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Aid and Economic Development (African Studies)

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  1. Introduction
  2.  
  3. The analysis of the relationships between foreign aid—also called “official development assistance” (ODA)—and economic development is a core issue in the disciplines of development economics and development studies. These relationships are addressed in the literature mostly in line with understanding the impact of foreign aid either on economic growth or on development. An understanding of the concept of aid as well as those of development and growth, respectively, is required. The concept of development is viewed as more comprehensive than that of economic growth. A consensus exists that, beyond an increase in countries’ wealth and individual incomes, “development” encompasses human development—health and education—and it includes consideration of the quality of economic and political institutions. Foreign aid includes a great variety of heterogeneous elements, for example, not only financial flows (grants and long-term loans), but also technical cooperation or debt relief, which give rise to debates on its measurement. In addition, aid can be given by different types of donors. It can be provided by multilateral institutions, that is, allocated to a given government or any sub- or nongovernmental entity by multilateral organizations, for example, the international financial institutions (the World Bank or the International Monetary Fund [IMF]) or regional institutions (such as the European Union, the Asian Development Bank, the Inter-American Development Bank, and many others). Aid can also be bilateral, that is, allocated by bilateral sources, such as governments of donor countries or various donor national entities, such as public agencies, private firms, or nongovernmental organizations. The various short- and medium-term forms of lending made by the IMF, strictly speaking, are not considered as ODA; however, concessional lending made by the World Bank is viewed as aid. Likewise, the impacts of aid are numerous: they can be macroeconomic and microeconomic and can involve all levels of human activity—economic, political, and social. This variety of definitions and channels explains why the relationships between foreign aid and development are complex, which is reflected in the literature.
  4.  
  5. General Overviews
  6.  
  7. Development theory started as a full discipline after the middle of the 20th century, spurred by outstanding thinkers such as Arthur Lewis (who received the Nobel memorial prize in economics in 1979 for his work), Paul Rosenstein-Rodan, Ragnar Nurske, and Gunnar Myrdal. During the 1950s and 1960s, the deepening of the discipline was marked by accompanying reflections on decolonization, the development needs of newly independent countries, and the appropriate policies these countries should adopt. The early theories of the mid-20th century strongly defended foreign aid as a key engine of development. Theorists relied, in particular, on the Harrod 1939–Domar 1946 model and the subsequent “two gaps” model elaborated in 1966 by Hollis Chenery and Alan Strout: this model assumed that developing countries were saddled with a “savings gap” and a “trade gap” (or “foreign exchange gap”), and it was affirmed that foreign aid was needed to fill these gaps (Temple 2010). These theoretical justifications have come to be challenged over time in view of the disappointing results of foreign aid, in particular in sub-Saharan Africa. A great deal of the literature on aid, its effectiveness, and its impact concentrates on sub-Saharan Africa, which is compounded by the fact that East Asian developing countries started their rapid growth as early as the 1960s and ceased to receive foreign aid in that period. The trends in the literature on aid reflect these evolutions. This literature includes general reviews of the various dimensions of aid: some studies are written by experts who have direct experience in aid work due to their activities within donor agencies or consultancy firms (Riddell 1987), while other general reviews are based largely on the work of academic researchers (Tarp and Hjertholm 2000). Most general studies on aid are situated within the framework of development economics; a noticeable exception is Martens, et al. 2002, which explores the relevance of institutional economics (a subfield of economics that grew greatly beginning in the 1990s) for analysis of foreign aid. The steadily mounting disappointment with aid outcomes is reflected in the fact that, at the beginning of the 21st century, the debates on aid tend to highlight its negative effects more than did those that took place in the 20th century, as explained in Sindzingre 2012. Many discussions on the negative effects of aid have been driven by William Easterly (Easterly 2006, Easterly 2009), an academic scholar based in the United States who acquired an extensive practical experience during his previous career at the World Bank and who has published a great number of critical studies on aid. Arguing that aid does more harm than good, this perspective underscoring the negative effects of aid is continued by Angus Deaton, a reputable economist based at Princeton University (Deaton 2013).
  8.  
  9. Deaton, Angus. “Aid and Politics,” In The Great Escape: Health, Wealth and the Origins of Inequality. Princeton, NJ: Princeton University Press, 2013.
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  11. Written by one of the world’s most renowned economists and experts on poverty and inequality, chapter 7 of this book argues that aid rarely reaches the poor and that there is no evidence that it promotes growth. Deaton also claims that aid is also distorted by politics.
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  13. Easterly, William. The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. Oxford: Oxford University Press, 2006.
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  15. An influential book and a concise summary of the critical reflections of William Easterly, who articulates for the general public the many criticisms of aid that he developed in academic articles.
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  17. Easterly, William. “Can the West Save Africa?” Journal of Economic Literature 47.2 (2009): 373–447.
  18. DOI: 10.1257/jel.47.2.373Save Citation »Export Citation »E-mail Citation »
  19. A critical breakthrough by one of the most prominent scholars on aid, which puts forward an original distinction between donors’ predominant “transformational” (“savior”) and a “marginal” approach (based on learning by doing).
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  21. Martens, Bertin, Uwe Mummert, Peter Murrell, and Paul Seabright. The Institutional Economics of Foreign Aid. Cambridge, UK: Cambridge University Press, 2002.
  22. DOI: 10.1017/CBO9780511492563Save Citation »Export Citation »E-mail Citation »
  23. A collection of theoretical papers written by the authors, who analyze aid through the lens of institutional economics, in particular, the concepts of incentives driving the behavior of persons involved in the entire chain of aid programs.
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  25. Riddell, Roger C. Foreign Aid Reconsidered. Baltimore: Johns Hopkins University Press, 1987.
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  27. One of the first books that evaluated foreign aid—very few studies had been done before the 1980s—in its various dimensions, including its historical evolutions, the validity of its motives (e.g., ethical), its theoretical justifications, and its empirical applications.
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  29. Sindzingre, Alice N. Theoretical Criticisms and Policy Optimism: Assessing the Debates on Foreign Aid. Working Paper 1-2012. Vienna: University of Vienna, Department of Development Studies, 2012.
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  31. The author highlights the tensions regarding aid in the 2000s, namely, the emphasis in the academic literature on the detrimental effects of aid coexisting with a paradigm in the policymaking sphere based on the necessity of increasing aid.
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  33. Tarp, Finn, and Peter Hjertholm, eds. Foreign Aid and Development: Lessons Learnt and Directions for the Future. London: Routledge, 2000.
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  35. A useful collection of articles on foreign aid and one of the few books that includes material written by the best economists and specialists on the subject. It provides a comprehensive presentation of all the questions regarding aid.
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  37. Temple, Jonathan R. W. “Aid and Conditionality.” In Handbook of Development Economics. Vol. 5. Edited by Dani Rodrik and Mark Rosenzweig, 4415–4523. Amsterdam: Elsevier, 2010.
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  39. A complete review of the academic literature on aid that includes both accessible and deep analyses of the main concepts and issues, for example, impacts on growth, poverty, human development; limits of conditionality; and fiscal responses to aid. It addresses technical concepts with clarity and is a useful complement to Tarp and Hjertholm 2000.
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  41. Reference Works
  42.  
  43. The main donors are members of the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD). The OECD Development Cooperation Directorate (DCD) became part of the OECD in 1961, and it supports the DAC. The DAC has twenty-four members (most European states, Japan, the United States, Australia, New Zealand, and Switzerland, among others). The World Bank, the International Monetary Fund, and the UN Development Programme participate as observers. The DAC publishes annually the Development Cooperation Report, which analyzes the activities of its members and trends in their assistance policies during the period under review (Development Cooperation Reports). These reports are published not only in hard copy, but also by chapters on the OECD DAC website. They include not only a great deal of key data on global and bilateral official development assistance, but also a glossary that includes explanations of the meaning of the terms and concepts used by donor agencies, which is very useful as these terms are often technical and difficult to understand for nonpractitioners (DAC Glossary of Key Terms and Concepts).
  44.  
  45. DAC Glossary of Key Terms and Concepts.
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  47. Operated by the OECD DCD-DAC, this website provides a glossary of key terms and concepts, which serves as the main reference source regarding definitions related to foreign aid.
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  49. Development Assistance Committee.
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  51. The entity within the OECD that represents the international community of donors, which has competence on all matters regarding foreign aid and in particular its definitions, the elaboration of global standards regarding aid, and the monitoring of aid flows of member countries and their measurement.
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  53. Development Co-operation Reports.
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  55. Annual reports released by the DAC that are authoritative regarding global aid trends and policies as well as those of member countries. They include definitions and data, which are based on an international consensus and constitute essential reference for any study of foreign aid.
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  57. Primary Sources
  58.  
  59. The primary sources for study of foreign aid are the statistics and data compiled concerning aid flows to recipient countries. Data may be provided by the national statistical departments of recipient countries as well as by donors, including donor governments and private donors such as private firms or nongovernmental organizations. The data are then harmonized by the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), which constitutes the international body tasked with this responsibility. The OECD DAC also maintains, in conjunction with the UN Development Programme, the website Aid Effectiveness. In addition, an initiative was promoted in 2009 by the World Bank called AidData, which provides abundant data on aid with the aim of facilitating access to information. It is linked to another initiative, AidInfo, which is a comprehensive catalogue of resources on aid information and also provides data on aid. Primary data are also provided by “traditional” sources of international development aid, in particular the international financial institutions of the World Bank and the International Monetary Fund (IMF). The World Bank formulates a great number of data sets that have a global or a sectoral coverage. Of particular interest with regard to aid are the World Development Indicators. The IMF annually compiles the IMF Data and Statistics. The IMF also compiles several data sets on debt, which are relevant for analyses of aid as assistance flows include both grants and loans. The World Bank and the IMF also publish annual reports, which provide useful analyses of global economic trends and key subjects, including aid. They include, for the World Bank, the annual World Development Reports, and, for the IMF, the biannual World Economic Outlooks and the biannual Regional Economic Outlooks (providing detailed data and analyses on the five regions of the world, namely, Europe, Asia and the Pacific, sub-Saharan Africa, the Middle East and Central Asia, and the Western Hemisphere). The OECD also annually releases the African Economic Outlook, a report that focuses on Africa. In principle, all these data are harmonized with those provided by the OECD DAC. However, differences in definitions and levels of analysis can occur, which may lead to discrepancies.
  60.  
  61. African Economic Outlook. Paris: Organisation for Economic Co-operation and Development.
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  63. These reports, released annually and with a different theme each year, contain detailed analyses and data on the economy of Africa as a region as well as country-level notes, including on aid.
  64. Find this resource:
  65. AidData.
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  67. A website that provides very detailed data on aid projects and development finance on a global scale; includes visualization tools and maps.
  68. Find this resource:
  69. Aid Effectiveness.
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  71. A website devoted to the issue of aid effectiveness.
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  73. AidInfo.
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  75. A website that is part of the consortium supporting the AidData initiative, aimed at enhancing the information on aid and its transparency.
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  77. IMF Data and Statistics. Washington, DC: International Monetary Fund.
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  79. Includes the main global and country economic indicators, with a specific focus on financial data, namely, the government finance statistics, which contain data on revenue, expenses, and transactions in assets and liabilities of governments, among others.
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  81. Regional Economic Outlooks. Washington, DC: International Monetary Fund.
  82. Save Citation »Export Citation »E-mail Citation »
  83. These reports, released twice a year, focus on each region of the world, including Africa, the Western Hemisphere, the Middle East, and Asia and the Pacific.
