheimpactofaiddrivenbynon‐developmentalobjectives.Itcannotbeconcludedthattheimpactof‘realdevelopmentalaid’isthesame(i.e.,nil).Arguably,regressionsthatrelyonpooledaidmayunderestimatethetrueimpactof‘developmentallymotivatedaid’.

(35)See,forexample,therevisedversionofRoodman(2004)andRoodman(2007).

(36)SimilarconcernsarealludedtobyCornia(2005)whenhepointsoutthatitisfarfromclearwhatcanbeconcludedbasedonnegativecorrelationbetween‘bad


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governance/corruption’and‘slow/negativegrowthinGDPpercapita’.Itmay,inCornia'sformulation,bethatotherunobservedvariablesareatwork,suchas‘highilliteracyandlowlandproductivitythatsimultaneouslyreducegrowthandthesalariesofcivilservants,whothereforeasksbribeswheneverpossible’.

(37)SongbyBobDylan.Forthefulltext,see<http://www.bobdylan.com/#/songs/blowin‐wind>.

(38)TheUNMillenniumProject(2005)goesontorecommendnofewerthan449interventionstoendpoverty.

(39)Itiscertainlyamusingtoreadabout‘Bono,Sachs,theDalaiLama,andthePope’atEasterly(2001:126),butEasterly(2006)creates,asIseeit,toomanycaricatures.

(40)Toillustrate,Ifullyacknowledgethekeyincentiveandagencyproblemsassociatedwithaidtransfers,suchasthoseuncoveredbySvensson(2000,2005),and,onthisbasis,hedoesnotconcludethataidiswithoutpotentialimpactonthedevelopmentprocess.

(41)SeeTarp(2000),andhereespeciallythesummaryandsynthesisauthoredwithShermanRobinson.

(42)SeeTarp(2006),publishedabouttwoyearsbeforeEasterly(2008),forcomparison.

(43)Onecanalsonotethattheconventionalwisdomattheendofthe1980stendedtoover‐emphasizeormisinterpretstudieswhichhadfoundanegativeorinsignificantrelationship;seeHansenandTarp(2000).

(44)Forthetextofthisforum,seehttp://www.oecd.org/dataoecd/11/41/34428351.pdf>.SeealsoAdamandGunning(2002)andAdametal.(2004).

(45)SeeBourguignonandSundberg(2007)fortheirsuggestionsonhowto‘opentheblackbox’.

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