  84. Find this resource:
  85. World Development Indicators.
  86. Save Citation »Export Citation »E-mail Citation »
  87. These are among the most comprehensive data sets on economic and social indicators in developing countries, and they include several tables on aid and aid dependence.
  88. Find this resource:
  89. World Development Reports. Washington, DC: World Bank.
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  91. These influential reports, released annually, constitute an analysis of a different subject, one that the World Bank considers to be the most important at the time of publication; they include detailed data on development theories and donor policies and projects.
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  93. World Economic Outlooks. Washington, DC: International Monetary Fund.
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  95. These reports, released twice a year, are a key source of information and data regarding global macroeconomic issues and financial flows, which is relevant for analysis of official development assistance.
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  97. Think Tanks and Bibliographical Resources
  98.  
  99. The literature on foreign aid is very large. However, aid is both an academic topic and one that is strongly driven by policymaking, which is the origin of aid. Therefore, aid is relatively underaddressed in terms of academic bibliographical compilations, and no published bibliography on aid exists. Informational resources and bibliographies can be found in some aid agencies or on the websites of research projects, which, however, may be temporary. Gathering references and information is undertaken by think tanks (such as the Center for Global Development and the Overseas Development Institute), aid agencies (such as the World Bank through its World Bank Institute), academic research centers (such as the Institute of Development Studies [IDS] and the International Institute of Social Studies), and nongovernmental organizations. The World Institute for Development Economics Research, which is an influential organization among development economists and practitioners, has a mixed status as it is funded by the UN but is focused on organizing academic conferences and completing research papers. It sometimes provides useful information, data, and lists of resources on aid. Many individuals working and studying in the field also conduct their own research and publish their own collections of working papers.
  100.  
  101. Center for Global Development.
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  103. An independent think tank located in Washington, DC, one of the most important in the United States regarding development, which maintains high-level research with a policy orientation on key development issues, including aid effectiveness and debt relief.
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  105. Institute of Development Studies.
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  107. Located in Brighton, England, the Institute conducts research on all issues related to development, and provides many “knowledge services,” in particular, a rich online library on development issues, the British Library for Development Studies.
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  109. International Institute of Social Studies.
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  111. An important center located in The Hague with research and education missions that covers all the topics of development studies. Affiliated with Erasmus University in Rotterdam.
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  113. Overseas Development Institute.
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  115. The main think tank in the United Kingdom devoted to development (and to aid in particular) that provides useful information and resources (publications, projects).
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  117. World Bank.
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  119. Based in Washington, DC, but a multilateral organization. A reference institution on aid, regarding research publications, projects, policies, and data. It includes the World Bank Institute, which produces many publications, bibliographies, and informational resources.
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  121. World Institute for Development Economics Research.
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  123. The research and training center of the United Nations University (Finland), which conducts research projects on key issues in development and publishes collections of influential working papers, many of them on aid.
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  125. Journals
  126.  
  127. Economics as an academic discipline gives more importance to the publication of articles in journals rather than books and book chapters. Thus, most important studies on aid and development are found in journals or are published as working papers by important research centers and think tanks. Articles on aid are published by many “generalist” journals in economics, political science, and development studies. The journals included in this section are focused more particularly on international development and developing countries, and therefore more likely to include articles on aid. World Development, the Journal of Development Studies, and Development and Change are leading academic journals in the field of development economics, including research on aid. The Journal of International Development also devotes considerable space to research on aid as it is published on behalf of the UK Development Studies Association, an organization that includes the majority of academics and practitioners working on development issues in the United Kingdom. This is also the case for the European Journal of Development Research, which is published by a consortium of European research institutes and think tanks dealing with international development. The World Bank Economic Review and the World Bank Research Observer are published by the World Bank and, therefore, often include articles on aid. The Development Policy Review is published by the UK-based Overseas Development Institute, an important think tank focused on international development, and, therefore, it often publishes articles on aid.
  128.  
  129. Development and Change. 1970–.
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  131. A comprehensive journal on development issues, published on behalf of the International Institute of Social Studies (The Hague), which has a multidisciplinary approach.
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  133. Development Policy Review. 1966–.
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  135. A leading journal on development, in particular its policy dimensions, published on behalf of the most important think tank on development in the United Kingdom, the Overseas Development Institute.
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  137. European Journal of Development Research. 1989–.
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  139. A multidisciplinary journal devoted to all aspects of human development published on behalf of the European Association of Development Research and Training Institutes, which is based in Germany and brings together the majority of the centers working on development issues in Europe.
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  141. Journal of Development Studies. 1964–.
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  143. One of the reference journals in the domain of development studies, with an emphasis on development economics.
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  145. Journal of International Development. 1989–.
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  147. One of the reference journals in development studies, with a multidisciplinary perspective, published on behalf of the Development Studies Association of the United Kingdom.
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  149. World Bank Economic Review. 1986–.
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  151. An economic journal published on behalf of the World Bank devoted to development issues and the research conducted within the World Bank; emphasis is placed on quantitative analysis.
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  153. World Bank Research Observer. 1986–.
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  155. A journal published on behalf of the World Bank with less technical articles than the World Bank Economic Review; aims to make its research more accessible and useful for policymakers.
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  157. World Development. 1973–.
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  159. The key reference journal for studies of development with a multidisciplinary scope and with an emphasis on development economics and quantitative approaches; regularly publishes articles on aid.
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  161. Evolution of Aid and Trends
  162.  
  163. The key reference documents on the evolution of aid are the annual Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) reports and the Development Cooperation Reports (cited under Reference Works). The independent evaluation body of the International Monetary Fund (IMF), the Independent Evaluation Office, has evaluated IMF activities in sub-Saharan Africa in 2007, including the evolution of its financial assistance (Independent Evaluation Office 2007). The IMF magazine aimed at disseminating IMF research, Finance and Development, regularly devotes articles to aid, such as Gupta, et al. 2006, which is still relevant as it covers long-term evolution of aid (since 1960). The AidData database (cited under Primary Sources) serves as the source for a series of papers on specific issues and dynamics, such as the relationship between aid and conflict (Strandow, et al. 2010). Sub-Saharan Africa is the region that receives the largest share of aid flows together with South Asia, and so it occupies a prominent place in the literature. For sub-Saharan Africa, as aid flows have tended to rise in the early 21st century, the effects of aid surges and “big push” policies have produced studies of the trends (UN Conference on Trade and Development 2006). Also, a few academic studies have been done on the evolution of, and trends in aid (Easterly 2007, Tarp 2006), though, due to publication delays, they risk becoming rapidly obsolete.
  164.  
  165. Easterly, William. “Are Aid Agencies Improving?” Economic Policy 22.52 (2007): 633–678.
  166. DOI: 10.1111/j.1468-0327.2007.00187.xSave Citation »Export Citation »E-mail Citation »
  167. A paper by one of the most influential scholars on aid, which constitutes a criticism of aid agencies and shows that, with rare exceptions, aid agencies do not learn from experience, and that many negative aspects persist, such as donor fragmentation and the excessive importance of foreign technical assistance.
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  169. Gupta, Sanjeev, Catherine Pattillo, and Smita Wagh. Are Donor Countries Giving More or Less Aid? Working Paper WP/06/1. Washington, DC: International Monetary Fund, 2006.
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  171. A synthetic presentation of the evolution of aid flows between 1960 and 2004, by destination, donors, and types of aid, that includes useful data and graphs.
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  173. Independent Evaluation Office of the International Monetary Fund. The IMF and Aid to Sub-Saharan Africa. Washington, DC: International Monetary Fund, 2007.
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  175. A comprehensive evaluation of the activities of the IMF in sub-Saharan Africa related to its Poverty Reduction and Growth Facility over the period 1999–2005 and the ways it has addressed aid; includes a wealth of information and data. It is written by the internal Evaluation Office of the IMF; hence, it includes well-informed criticisms of IMF activities.
  176. Find this resource:
  177. Strandow, Daniel, Josh Powell, and Michael Findley. The Geography of Foreign Aid and Violent Armed Conflict. Paper presented at the Aid Transparency and Development Finance Conference, University of Oxford, 25 March 2010.
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  179. An innovative paper, presented at a major conference on aid (including many other relevant papers), as it focuses on an underaddressed issue, the relationship between aid and conflict, and uses the AidData database, which was constructed in the late 2000s.
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  181. Tarp, Finn. “Aid and Development.” Swedish Economic Policy Review 13 (2006): 9–61.
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  183. A retrospective look at how foreign aid has evolved since World War II and an assessment as to whether it has contributed to development and economic growth.
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  185. UN Conference on Trade and Development. Economic Development in Africa: Doubling Aid: Making the “Big Push” Work. Geneva, Switzerland: UN Conference on Trade and Development, 2006.
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  187. The perspective of the UN Conference on Trade and Development is usually viewed as “heterodox” and often criticizes the international financial institutions, such as the IMF and the World Bank. This study offers critical analyses, both theoretical and empirical, on the impact of aid increases (“big push”) in sub-Saharan Africa.
  188. Find this resource:
  189. Relationships between Aid and Economic Growth
  190.  
  191. The literature driven by an international financial institution such as the World Bank contends that aid has a positive impact on economic growth (Dollar and Pritchett 1998; Dollar, et al. 2001). Two researchers at the World Bank (Burnside and Dollar 2000) thus have argued that aid has a positive impact if recipient countries implement “good” policies and are therefore able to use aid efficiently, which are typically the policy reforms that are the conditions of World Bank lending. These views on the positive impact of aid on economic growth are confirmed in some academic studies (Arndt, et al. 2009). Other studies challenge these views in affirming that this positive relationship is more complex and determined by additional factors (Dalgaard, et al. 2004; Gomanee, et al. 2005). The literature on the relationship between aid and growth usually relies on cross-country econometric regressions; therefore, several articles focus on the accuracy of the econometric techniques of previous studies. Arndt, et al. 2015 thus makes claims to having elaborated more appropriate econometric models, which show that aid has had a positive impact on the economic growth of recipient countries over the long run.
  192.  
  193. Arndt, Channing, Sam Jones, and Finn Tarp. Aid and Growth: Have We Come Full Circle? Discussion Paper 2009/05. Helsinki: World Institute for Development Economics Research of the United Nations University, 2009.
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  195. The authors show that aid has a positive and statistically significant causal effect on growth over the long run and argue that findings confirm growth theories.
  196. Find this resource:
  197. Arndt, Channing, Sam Jones, and Finn Tarp. “Assessing Foreign Aid’ Long-Run Contribution to Growth and Development.” World Development 69 (May 2015): 6–18.
  198. DOI: 10.1016/j.worlddev.2013.12.016Save Citation »Export Citation »E-mail Citation »
  199. Focuses on the long-term effects of aid (from the 1970s onward) and finds that aid has had positive impacts not only on economic growth but also on social indicators (health, education) and poverty reduction.
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  201. Burnside, Craig, and David Dollar. “Aid, Policies, and Growth.” American Economic Review 90.4 (2000): 847–868.
  202. DOI: 10.1257/aer.90.4.847Save Citation »Export Citation »E-mail Citation »
  203. An influential paper by World Bank researchers, which has triggered much subsequent debate and disagreement, based on panel growth regressions for fifty-six developing countries from 1970 to 1993 and an index of three policies (fiscal surplus, inflation, and trade openness). The authors show that aid has a positive impact on growth in countries with “good” fiscal, monetary, and trade policies. In the presence of “poor” policies, aid has no positive effect on growth. Available online by subscription.
  204. Find this resource:
  205. Dalgaard, Carl-Johan, Henrik Hansen, and Finn Tarp. “On the Empirics of Foreign Aid and Growth.” Economic Journal 114.496 (2004): 191–216.
  206. DOI: 10.1111/j.1468-0297.2004.00219.xSave Citation »Export Citation »E-mail Citation »
  207. The authors show that aid inflows affect long-run productivity and that aid has a positive impact on growth, but its magnitude depends on climate; hence, they argue for a greater degree of caution in applying selectivity and allocation rules. Available online for purchase or by subscription.
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  209. Dollar, David, Torgny Holmgren, and Shantayanan Devarajan. Aid and Reform in Africa. Washington, DC: World Bank, 2001.
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  211. Another example of the line of research developed in particular by the World Bank (e.g., Dollar and Pritchett 1998), for which aid is effective in promoting growth, and, if failures result, the culprits are the recipient governments that resisted implementing reforms.
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  213. Dollar, David, and Lant Pritchett. Assessing Aid: What Works, What Doesn’t, and Why. Washington, DC: World Bank, 1998.
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  215. A “flagship” report by the World Bank that has been a key reference in support of the argument that aid augments growth in a “good policy environment” and in the subsequent controversies.
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  217. Gomanee, Karuna, Sourafel Girma, and Oliver Morrissey. Aid and Growth in Sub-Saharan Africa: Accounting for Transmission Mechanisms. Research Paper 2005/60. Helsinki: World Institute for Development Economics Research of the United Nations University, 2005.
  218. Save Citation »Export Citation »E-mail Citation »
  219. A contribution to the debate on aid and growth, which shows that, from 1970 to 1997, investment served as the key transmission mechanism in the impact of aid on growth.
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  221. The Impact of Aid on Broader Dimensions of Development
  222.  
  223. Foreign aid not only has an impact on macroeconomic aggregates such as economic growth but also on other dimensions of development, which are more “mesoeconomic” and microeconomic, such as inequality and poverty (Bourguignon, et al. 2009). The impacts of aid may be disaggregated in distinguishing different sources of poverty (Mourmouras and Rangazas 2006). Aid may be effective in domains other than income, such as education and health (Fielding, et al. 2006).
  224.  
  225. Bourguignon, François, Victoria Levin, and David Rosenblatt. “International Redistribution of Income.” World Development 37.1 (2009): 1–10.
  226. DOI: 10.1016/j.worlddev.2008.06.008Save Citation »Export Citation »E-mail Citation »
  227. The authors show that, at the world level, aid has a positive distributional impact and is equality enhancing, an effect that is more important for the lowest decile of the distribution. Available online for purchase or by subscription.
  228. Find this resource:
  229. Fielding, David, Mark McGillivray, and Sebastian Torres. A Wider Approach to Aid Effectiveness: Correlated Impacts on Health, Wealth, Fertility and Education. Research Paper 2006/23. Helsinki: World Institute for Development Economics Research of the United Nations University, 2006.
  230. Save Citation »Export Citation »E-mail Citation »
  231. The authors argue that studies of aid should focus not just on per capita income but also on the substantial positive impact aid has on human development, notably health, education, and fertility.
  232. Find this resource:
  233. Mourmouras, Alex, and Peter Rangazas. Foreign Aid Policy and Sources of Poverty: A Quantitative Framework. Working Paper WP/06/14. Washington, DC: International Monetary Fund, 2006.
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  235. Observing that econometric literature cannot establish a robust association between aid and growth and poverty reduction, through a dynamic general equilibrium model, the authors quantify three sources of poverty, and they show that they lead to different policies and, hence, very different aid costs of implementing these different policies.
  236. Find this resource:
  237. Questioning the Positive Impact of Aid on Growth
  238.  
  239. After 2000, the International Monetary Fund (IMF) developed a theoretical stance regarding aid that slightly differs from that of the World Bank, which, given its mandate as a development bank, defends the view of a positive impact of aid on growth. With its mandate to keep close watch of the global monetary and financial system, the IMF has a more cautious position vis-à-vis aid flows, which, particularly in aid-dependent countries, may induce macroeconomic imbalances and cause inflation and appreciation of exchange rates. In a series of studies, IMF senior researchers have demonstrated the negative impact of aid on economic growth, due, in particular, to the overvaluation of the recipient countries’ exchange rates caused by aid flows, which erodes the competitiveness of manufacturing sectors (Rajan and Subramanian 2005, Rajan and Subramanian 2008, Rajan and Subramanian 2011). IMF researchers argue that it is hard to find robust evidence that foreign aid helps countries grow. The IMF maintains that the aid apparatus must be rethought.
  240.  
  241. Rajan, Raghuram G., and Arvind Subramanian. What Undermines Aid’s Impact on Growth? Working Paper WP/05/126. Washington, DC: International Monetary Fund, 2005.
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  243. The authors explain that there is no robust effect of aid on the long-term growth of poor countries, even those with good policies, because aid inflows have systematic adverse effects on a country’s competitiveness due to the real exchange rate overvaluation caused by aid inflows.
  244. Find this resource:
  245. Rajan, Raghuram G., and Arvind Subramanian. “Aid and Growth: What Does the Cross-Country Evidence Really Show?” Review of Economics and Statistics 90.4 (2008): 643–665.
  246. DOI: 10.1162/rest.90.4.643Save Citation »Export Citation »E-mail Citation »
  247. A paper based on cross-sectional and panel data in which the authors show little robust evidence of a positive (or negative) relationship between aid flows and growth, and no evidence that aid works better in better policy or geographical environments or that certain forms of aid work better than others. Available online by subscription.
  248. Find this resource:
  249. Rajan, Raghuram G., and Arvind Subramanian. “Aid, Dutch Disease, and Manufacturing Growth.” Journal of Development Economics 94.1 (2011): 106–118.
  250. DOI: 10.1016/j.jdeveco.2009.12.004Save Citation »Export Citation »E-mail Citation »
  251. A continuation of Rajan and Subramanian 2005 and Rajan and Subramanian 2008, on the effects of aid on the manufacturing sectors, in which the authors find that aid inflows have systematic adverse effects on a country’s competitiveness, as reflected in the lower relative growth rate of exportable industries, due to the real exchange rate appreciation caused by aid inflows. Available online for purchase or by subscription.
  252. Find this resource:
  253. Criticisms of the Aid–Growth Econometric Studies
  254.  
  255. There have been many criticisms of the Burnside–Dollar findings and arguments on the links, namely, of aid—“good policies”—growth, for example, methodological criticisms, especially of the weakness of the econometric model and data (Antipin and Mavrotas 2006, Lensink and White 2000, Roodman 2007a). In some studies, the results of the Burnside–Dollar analysis are completely different when particular variables are added (Easterly, et al. 2003). Moreover, results differ if the definitions of variables such as “policies,” “growth,” or “aid” differ. Results of aid–growth econometric regressions are also highly diverse: Roodman 2007b shows that aid raises growth in countries with good policies or in countries with difficult economic environments or “outside the tropics” or with diminishing returns. Methodologies are a key problem in assessing causalities involving aid and economic growth (Roodman 2008). It is also very difficult to define “good” policies. Easterly 2003 even argues that there may be no relationship between aid and growth.
  256.  
  257. Antipin, Jan-Erik, and George Mavrotas. On the Empirics of Aid and Growth: A Fresh Look. Research Paper 2006/05. Helsinki: World Institute for Development Economics Research of the United Nations University, 2006.
  258. Save Citation »Export Citation »E-mail Citation »
  259. Critique of the aid-policies-growth causality defended in Burnside and Dollar 2000 (cited under Relationships between Aid and Economic Growth) using three data sets and Bayesian instrumental variable methods: the authors obtain different results; hence, they doubt the robustness of Burnside and Dollar’s findings and the validity of their policy lessons.
  260. Find this resource:
  261. Easterly, William. “Can Foreign Aid Buy Growth?” Journal of Economic Perspectives 17.3 (2003): 23–48.
  262. DOI: 10.1257/089533003769204344Save Citation »Export Citation »E-mail Citation »
  263. Easterly argues that the empirical literature on the links between aid and growth lack a clear theoretical model by which aid would influence growth, and that there is no relationship between aid and growth. Available online by subscription.
  264. Find this resource:
  265. Easterly, William, Ross Levine, and David Roodman. New Data, New Doubts: Revisiting “Aid, Policies and Growth”. Working Paper 26. Washington, DC: Center for Global Development, 2003.
  266. Save Citation »Export Citation »E-mail Citation »
  267. The authors show that when new data are included, that is, if data are updated from 1970–1993 to 1970–1997, the findings of Burnside and Dollar 2000 (cited under Relationships between Aid and Economic Growth) are not robust.
  268. Find this resource:
  269. Lensink, Roger, and Howard White. “Assessing Aid: A Manifesto for Aid in the 21st Century?” Oxford Development Studies 28.1 (2000): 5–18.
  270. DOI: 10.1080/713688303Save Citation »Export Citation »E-mail Citation »
  271. A critique of the World Bank 1998 report (see Dollar and Pritchett 1998, cited under Relationships between Aid and Economic Growth) on aid, of the weak robustness of its regressions, different results being obtained with minor variations in model specification, and of the argument that aid works only if “good” policies are implemented. Available online by subscription.
  272. Find this resource:
  273. Roodman, David. The Anarchy of Numbers: Aid, Development, and Cross-Country Empirics. Working Paper 32. Washington, DC: Center for Global Development, 2007a.
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  275. An update of a paper with the same title by Roodman published in 2003, which showed that the econometric regressions on the link between aid and growth are weakly robust. The diversity of results of aid-growth econometric regressions suggests that many are fragile.
  276. Find this resource:
  277. Roodman, David. Macro Aid Effectiveness Research: A Guide for the Perplexed. Working Paper 135. Washington, DC: Center for Global Development, 2007b.
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  279. Roodman argues that the quantitative approach on aid and growth will remain inconclusive as it is able to highlight only correlations, but not causation (i.e., aid causing growth).
  280. Find this resource:
  281. Roodman, David. Through the Looking Glass, and What OLS Found There: On Growth, Foreign Aid, and Reverse Causality. Working Paper 135. Washington, DC: Center for Global Development, 2008.
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  283. Roodman discusses the usual econometric techniques utilized in the cross-country literature on aid (instruments that help distinguish causality from correlation): noninstrumental techniques show there is a negative causal relationship from growth to aid; moreover, aid is endogenous (when gross domestic product [GDP] goes up, aid/GDP goes down).
  284. Find this resource:
  285. The Possible Nonlinearity in the Aid–Growth Relationship
  286.  
  287. There may be threshold effects and nonlinearity in the relationship between aid and growth (Lensink and White 2001; see also Lensink and White 2000, cited under Criticisms of the Aid-Growth Econometric Studies), but these arguments remain challenged (Nkusu 2004). There may be diminishing returns of aid, and aid may be more effective in countries at lower levels of development. Related debates refer to the appropriate levels of aid and consider not only the qualitative aspects of aid effectiveness but also its quantitative aspects, for example, the levels of aid that make it the most effective. The investigation of the relationships between aid and growth needs detailed case studies at the country level and even at the project level (Kourtellos, et al. 2007).
  288.  
  289. Kourtellos, Andros, Chih Ming Tan, and Xiaobo Zhang. “Is the Relationship between Aid and Economic Growth Nonlinear?” Journal of Macroeconomics 29.3 (2007): 515–540.
  290. DOI: 10.1016/j.jmacro.2007.02.007Save Citation »Export Citation »E-mail Citation »
  291. Critique of cross-country regressions assuming linear relationship between aid and growth, because countries are heterogeneous and data are not comparable; but there is no evidence that the relationship between aid and growth is nonlinear. The authors argue that aid is potentially counterproductive to growth. Available online for purchase or by subscription.
  292. Find this resource:
  293. Lensink, Roger, and Howard White. “Are There Negative Returns to Aid?” Journal of Development Studies 37.6 (2001): 42–65.
  294. DOI: 10.1080/713601082Save Citation »Export Citation »E-mail Citation »
  295. The authors highlight the possible existence of an aid “Laffer curve,” and the possible negative returns to aid: the benefits of aid increase with the initial inflows, but they decline after a certain level. Available online for purchase or by subscription.
  296. Find this resource:
  297. Nkusu, Mwanza. Are There Negative Returns to Aid? A Comment. Working Paper WP/04/212. Washington, DC: International Monetary Fund, 2004.
  298. Save Citation »Export Citation »E-mail Citation »
  299. A critique of the argument of Lensink and White 2001 on the possibility of negative returns to aid.
  300. Find this resource:
  301. The Concept of Aid Selectivity
  302.  
  303. The argument that aid has a positive impact on growth, but only in the presence of “good policies,” typically defended by World Bank researchers, has served as the basis for the idea, prevalent since 2000, that aid should be selective (the concept of “aid selectivity”) and given only to countries that implement “good policies” and to governments that “merit” aid (Burnside and Dollar 2004, Collier and Dollar 2002). Countries with “unsound” policies should receive less aid according to the selectivity approach, as these policies lessen aid’s impact on growth. This approach has its roots in the World Bank 1998 report (see Dollar and Pritchett 1998, cited under Relationships between Aid and Economic Growth) elaborated by World Bank researchers such as Paul Collier, David Dollar, and Lant Pritchett. This approach has triggered much debate and has been discussed in many studies. For example, aid ineffectiveness stems not only from the poor economic policies of recipient governments, but also from their poor institutions, which foster policy failures. Aid ineffectiveness also results from external economic shocks in vulnerable countries (e.g., commodity-dependent countries), which selectivity criteria should take into account (Amprou, et al. 2007). It may also result from the combination of economic vulnerability and political instability (McGillivray 2003). The empirical evidence of the selectivity of aid and the evolution of that evidence are analyzed in Dollar and Levin 2004 and Claessens, et al. 2007.
  304.  
  305. Amprou, Jacky, Patrick Guillaumont, and Sylviane Guillaumont-Jeanneney. “Aid Selectivity According to Augmented Criteria.” World Economy 30.5 (2007): 733–763.
  306. DOI: 10.1111/j.1467-9701.2007.01021.xSave Citation »Export Citation »E-mail Citation »
  307. The authors argue that the selectivity criteria that usually consider only indicators internal to countries receiving aid, such as domestic policies, should include vulnerability to exogenous shocks and low levels of human capital. Available online for purchase or by subscription.
  308. Find this resource:
  309. Burnside, Craig, and David Dollar. Aid, Policies, and Growth: Revisiting the Evidence. Policy Research Working Paper 3251. Washington, DC: World Bank, 2004.
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  311. Confirms the results of Burnside and Dollar 2000 (cited under Relationships between Aid and Economic Growth) and argue that in the 1990s allocation of aid to low-income countries favored those with better institutional quality: selectivity shows that aid is more productive in “sound institutional and policy environments” (p. 1).
  312. Find this resource:
  313. Chauvet, Lisa, and Patrick Guillaumont. Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability. Working Paper E 2003.27. Clermont-Ferrand, France: Centre d’Études et de Recherches sur le Développement International, 2003.
  314. Save Citation »Export Citation »E-mail Citation »
  315. The authors refine the Burnside-Dollar model, in which aid effectiveness depends on policy, using data for the period 1975–1999 for fifty-three developing countries, and add that policy depends on aid, while aid effectiveness positively depends on structural economic vulnerability and depends negatively on political instability.
  316. Find this resource:
  317. Claessens, Stijn, Danny Cassimon, and Bjorn van Campenhout. Empirical Evidence on the New International Aid Architecture. Working Paper WP/07/277. Washington, DC: International Monetary Fund, 2007.
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  319. In a review of the bilateral aid allocation of twenty-two donors among 147 recipient countries over the period 1970–2004, analysis of the changes in the international aid architecture shows that, in the late 1990s, bilateral aid responded more to economic need and the quality of a recipient country’s policy and institutional environment: aid allocations are more selective but with large differences among donors owing to donors’ own institutional environments.
  320. Find this resource:
  321. Collier, Paul, and David Dollar. “Aid Allocation and Poverty Reduction.” European Economic Review 46.8 (2002): 1475–1500.
  322. DOI: 10.1016/S0014-2921(01)00187-8Save Citation »Export Citation »E-mail Citation »
  323. A follow-up to the World Bank 1998 report (see Dollar and Pritchett 1998, cited under Relationships between Aid and Economic Growth) on aid effectiveness and its prescriptive approach: the authors argue that aid allocation is optimal in countries with high levels of poverty, low per capita incomes, and good, “sound policies.” Available online for purchase or by subscription.
  324. Find this resource:
  325. Dollar, David, and Victoria Levin. The Increasing Selectivity of Foreign Aid, 1984–2002. Policy Research Working Paper 3299. Washington, DC: World Bank, 2004.
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  327. The authors observe a shift toward selectivity from the 1990s onward, but the importance given to the “quality of governance” varies across donor countries: some multilateral and bilateral aid agencies are very policy focused, for example, the World Bank, Denmark, the United Kingdom, Norway, and the Netherlands, while France and the United States are not selective.
  328. Find this resource:
  329. McGillivray, Mark. Aid Effectiveness and Selectivity: Integrating Multiple Objectives into Aid Allocations. Discussion Paper 2003/71. Helsinki: World Institute for Development Economics Research of the United Nations University, 2003.
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  331. The relationship between aid and growth depends not only on the “soundness” of recipient countries’ policies, but also on several other factors, in particular political factors (stability, democracy) and economic vulnerability.
  332. Find this resource:
  333. The Debate on “Aid Effectiveness”
  334.  
  335. The arguments in the World Bank 1998 report (see Dollar and Pritchett 1998, cited under Relationships between Aid and Economic Growth) generated intense debate over the context in which aid works, that is, whether the effectiveness of aid inflows depends on the policy regime of recipient countries. It may be argued that aid works (Hansen and Tarp 2000) and that in its absence growth would be lower (McGillivray, et al. 2005). Beginning in the 1990s, the inconclusive character of the relationships between aid and growth has also fostered intense debates on the concept of “aid effectiveness.” To understand the reasons for the recurrent ineffectiveness of aid in some settings, while success may be achieved in others, aid effectiveness has been defined to mean aid that is positively related to growth (Cassen, et al. 1994). Comprehensive assessments can be found in Riddell 2008 and Doucouliagos and Paldam 2009. The assessment in Nissanke 2010 is deep and detailed, but more critical. Reasons for aid effectiveness remain much debated: some authors argue that aid is intrinsically ineffective; others that ineffectiveness is caused by factors that are external to aid, such as economic instability (e.g., export prices); others that ineffectiveness cannot be demonstrated (Bourguignon and Sundberg 2007), because good or poor results of aid can never be assigned to aid with certainty; and others that the expectations regarding aid are excessive (Dalgaard and Erickson 2009).
  336.  
  337. Bourguignon, François, and Mark Sundberg. “Aid Effectiveness: Opening the Black Box.” American Economic Review 97.2 (2007): 316–321.
  338. DOI: 10.1257/aer.97.2.316Save Citation »Export Citation »E-mail Citation »
  339. The authors argue that the ambiguous results of aid stem from problems of causality and from the difficulty of attributing the effects of aid, for example, to say how many children are inoculated or crops taken to market due to a particular aid amount. Available online by subscription.
  340. Find this resource:
  341. Cassen, Robert, et al. Does Aid Work? Report to an Intergovernmental Task Force. 2d ed. New York: Oxford University Press, 1994.
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  343. A comprehensive analysis of the determinants of aid effectiveness and reasons for aid failures that cover the main dimensions (macroeconomic effects, poverty, technical cooperation, and problems of coordination). The second edition of the book takes into account debates that have been ongoing since the 1980s. Originally published in 1986.
  344. Find this resource:
  345. Dalgaard, Carl-Johan, and Lennart Erickson. “Reasonable Expectations and the First Millennium Development Goal: How Much Can Aid Achieve?” World Development 37.7 (2009): 1170–1181.
  346. DOI: 10.1016/j.worlddev.2008.11.003Save Citation »Export Citation »E-mail Citation »
  347. The authors argue that too much is expected from aid and that to be effective, aid flows should be very large, much larger than those commonly calculated by donor agencies and authors of academic studies. Available online for purchase or by subscription.
  348. Find this resource:
  349. Doucouliagos, Christos, and Martin Paldam. “The Aid Effectiveness Literature: The Sad Results of 40 Years of Research.” Journal of Economic Surveys 23.3 (July 2009): 433–461.
  350. DOI: 10.1111/j.1467-6419.2008.00568.xSave Citation »Export Citation »E-mail Citation »
  351. A useful synthesis of the literature on aid effectiveness over the past forty years. Available online for purchase or by subscription.
  352. Find this resource:
  353. Hansen, Henrik, and Finn Tarp. “Aid Effectiveness Disputed.” Journal of International Development 12.3 (2000): 375–398.
  354. DOI: 10.1002/(SICI)1099-1328(200004)12:3<375::AID-JID657>3.0.CO;2-MSave Citation »Export Citation »E-mail Citation »
  355. The authors criticize the arguments that cross-country analyses do not find robust links between aid flows and growth, and that aid is successful only when associated with good policies. Relying on the links among aid, savings, investment, and growth, they argue that aid works, even in unfavorable policy contexts. Available online for purchase or by subscription.
  356. Find this resource:
  357. McGillivray, Mark, Simon Feeny, Niels Hermes, and Robert Lensink. It Works; It Doesn’t; It Can, but That Depends . . . : 50 Years of Controversy over the Macroeconomic Impact of Development Aid. Research Paper 2005/54. Helsinki: World Institute for Development Economics Research of the United Nations University, 2005.
  358. Save Citation »Export Citation »E-mail Citation »
  359. A general discussion of the “pros” and “cons” regarding aid and the evolution of the literature’s findings: until the late 1990s, inconclusive results, then a shift with the release of the World Bank’s report Assessing Aid (see Dollar and Pritchett 1998, cited under Relationships between Aid and Economic Growth) and a consensus that aid works.
  360. Find this resource:
  361. Nissanke, Machiko. “Reconstructing the Aid Effectiveness Debate.” In Foreign Aid for Development: Issues, Challenges, and the New Agenda. Edited by George Mavrotas, 63–93. Helsinki: Oxford University Press and World Institute for Development Economics Research of the United Nations University, 2010.
  362. DOI: 10.1093/acprof:oso/9780199580934.001.0001Save Citation »Export Citation »E-mail Citation »
  363. A comprehensive synthesis of the key aspects of the debates on aid effectiveness by one of its best specialists, which critically assesses the selectivity approach, conditionality, and the relationships between aid and debt, and proposes innovative approaches such as state-contingent aid contracts.
  364. Find this resource:
  365. Riddell, Roger C. Does Foreign Aid Really Work? Oxford: Oxford University Press, 2008.
  366. Save Citation »Export Citation »E-mail Citation »
  367. A presentation of the historical transformation and contemporary debates regarding foreign aid, which takes into account its evolutions, for example, the increasing role of nongovernmental organizations.
  368. Find this resource:
  369. Impacts of Different Types of Aid
  370.  
  371. There are many types of aid, for example, technical assistance, food aid, project aid, program aid, and budget support. Aid is given also in the form of loans or grants, which have different degrees of effectiveness (Mourmouras and Mayer 2004; Nunnenkamp, et al. 2005). All these types of aid have different effects, and they all have an impact on different sectors of economic activity. Aid is heterogeneous, and governments, firms, and households respond differently according to the nature of the aid inflows (Mavrotas and Ouattara 2003). For example, there have been debates on food aid, which is often viewed as harmful for agricultural producers (an assertion that is challenged in Levinsohn and McMillan 2005); on budget aid, which has been cited as breeding corruption; and on project aid, which it is claimed has resulted in useless “white elephants” or in reduced public savings (Ouattara 2007), and so on. A rigorous assessment of the relationships between aid and growth implies a distinction between types of aid flows (Clemens, et al. 2004).
  372.  
  373. Clemens, Michael, Steven Radelet, and Rikhil Bhavnani. Counting Chickens When They Hatch: The Short-Term Effect of Aid on Growth. Working Paper 44. Washington, DC: Center for Global Development, 2004.
  374. Save Citation »Export Citation »E-mail Citation »
  375. A paper that clarifies the debate on the impact of aid in distinguishing three categories of aid and in showing their differing impacts on growth (and over different time spans): emergency and humanitarian aid, aid that affects growth over a long period of time (environment, health, and education), and short-term impact aid (budget, infrastructure, and productive sectors).
  376. Find this resource:
  377. Levinsohn, James A., and Margaret S. McMillan. Does Food Aid Harm the Poor? Household Evidence from Ethiopia. Working Paper 11048. Cambridge, MA: National Bureau of Economic Research, 2005.
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  379. In contrast with conventional views, using the example of Ethiopia, the authors show that households at all levels of income benefit from food aid and that the benefits go disproportionately to the poorest households.
  380. Find this resource:
  381. Mavrotas, George, and Bazoumana Ouattara. Aid Disaggregation, Endogenous Aid and the Public Sector in Aid-Recipient Economies: Evidence from Côte d’Ivoire. Discussion Paper 2003/15. Helsinki: World Institute for Development Economics Research of the United Nations University, 2003.
  382. Save Citation »Export Citation »E-mail Citation »
  383. The authors distinguish different categories of foreign aid inflows: project aid, program aid, technical assistance, and food aid, and they show that governments respond differently according to the nature of the aid inflows.
  384. Find this resource:
  385. Mourmouras, Alex, and Wolfgang Mayer. The Political Economy of Conditional and Unconditional Foreign Assistance: Grants versus Loans Rollovers. Working Paper WP/04/38. Washington, DC: International Monetary Fund, 2004.
  386. Save Citation »Export Citation »E-mail Citation »
  387. The authors argue that one-time grants are more effective than loan rollovers when assistance is unconditional, and the opposite when assistance is conditional.
  388. Find this resource:
  389. Nunnenkamp, Peter, Rainer Thiele, and Tom Wilfer. Grants versus Loans: Much Ado about (Almost) Nothing. Kiel Economic Policy Paper 4. Kiel, Germany: Kiel Institute for the World Economy, 2005.
  390. Save Citation »Export Citation »E-mail Citation »
  391. A reflection on the composition of aid and the impacts on growth of grants and loans, respectively, grants being positively associated with growth in highly indebted poor countries.
  392. Find this resource:
  393. Ouattara, Bazoumana. “Foreign Aid, Public Savings Displacement and Aid Dependency in Côte d’Ivoire: An Aid Disaggregation Approach.” Oxford Development Studies 35.1 (2007): 33–46.
  394. DOI: 10.1080/13600810601167579Save Citation »Export Citation »E-mail Citation »
  395. The authors underscore the importance of aid heterogeneity and use a “fiscal response” model. They examine the categories of aid flows (project aid, program aid, technical assistance, and food aid) that displace public savings and affect the recipient country’s dependence on aid. Data from Côte d’Ivoire for the period 1975–1999 show that project aid flows reduced public savings and aggravated Côte d’Ivoire’s dependence on aid. Available online by subscription.
  396. Find this resource:
  397. The Concept of Aid Dependence and Its Negative Effects
  398.  
  399. In the first decade of the 21st century, the general public grew increasingly aware that aid was being poured into developing countries without visible positive effects, and that countries that grew economically did so without aid (e.g., the East Asian countries). This awareness was reflected in the academic and policymaking literature, which focused increasingly on the idea that aid includes an intrinsic risk, namely, that the governments of recipient countries could become dependent on it, and that aid dependence may lead to vicious circles and “aid traps,” the mechanisms of which include the overvaluation of exchange rates (Elbadawi 1999), the weakening of institutions (Azam, et al. 1999), or the destabilization of local political economies (van de Walle 2005). The notion of dependence is always analyzed in terms of its negative effects. Aid dependence may be measured through a variety of economic indicators, such as the ratio aid/gross national income or the ratio aid/central government expenses, which can be found in databases such as the World Bank annually updated World Development Indicators (cited under Primary Sources).
  400.  
  401. Azam, Jean-Paul, Shatayanan Devarajan, and Stephen O’Connell. Aid Dependence Reconsidered. Working Paper WPS/99-5. Oxford: Centre for the Study of African Economies, 1999.
  402. Save Citation »Export Citation »E-mail Citation »
  403. Among the first studies highlighting the negative effects of aid dependence; there are short-run benefits from aid, but they create an increasing need for aid, damaging in the long run, resulting in an equilibrium of high-aid/weak institutions.
  404. Find this resource:
  405. Elbadawi, Ibrahim A. “External Aid: Help or Hindrance to Export Orientation in Africa?” Journal of African Economies 8.4 (1999): 578–616.
  406. DOI: 10.1093/jae/8.4.578Save Citation »Export Citation »E-mail Citation »
  407. The author shows that highly aid-dependent countries, of which sub-Saharan African countries are prominent examples, experience exchange rate overvaluation.
  408. Find this resource:
  409. van de Walle, Nicolas. Overcoming Stagnation in Aid-Dependent Countries. Washington, DC: Center for Global Development, 2005.
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  411. An analysis of the determinants and effects of aid dependence in a political economy perspective by one of the most prominent scholars on the political economy of developing countries, with a focus on sub-Saharan Africa, as the latter includes a great number of aid-dependent countries.
  412. Find this resource:
  413. Macroeconomic Management of Aid
  414.  
  415. The research of the International Monetary Fund (IMF) is aware of the problems caused by aid dependence to a greater degree than that of the World Bank. In the context of the promises made by the donor community to increase aid at the Gleneagles Summit in 2005, the IMF has devoted much research to the issue of the “scaling-up of aid,” the concept of “aid surges” and their possible negative effects (notably what economics calls the “Dutch disease”), and the concepts of “absorption” and “spending” of aid (Gupta, et al. 2005). Problems of absorption capacity are also analyzed within the World Bank (Bourguignon and Sundberg 2006). The IMF has developed these concepts based on its mandate to monitor the global monetary and financial system. The main papers on these issues are thus written mostly by IMF researchers (e.g., Aiyar, et al. 2008; Berg, et al. 2010). Analysis of these issues is also found in several academic studies, including Martins 2007, which applies the conceptual framework of aid absorption and spending to the case of a particular country, namely, Ethiopia; Killick and Foster 2007, which assesses the Dutch disease effects of aid; and Adam, et al. 2009, which has a broader view of the problems of macroeconomic management of aid. A review of these effects of aid on government spending is Morrissey 2015, who examines ten years of existing studies with a focus on its impact on the tax effort of recipient countries.
  416.  
  417. Adam, Christopher, Edward Buffie, Stephen O’Connell, and Catherine Pattillo. “Monetary Policy Rules for Managing Aid Surges in Africa.” Review of Development Economics 13.3 (2009): 464–490.
  418. DOI: 10.1111/j.1467-9361.2009.00502.xSave Citation »Export Citation »E-mail Citation »
  419. The authors discuss the instruments of monetary policy and the macroeconomic management of aid surges and volatile aid inflows recommended by the IMF, but they underscore that short-run management of aid inflows should not overshadow medium-term rationales for aid. Available online for purchase or by subscription.
  420. Find this resource:
  421. Aiyar, Shekhar, Andrew Berg, and Mumtaz Hussain. The Macroeconomic Management of Increased Aid: Policy Lessons from Recent Experience. Research Paper 2008/79. Helsinki: World Institute for Development Economics Research of the United Nations University, 2008.
  422. Save Citation »Export Citation »E-mail Citation »
  423. Focusing on the macroeconomic challenges created by an aid surge, the authors analyze the possible policy responses to increased aid in terms of absorption and spending of aid, showing that different combinations of absorption and spending lead to different macroeconomic consequences in drawing on evidence from five sub-Saharan African countries.
  424. Find this resource:
  425. Berg, Andrew, Jan Gottschalk, Rafael Portillo, and Luis-Felipe Zanna. The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios. Working Paper WP/10/160. Washington, DC: International Monetary Fund, 2010.
  426. Save Citation »Export Citation »E-mail Citation »
  427. A model that analyzes the macroeconomic effects of a scaling-up of aid and assesses the implications of different policy responses, based on the concepts of aid absorption and spending.
  428. Find this resource:
  429. Bourguignon, François, and Mark Sundberg. Absorptive Capacity and Achieving the MDGs. Research Paper 2006/47. Helsinki: World Institute for Development Economics Research of the United Nations University, 2006.
  430. Save Citation »Export Citation »E-mail Citation »
  431. The authors show that the scaling-up of aid depends on the key issue of the absorptive capacity of low-income countries, that is, their ability to absorb large amounts of aid: the macroimpact of large aid flows on the sector of tradable goods can be serious in the short run.
  432. Find this resource:
  433. Gupta, Sanjeev, Robert Powell, and Yongzheng Yang. The Macroeconomic Challenges of Scaling Up Aid to Africa. Working Paper WP/05/179. Washington, DC: International Monetary Fund, 2005.
  434. Save Citation »Export Citation »E-mail Citation »
  435. A reference study by IMF researchers regarding the concept of aid absorption and spending that lays out the general framework.
  436. Find this resource:
  437. Killick, Tony, and Mick Foster. “The Macroeconomics of Doubling Aid to Africa and the Centrality of the Supply Side.” Development Policy Review 25.2 (2007): 167–192.
  438. DOI: 10.1111/j.1467-7679.2007.00365.xSave Citation »Export Citation »E-mail Citation »
  439. A detailed study by a renowned specialist, Tony Killick, of the macroeconomic effects of aid surges in the case of sub-Saharan Africa, which, in particular, deepens the issue of “Dutch disease” effects. Available online for purchase or by subscription.
  440. Find this resource:
  441. Martins, Pedro M. G. The Impact of Foreign Aid on Government Spending, Revenue and Domestic Borrowing in Ethiopia. Working Paper 41. Brasilia, Brazil: International Poverty Centre, 2007.
  442. Save Citation »Export Citation »E-mail Citation »
  443. A questioning of the IMF framework on aid absorption and spending, in particular Gupta, et al. 2005, through the example of an aid-dependent country, Ethiopia.
  444. Find this resource:
  445. Morrissey, Oliver. “Aid and Government Fiscal Behavior: Assessing Recent Evidence.” World Development 69 (May 2015): 98–105.
  446. DOI: 10.1016/j.worlddev.2013.12.008Save Citation »Export Citation »E-mail Citation »
  447. This review of existing research shows that aid finances government spending and has no systematic effect on tax effort, though results vary across countries.
  448. Find this resource:
  449. Volatility of Aid and Its Impacts
  450.  
  451. The view that aid may have negative effects has been reinforced by studies that were elaborated within the International Monetary Fund (IMF), especially by Ales Bulir and Javier Hamann (Bulir and Hamann 2001, Bulir and Hamann 2003, Bulir and Hamann 2008, Bulir and Lane 2002), which are in line with the cautious stance regarding aid that is typical of the IMF. The results of these studies were striking and have been widely quoted because they demonstrate that a key characteristic of aid is its volatility and uncertainty, and that, therefore, aid may have harmful effects on recipient countries: aid flows are even more volatile than commodity prices, and there are important gaps between aid commitments and effective disbursements. These studies also triggered research on aid volatility outside the IMF (Fielding and Mavrotas 2005, Hudson and Mosley 2008, Jones 2011). Most of this research confirms the results of the IMF studies (Kharas 2008).
  452.  
  453. Bulir, Ales, and A. Javier Hamann. How Volatile and Unpredictable Are Aid Flows, and What Are the Policy Implications? Working Paper WP/01/167. Washington, DC: International Monetary Fund, 2001.
  454. Save Citation »Export Citation »E-mail Citation »
  455. The first of a series of influential papers showing that aid flows are unpredictable and even more volatile than fiscal revenues, particularly in aid-dependent countries, and that aid is procyclical in relation to activity in the recipient country, hence welfare-reducing.
  456. Find this resource:
  457. Bulir, Ales, and A. Javier Hamann. “Aid Volatility: An Empirical Assessment.” IMF Staff Papers 50.1 (2003): 64–89.
  458. Save Citation »Export Citation »E-mail Citation »
  459. A follow-up to Bulir and Hamann 2001, which shows that aid is more volatile than fiscal revenues, and that this volatility increases with aid dependency. Aid disbursements are also very uncertain and cannot be predicted.
  460. Find this resource:
  461. Bulir, Ales, and A. Javier Hamann. “Volatility of Development Aid: From the Frying Pan into the Fire?” World Development 36.10 (2008): 2048–2066.
  462. DOI: 10.1016/j.worlddev.2007.02.019Save Citation »Export Citation »E-mail Citation »
  463. An update of Bulir and Hamann 2001 and Bulir and Hamann 2003, building three measures of aid instability and showing that the volatility of aid flows is much greater than that of domestic revenue, that aid volatility makes the macroeconomy hard to manage, and, therefore, that aid has failed to stabilize and help recipient countries.
  464. Find this resource:
  465. Bulir, Ales, and Timothy D. Lane. Aid and Fiscal Management. Working Paper WP/02/112. Washington, DC: International Monetary Fund, 2002.
  466. Save Citation »Export Citation »E-mail Citation »
  467. Part of a series of papers showing that aid volatility makes the macroeconomic fiscal management in recipient countries difficult.
  468. Find this resource:
  469. Fielding, David, and George Mavrotas. The Volatility of Aid. Discussion Paper 2005/06. Helsinki: World Institute for Development Economics Research of the United Nations University, 2005.
  470. Save Citation »Export Citation »E-mail Citation »
  471. The authors analyze aid volatility using data for sixty-six aid recipients for the period 1973–2002 and show that the institutional quality of the aid recipient affects the stability of sector aid but not that of program assistance.
  472. Find this resource:
  473. Hudson, John, and Paul Mosley. “Aid Volatility, Policy and Development.” World Development 36.10 (2008): 2082–2102.
  474. DOI: 10.1016/j.worlddev.2007.02.018Save Citation »Export Citation »E-mail Citation »
  475. A paper by a renowned specialist in the field of aid (Paul Mosley) in which the authors disagree with the results found by Bulir and Hamann that the poorest countries have the highest volatility, arguing that results depend on the data set used and that components of aid should be distinguished (e.g., program aid and technical assistance).
  476. Find this resource:
  477. Jones, Sam. Aid Supplies over Time: Accounting for Heterogeneity, Trends, and Dynamics. Working Paper 2011/04. Helsinki: World Institute for Development Economics Research of the United Nations University, 2011.
  478. Save Citation »Export Citation »E-mail Citation »
  479. The author shows that bilateral aid is also very volatile.
  480. Find this resource:
  481. Kharas, Homi. Measuring the Cost of Aid Volatility. Working Paper 3. Washington, DC: Wolfensohn Center for Development at the Brookings Institution, 2008.
  482. Save Citation »Export Citation »E-mail Citation »
  483. The author confirms the results obtained by IMF researchers Bulir and Hamann and finds that aid is much more volatile than major macrovariables, namely, five times as volatile as the gross domestic product and three times as volatile as exports for the average recipient; thus, aid amplifies real business cycles in recipient countries.
  484. Find this resource:
  485. Impact of Foreign Aid on the Institutional Development of Recipient Countries
  486.  
  487. Some studies show that aid weakens the institutions of recipient countries, in particular political legitimacy and government accountability. In lowering the tax effort, aid dependence erodes the relationship between state and citizens (Brautigam and Knack 2004, Moss and Subramanian 2005, Rajan and Subramanian 2007). The negative effects of aid may be compared to those created by natural resources rents (Auty 2007). States that can raise a substantial proportion of their revenues from aid are less likely to have the incentive to invest in effective public institutions (Moss, et al. 2006; see also Azam, et al. 1999, cited under the Concept of Aid Dependence and Its Negative Effects). Aid weakens fiscal discipline, and, in a vicious circle, increased fiscal difficulties lead to higher aid (see also Svensson 2000, cited under the Intrinsic Problems of Divergent Incentives). However, it has been argued that aid decreases corruption (Tavares 2003).
  488.  
  489. Auty, Richard M. Aid and Rent-Driven Growth: Mauritania, Kenya and Mozambique Compared. Research Paper 2007/35. Helsinki: World Institute for Development Economics Research of the United Nations University, 2007.
  490. Save Citation »Export Citation »E-mail Citation »
  491. The author links in an original way the analyses of aid to those centered on natural resources rents: aid is presented as a geopolitical form of rent, that is, a large revenue stream detached from the economic activity that generates it and creating political contests for its capture, which has adverse effects and explains aid failure.
  492. Find this resource:
  493. Brautigam, Deborah, and Stephen Knack. “Foreign Aid, Institutions and Governance in Sub-Saharan Africa.” Economic Development and Cultural Change 52.2 (2004): 255–286.
  494. DOI: 10.1086/380592Save Citation »Export Citation »E-mail Citation »
  495. A demonstration by specialists in institutional development that large amounts of aid and the way it is delivered make it more difficult for good governance to develop, and aid erodes institutions in weak states. Available online by subscription.
  496. Find this resource:
  497. Moss, Todd, Gunilla Pettersson, and Nicolas van de Walle. An Aid-Institutions Paradox? A Review Essay on Aid Dependency and State Building in Sub-Saharan Africa. Working Paper 74. Washington, DC: Center for Global Development, 2006.
  498. Save Citation »Export Citation »E-mail Citation »
  499. A breakthrough study by economists and political scientists in which the authors show the negative effects of aid dependence on state institutions and legitimacy, in particular, on fiscal capacity and state revenues.
  500. Find this resource:
  501. Moss, Todd, and Arvind Subramanian. After the Big Push? Fiscal and Institutional Implications of Large Aid Increases. Working Paper 71. Washington, DC: Center for Global Development, 2005.
  502. Save Citation »Export Citation »E-mail Citation »
  503. A study by specialists who are influential in policymaking spheres (Center for Global Development and the International Monetary Fund [IMF]) in which the authors show the negative influences of large aid increases on the incentives for institutional development and on the accountability of state institutions to their own populations.
  504. Find this resource:
  505. Rajan, Raghuram G., and Arvind Subramanian. “Does Aid Affect Governance?” American Economic Review 97.2 (2007): 322–327.
  506. DOI: 10.1257/aer.97.2.322Save Citation »Export Citation »E-mail Citation »
  507. An IMF perspective by senior IMF economists of the analyses of the link between aid and weak governance, here explained by the fact that aid reduces the need for governments to tax the governed or rely on their cooperation. Available online by subscription.
  508. Find this resource:
  509. Tavares, Jose. “Does Foreign Aid Corrupt?” Economic Letters 79.1 (2003): 99–106.
  510. DOI: 10.1016/S0165-1765(02)00293-8Save Citation »Export Citation »E-mail Citation »
  511. A model of the impact of aid on corruption by an economist specialist of political economy issues, which finds that aid decreases corruption.
  512. Find this resource:
  513. Intrinsic Problems of Divergent Incentives
  514.  
  515. Aid is sometimes referred to as the “aid game,” a game with multiple principals (donors) based on the “exchange of external finance for economic reform” or the “buying of reform,” especially when it is conditional. An intrinsic divergence exists between donors and recipients regarding the incentives created by aid flows: the device of aid generates inherent problems of incentives. There are many studies on the negative effects of these divergences between donors and recipients, which are reinforced by the mechanisms of conditionality. This divergence explains many aid failures. An important issue is the “fungibility” of aid: aid flows can be used by recipient governments for purposes that differ from those of donors. For example, conditionalities of loans may be very minor among incentives for politicians, who may be more preoccupied by redistribution between groups and power than development. For their part, aid lenders often do not fully comply with their own conditions, and loans may enable old aid loans to be repaid: together with poor donor coordination, this affects the incentives of the recipient government. It creates expectations from recipient governments that the sanction will be weakly enforced, and hence that they can make promises that they may not fulfill. External aid may also be used as an instrument by rulers for implementing their own domestic policy according to a “double-edged diplomacy.” Recipient governments may use the “scapegoat” strategy analyzed in the breakthrough study Vreeland 1999, that is, using donors and their conditions as convenient scapegoats. Likewise, aid serves as an incentive for recipient governments to reduce their tax efforts. Hence, an intrinsic dimension of moral hazard exists in the aid relationship. The relationship of aid dependence is also associated with problems concerning the credibility of the commitments of both donors (e.g., their sanctions) and recipients (e.g., promises of governments), and aid contracts exhibit what economics has coined the term “time-inconsistency,” which explains poor aid results (Svensson 2000, Svensson 2003). Similarly, in the context of the poverty-reduction objectives of aid, studies have highlighted the “Samaritan dilemma,” namely, the recipient government knows that aid is governed by poverty alleviation and, therefore, has little incentive to expend considerable effort (or channel its own resources) toward this objective; aid targeting the poor is implicitly taxed if these interventions result in less aid received in the future (Gibson, et al. 2005; Svensson 2005). These issues are often addressed through the conceptual tools of game theory.
  516.  
  517. Gibson, Clark C., Krister Andersson, Elinor Ostrom, and Sujai Shivakumar. The Samaritan’s Dilemma: The Political Economy of Development Aid. Oxford: Oxford University Press, 2005.
  518. DOI: 10.1093/0199278857.001.0001Save Citation »Export Citation »E-mail Citation »
  519. The authors analyze the various dimensions of the Samaritan dilemma and other political and institutional aspects of aid, and they build an original theoretical framework, with examples from India and Zambia. Elinor Ostrom is among the best theoreticians of these issues, having been given the Nobel Prize in economics in 2009.
  520. Find this resource:
  521. Svensson, Jakob. “When Is Foreign Aid Policy Credible? Aid Dependence and Conditionality.” Journal of Development Economics 61.1 (2000): 61–84.
  522. DOI: 10.1016/S0304-3878(99)00061-9Save Citation »Export Citation »E-mail Citation »
  523. A theoretical reflection on conditionality efficiency and the nature of the aid contract by one of the best scholars regarding the approach of aid in terms of the divergence between donors and recipients incentives’ divergence; the author shows the time inconsistency of the aid contract. Available online for purchase or by subscription.
  524. Find this resource:
  525. Svensson, Jakob. “Why Conditional Aid Doesn’t Work and What Can Be Done about It?” Journal of Development Economics 70.2 (2003): 381–402.
  526. DOI: 10.1016/S0304-3878(02)00102-5Save Citation »Export Citation »E-mail Citation »
  527. A model assessing the advantages of ex post incentives for the donor to reward good policies—contrary to existing practices, that is, committing aid to each recipient ex ante and making aid conditional on reform. Available online by subscription.
  528. Find this resource:
  529. Svensson, Jakob. “Absorption Capacity and Disbursement Constraints.” Paper presented at the Third Agence Française de Développement / European Development Research Network Conference, Paris, 2005.
  530. Save Citation »Export Citation »E-mail Citation »
  531. A clear analysis of the “Samaritan dilemma” by one of its best-known theoreticians, underscoring that it is made worse by the moral hazard problem, in which the donor cannot distinguish if a poor outcome is the result of low effort (“bad policies”) or “bad luck.”
  532. Find this resource:
  533. Vreeland, James Raymond. “The IMF: Lender of Last Resort or Scapegoat?” Paper presented at the Midwest Political Science Association annual meeting, Chicago, 15–17 April 1999.
  534. Save Citation »Export Citation »E-mail Citation »
  535. A breakthrough paper showing that governments tie their hands with IMF conditionality because they can increase their bargaining leverage with domestic opponents of economic reform and use IMF conditions to put forward their own policies and agenda.
  536. Find this resource:
  537. Limits of Conditional Aid and Conditionality
  538.  
  539. Aid loans or grants are most often commanded by conditionalities, which are made ex ante, and the disbursement may be made before or after the result. These conditionalities give donors a significant influence on the domestic policies of recipient countries (Morrissey 2004), which may sometimes be positive, especially regarding policies oriented toward poverty reduction (Mosley, et al. 2004). The literature on the limits of conditionalities is vast, especially on the International Monetary Fund (IMF) and World Bank conditionalities (e.g., Ranis, et al. 2007), including within aid agencies, which are aware of its problems (Koeberle, et al. 2005). Alternative options, however, have proven difficult in practice. The failures of conditional aid have triggered reflections on the limits of conditionalities, for example, reflection on the respective advantages of ex ante or ex post conditionality or on the credibility of conditionality (Dixit 2000, Killick 1997) and the dilemmas associated with divergent aims within donor agencies—enforcing conditionality and maintaining reputation (Marchesi and Sabani 2007) or between donors and recipient countries (White and Morrissey 1997).
  540.  
  541. Dixit, Avinash. IMF Programs as Incentive Mechanisms. Working Paper. Princeton, NJ: Princeton University, 2000.
  542. Save Citation »Export Citation »E-mail Citation »
  543. An influential paper by a prominent economist, analyzing IMF programs as incentive schemes or mechanisms; the author assesses the concept of conditionality and contrasts it with the concept of ownership and that of selectivity.
  544. Find this resource:
  545. Killick, Tony. “Principals, Agents and the Failings of Conditionality.” Journal of International Development 9.4 (1997): 483–495.
  546. DOI: 10.1002/(SICI)1099-1328(199706)9:4<483::AID-JID458>3.0.CO;2-SSave Citation »Export Citation »E-mail Citation »
  547. A pioneering article on the effectiveness of policy conditionality, analyzed through a principal-agent framework and a sample of twenty-one developing countries, showing the inability of IMF and World Bank conditionality to put in place rewards and punishments that overcome the conflicts of interest between them and recipient governments. Available online for purchase or by subscription.
  548. Find this resource:
  549. Koeberle, Stefan, Harold Bedoya, Peter Silarsky, and Gero Verheyen, eds. Conditionality Revisited: Concepts, Experiences and Lessons. Washington, DC: World Bank, 2005.
  550. DOI: 10.1596/0-8213-6013-2Save Citation »Export Citation »E-mail Citation »
  551. A book edited by researchers at the World Bank, including a wide range of policymakers and academics, that reflects the questioning of the bank regarding the difficulties in implementing conditional lending; an interesting read considering the World Bank is the key global actor in multilateral lending. Published in 2005, the book is the product of the many criticisms against the World Bank’s structural adjustment programs made during the 1990s. Book is based on a Development Policy Forum, “Conditionality Revisited,” held in Paris on 5 July 2004.
  552. Find this resource:
  553. Marchesi, Sylvia, and Laura Sabani. “IMF Concern for Reputation and Conditional Lending Failure: Theory and Empirics.” Journal of Development Economics 84.2 (2007): 640–666.
  554. DOI: 10.1016/j.jdeveco.2007.01.001Save Citation »Export Citation »E-mail Citation »
  555. An original analysis demonstrating that the dual role of the IMF, both as a creditor and as a monitor of reforms, explains the lack of credibility of its sanctions in case of noncompliance with conditionality, and that the IMF’s desire to preserve its reputation as a monitor distorts its lending decisions in favor of laxity. Available online by subscription.
  556. Find this resource:
  557. Morrissey, Oliver. “Conditionality and Aid Effectiveness Re-evaluated.” World Economy 27.2 (2004): 153–171.
  558. DOI: 10.1111/j.1467-9701.2004.00594.xSave Citation »Export Citation »E-mail Citation »
  559. It shows that conditionality has limitations but donors can still influence recipient policies in providing information and technical assistance. Available online for purchase or by subscription.
  560. Find this resource:
  561. Mosley, Paul, John Hudson, and Arjan Verschoor. “Aid, Poverty Reduction and the ‘New Conditionality.’” Economic Journal 114.496 (2004): 217–243.
  562. DOI: 10.1111/j.1468-0297.2004.00220.xSave Citation »Export Citation »E-mail Citation »
  563. The authors argue that conditionality may exert positive leverage toward pro-poor expenditure, and propose a new form of conditionality that gives greater flexibility to donors. Available online for purchase or by subscription.
  564. Find this resource:
  565. Ranis Gustav, James Raymond Vreeland, and Stephen Kosack, eds. Globalization and the Nation State: The Impact of the IMF and the World Bank. London: Routledge, 2007.
  566. Save Citation »Export Citation »E-mail Citation »
  567. A collection of papers on conditionality and the problems associated with IMF and World Bank conditional lending by the best-known specialists on these issues.
  568. Find this resource:
  569. White, Howard, and Oliver Morrissey. “Conditionality When Donor and Recipient Preferences Vary.” Journal of International Development 9.4 (1997): 497–505.
  570. Save Citation »Export Citation »E-mail Citation »
  571. An article that lays out a general framework of conditionality, which allows donor and recipient preferences for policy reform and aid to vary, conditionality being analyzed here as a bargaining process between donors and recipients. Available online by subscription.
  572. Find this resource:
  573. The Political Economy of Aid
  574.  
  575. In principle, foreign aid should be determined by the need of the recipient country, as measured by its low level of per capita income or poor indicators of human development. However, many studies show that the countries that exhibit indisputable need, for example, the poorest ones, are not the ones that systematically receive more aid (Alesina and Weder 2002). Middle-income countries are also important recipients of aid. Thus, several studies argue that aid is mainly driven by the strategic (geopolitical and economic) interests and foreign policy objectives of the donor country (Alesina and Dollar 2000, Boone 1996, Maizels and Nissanke 1984, Raffer and Singer 1996). A motive for bilateral aid may be the influence membership on international bodies such as the UN Security Council may have on decisions within international financial institutions, the International Monetary Fund, or the World Bank (an approach developed by Axel Dreher in several studies, such as Dreher, et al. 2009). These various objectives, both political and economic, can be disaggregated within donor countries, and their effects within recipient countries must also be disaggregated, as aid flows go to heterogeneous groups (Boyce 2002). Other authors find that aid is also fostered when historical and commercial ties link the donor and the recipient country. Donors may also give aid to small countries as the impact of such aid is likely to be more visible and the cost of buying support for the donor country’s foreign policy is lower, though donors may also give aid to large countries that have greater geostrategic value. Conditional financing inherently includes a power relationship, which induces resistance and policy reversals (Mosley, et al. 1995).
  576.  
  577. Alesina, Alberto, and David Dollar. “Who Gives Foreign Aid to Whom and Why?” Journal of Economic Growth 5.1 (2000): 33–63.
  578. DOI: 10.1023/A:1009874203400Save Citation »Export Citation »E-mail Citation »
  579. A widely quoted paper among the first to show that aid is driven by political and strategic considerations (including a colonial past) rather than responding to the economic needs or policy performance of the recipients. It has triggered a series of subsequent papers aiming at confirming or refuting its findings.
  580. Find this resource:
  581. Alesina, Alberto, and Beatrice Weder. “Do Corrupt Governments Receive Less Foreign Aid?” American Economic Review 92.4 (2002): 1126–1137.
  582. DOI: 10.1257/00028280260344669Save Citation »Export Citation »E-mail Citation »
  583. The existence of corruption in recipient countries has no impact on the amount of aid they receive, and corrupt governments receive as much as the less corrupt. Available online by subscription.
  584. Find this resource:
  585. Boone, Peter. “Politics and the Effectiveness of Foreign Aid.” European Economic Review 40.2 (1996): 289–329.
  586. DOI: 10.1016/0014-2921(95)00127-1Save Citation »Export Citation »E-mail Citation »
  587. A pioneering study on the political economy of aid, which shows that political motives underlie donors’ aid more than the needs of developing countries, and that aid finances consumption rather than growth. Available online for purchase or by subscription.
  588. Find this resource:
  589. Boyce, James K. “Unpacking Aid.” Development and Change 33.2 (2002): 239–246.
  590. DOI: 10.1111/1467-7660.00250Save Citation »Export Citation »E-mail Citation »
  591. The author underscores that the impact of aid would be better understood if it took into account that, on the donor’s side, aid is driven by economic, political, and institutional objectives of government agencies and their domestic constituents, and that, on the recipient’s side, aid flows are given not to countries but to specific groups and individuals. Available online for purchase or by subscription.
  592. Find this resource:
  593. Dreher, Axel, Jan-Egbert Sturm, and James Raymond Vreeland. “Development Aid and International Politics: Does Membership on the UN Security Council Influence World Bank Decisions?” Journal of Development Economics 88.1 (2009): 1–18.
  594. DOI: 10.1016/j.jdeveco.2008.02.003Save Citation »Export Citation »E-mail Citation »
  595. A paper written by the best-known specialists of this political economy approach. Using panel data for 157 countries for the period 1970–2004, they show a positive relationship between temporary UN Security Council membership and the number of World Bank projects a country receives. Available online for purchase or by subscription.
  596. Find this resource:
  597. Maizels, Alfred, and Machiko Nissanke. “Motivations for Aid to Developing Countries.” World Development 12.9 (1984): 879–900.
  598. DOI: 10.1016/0305-750X(84)90046-9Save Citation »Export Citation »E-mail Citation »
  599. Analysis of bilateral aid per capita received by eighty developing countries for 1969–1970 and 1978–1980; the authors find that bilateral aid is driven by donor interests, in contrast with multilateral aid, which is driven more by recipient needs. Available online for purchase or by subscription.
  600. Find this resource:
  601. Mosley, Paul, Jane Harrigan, and John Toye. Aid and Power: The World Bank and Policy Based Lending. New York: Routledge, 1995.
  602. Save Citation »Export Citation »E-mail Citation »
  603. A pioneering and influential study in two volumes (Vol. 2 presents case studies); the authors were among the first to analyze the power relationships inherent in the conditional lending of international financial institutions, in particular the World Bank.
  604. Find this resource:
  605. Raffer, Kunibert, and Hans W. Singer. The Foreign Aid Business: Economic Assistance and Development Co-operation. Cheltenham, UK: Edward Elgar, 1996.
  606. Save Citation »Export Citation »E-mail Citation »
  607. An influential book written by prominent scholars, Hans Singer having been one of the “founding fathers” of development economics, which argues that aid is an industry that largely benefits donors, with often no direct link to development.
  608. Find this resource:
  609. Negative Effects of Lack of Coordination and Fragmentation of Foreign Aid
  610.  
  611. The fact that aid is driven by motives internal to donors, for example, political or economic, leads to incoherence between donors and the multiplicity of agencies and procedures, as all donors want to maintain their influence and presence in recipient countries. Lack of coordination between donors may stem, for example, from the fact that donor countries compete for exports markets and also for the political support of recipient countries (Fuchs, et al. 2015). Aid is ineffective because its distribution reflects, above all, the objectives of the aid bureaucracy (Martens 2005). Incoherence and lack of coordination are thus intrinsic dimensions of aid—not only for bilateral donors, but also for international financial institutions such as the World Bank and the International Monetary Fund. This leads to a proliferation of aid projects and donor initiatives and to a fragmentation of aid programs and projects, which is detrimental to their effectiveness (Roodman 2006). This lack of coordination increases transaction costs and lowers aid effectiveness (Killick 2008). Donors have incomplete information about other donors’ aid, and these gaps in information are extended to the recipient countries, which are not aware of donor activities in detail ex ante, and even ex post. This incoherence and fragmentation have been extensively analyzed by William Easterly, one of the most prominent scholars on the subject of the characteristics and impacts of aid (Easterly 2002, Easterly 2005, Easterly 2007). Easterly 2007 affirms that there are no cases of development stemming from large inflows of aid and technical assistance; rather, a successful country such as South Korea began to grow after aid was reduced.
  612.  
  613. Easterly, William. “The Cartel of Good Intentions: The Problem of Bureaucracy in Foreign Aid.” Journal of Policy Reform 5.4 (2002): 223–250.
  614. DOI: 10.1080/1384128032000096823Save Citation »Export Citation »E-mail Citation »
  615. A critical analysis of aid, underscoring little ex post evaluation, no learning from the past, and enormous demands on scarce administrative skills in poor countries. Available online for purchase or by subscription.
  616. Find this resource:
  617. Easterly, William. “How to Assess the Needs for Aid? The Answer: Don’t Ask.” Paper presented at the Third Agence Française de Développement / European Development Research Network Conference, Paris, 14 December 2005.
  618. Save Citation »Export Citation »E-mail Citation »
  619. A criticism of donor agencies’ “central planning mentality,” obsolete theories, and inefficient bureaucracies that feature multiple goals and agents.
  620. Find this resource:
  621. Easterly, William. “Was Development Assistance a Mistake?” American Economic Review 97.2 (2007): 328–332.
  622. DOI: 10.1257/aer.97.2.328Save Citation »Export Citation »E-mail Citation »
  623. A critique of aid, which has failed to achieve per capita growth and development. Available online by subscription.
  624. Find this resource:
  625. Easterly, William, and Tobias Pfutze. “Where Does the Money Go? Best and Worst Practices in Foreign Aid.” Journal of Economic Perspectives 22.2 (2008): 29–52.
  626. DOI: 10.1257/jep.22.2.29Save Citation »Export Citation »E-mail Citation »
  627. A critical study of donors’ fragmentation and multiplication; the author provides much empirical evidence.
  628. Find this resource:
  629. Fuchs, Andreas, Peter Nunnenkamp, and Hannes Öhler. “Why Donors of Foreign Aid do not Coordinate: The Role of Competition for Exports Markets and Political Support.” World Economy 38.2 (2015): 255–285.
  630. DOI: 10.1111/twec.12213Save Citation »Export Citation »E-mail Citation »
  631. An econometric analysis showing that export competition between donors is a crucial factor behind the lack of coordination among them.
  632. Find this resource:
  633. Killick, Tony. Taking Control: Aid Management Policies in Least Developed Countries. Least Developed Countries Report 2008 Background Paper 1. Geneva, Switzerland: United Nations Conference on Trade and Development, 2008.
  634. Save Citation »Export Citation »E-mail Citation »
  635. An article that provides abundant evidence on the complexity of the aid system in a variety of developing countries.
  636. Find this resource:
  637. Martens, Bertin. “Why Do Aid Agencies Exist?” Development Policy Review 23.6 (2005): 643–663.
  638. DOI: 10.1111/j.1467-7679.2005.00306.xSave Citation »Export Citation »E-mail Citation »
  639. An original analysis that relies on a perspective from institutional economics (that of Ronald Coase), showing that the role of aid agencies is not to transfer funds but to reduce ex ante transaction costs, mediate between the diverging preferences of donors and recipients, and reduce ex post uncertainties for donors. Available online for purchase or by subscription.
  640. Find this resource:
  641. Roodman, David. Aid Project Proliferation and Absorptive Capacity. Research Paper 2006/04. Helsinki: World Institute for Development Economics Research of the United Nations University, 2006.
  642. Save Citation »Export Citation »E-mail Citation »
  643. A paper on project proliferation and the costs of administering aid projects for recipient countries by one of the best specialists on aid working at the Center for Global Development; the article is based on a sophisticated mathematical modeling, which highlights the existence of thresholds beyond which marginal aid effectiveness drops sharply.
  644. Find this resource:
  645. Evolution of Aid in the 21st Century
  646.  
  647. The opening years of the 21st century has witnessed a marked evolution of the aid landscape due to the appearance of new bilateral donors, first, among emerging countries—China being the most important but also India and other emerging donors, such as Brazil (Woods 2008)—and, second, among philanthropic foundations, private firms, nongovernmental organizations, and charities, which disperse private aid (not official development assistance [ODA]) (Kharas 2007). Most studies focus on China’s aid to Africa, although China’s cooperation is directed also toward other regions of the world, especially Asia and Latin America. This is due to the original links between investment, aid flows, trade, and natural resources, which characterize China’s relationships with Africa (Christensen 2010). China’s aid has a positive impact on development but also poses new challenges due to the specificities of Chinese aid practices, for example, in terms of conditionality and political economy (Nissanke and Söderberg 2011). China’s aid, however, is no more guided by economic interests or political considerations than that of the other donors (Dreher and Fuchs 2015). China’s aid is difficult to assess as China does not use the same criteria and measurements of ODA as do the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) donors (Brautigam 2010, Brautigam 2011). Deborah Brautigam is one among very few scholars who are able to analyze its nature and impact. She has studied and undertaken fieldwork in both China and Africa for decades (Brautigam 2009).
  648.  
  649. Brautigam, Deborah. The Dragon’s Gift: The Real Story of China in Africa. Oxford: Oxford University Press, 2009.
  650. Save Citation »Export Citation »E-mail Citation »
  651. A widely quoted book on the relationships between China and Africa, in particular trade, investment, and aid relationships, by one of the prominent scholars on these issues. It includes many cases studies, and the author highlights the positive impacts for Africa.
  652. Find this resource:
  653. Brautigam, Deborah. China, Africa, and the International Aid Architecture. Working Paper 107. Tunis, Tunisia: African Development Bank, 2010.
  654. Save Citation »Export Citation »E-mail Citation »
  655. The author analyzes China’s growing aid and export credit programs and the differences between Chinese aid and development finance and OECD standards, as well as the specificities of China’s aid regarding governance.
  656. Find this resource:
  657. Brautigam, Deborah. “Aid ‘With Chinese Characteristics’: Chinese Foreign Aid and Development Finance Meet the OECD-DAC Aid Regime.” Journal of International Development 23.5 (2011): 752–764.
  658. DOI: 10.1002/jid.1798Save Citation »Export Citation »E-mail Citation »
  659. A continuation of Brautigam’s studies of Chinese aid, which compares development finance from China and the OECD, the argument being that China provides finance that meets the definition of ODA, but amounts are relatively small. Available online for purchase or by subscription.
  660. Find this resource:
  661. Christensen, Benedicte Vibe. China in Africa: A Macroeconomic Perspective. Working Paper 230. Washington, DC: Center for Global Development, 2010.
  662. Save Citation »Export Citation »E-mail Citation »
  663. A well-documented and useful synthesis of the different dimensions of the relationships between China and Africa—trade, aid, debt—with abundant data and graphs.
  664. Find this resource:
  665. Dreher, Axel, and Andreas Fuchs. “Rogue Aid? An Empirical Analysis of China’s Aid Allocation.” Canadian Journal of Economics 48.3 (2015).
  666. Save Citation »Export Citation »E-mail Citation »
  667. A refutation of the view that China’s aid is mostly driven by its quest for natural resources and that its lack of conditionality stems from China’s focus on its national interest; the authors show that China’s aid allocation is no more determined by politics than Western donors.
  668. Find this resource:
  669. Kharas, Homi. The New Reality of Aid. Washington, DC: Wolfensohn Center for Development at the Brookings Institution, 2007.
  670. Save Citation »Export Citation »E-mail Citation »
  671. Although published in 2005, a useful review of the “new aid architecture” and the increasing importance of private actors.
  672. Find this resource:
  673. Nissanke, Machiko, and Marie Söderberg. The Changing Landscape in Aid Relationships in Africa: Can China’s Engagement Make a Difference to African Development? UI Paper 2011–2. Stockholm: Swedish Institute of International Affairs (UI), 2011.
  674. Save Citation »Export Citation »E-mail Citation »
  675. A comprehensive analysis of China’s economic cooperation with Africa and a comparison with that of Japan in Asia, both linking aid, investment, and trade. It shows the positive impacts of Chinese engagement because Beijing fills the gaps left by traditional donors.
  676. Find this resource:
  677. Woods, Ngaire. “Whose Aid? Whose Influence? China, Emerging Donors and the Silent Revolution in Development Assistance.” International Affairs 84.6 (2008): 1205–1221.
  678. DOI: 10.1111/j.1468-2346.2008.00765.xSave Citation »Export Citation »E-mail Citation »
  679. An analysis of the geopolitical consequences for the global aid architecture of the growing role of China, India, and other emerging countries by a leading scholar in international studies and a specialist on multilateral organizations. Available online for purchase or by subscription.
  680. Find this resource:
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