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On Aid and Growth – reflections ahead of Busan

Finn Tarp's picture

Not a month goes by without some sort of bad news about foreign aid. Examples of incompetence , abuse of funds by corrupt leaders, and distorted incentives abound. These stories fuel a deep skepticism of foreign aid. In this view, perverse effects dominate – and end up weakening, rather than encouraging, growth and development. If one accepts this view, then it is logical to turn off the poisoned tap of foreign aid. But are such views well founded?

The answer is no. First, take a look at the large literature that has over the years suggested that aid is impotent at the macroeconomic level because the aid-growth parameter was found to be statistically insignificant. We teach our students that statistical insignificance should be interpreted as ‘absence of evidence’ not as ‘evidence of absence’ (see J. Temple in his Chapter 67 of the volume 5 of the Handbook of Development Economics). The same standard should be applied in academic papers and policy debates.

Second, a series of carefully executed up-to-date studies carried out by UNU-WIDER under its collaborative International Research and Communication Programme (ReCom) sponsored by the governments of Denmark and Sweden (see here) show that the aggregate impact of aid on growth corresponds pretty well to the positive result one would expect from economic theory. Take a look at the following:

- What does cross country analysis say?

What does meta-analysis tell?

What do time-series data reveal?

What do we learn when unpacking the aggregate impact of aid?

These four studies rely on different analytical methodologies, but throughout the results stand in contrast to the gloom that circulates in the media. There is a statistically significant impact of aid on growth over the long run.

A rising ‘noise level’ has afflicted the aid debate in recent years, with too little attention being devoted to existing evidence, and too much to rhetoric. This is a pity. Policy makers are well advised to take a careful look at the evidence from well-designed analytical studies. They should also keep in mind that no well informed individual believes that aid has been beneficial in all places at all times. This does not, however, undermine the case for the principles underlying aid; rather it points to a need for redoubling our efforts to learn what works and could work – a central objective of ReCom and the UNU-WIDER research that underpins it. The lessons of failure as well as success must be incorporated into aid strategies and practices.


 

Comments

There is nothing wrong with aid. Growth is and will depend on how a country manages successes that comes with it. Unfortunately aid has been misused in most African countries through corruption, misdirecting intended efforts and lack of engaging local communities. I do agree that we have alot of negative news about effects and impact of aid. It is high time that people shared what has worked more frequently

Submitted by Finn Tarp on
Thanks for your comment. As I have indicated above one cannot claim that aid works in all places at all times. There are instances where aid fails to fully meet the objectives that it was initially designed to achieve, as is the case with most investment resources. On the other hand, there is ample evidence showing success stories where aid is making a difference in the lives of the poor in many countries. The aid-development discourse should thus be formulated in such a way that both failures and successes are incorporated into the learning process instead of solely focusing on the failures to claim that aid is ineffective. As you rightly state, it is indeed high time that people share what has worked more frequently as little attention is being given to the existing evidence on "what works". This is the agenda which UNU-WIDER wants to contribute to, making sure that we pay adequate attention to the failures in order to help avoiding mistakes that have been committed in the past. In this way, we can have a balanced assessment of "what works" and "what did not" so that we can learn from our mistakes and capitalize on our achievements. This is what we are trying to achieve under ReCom.

Submitted by Kachi Okezie on
Justin Yifu Lin comes across in this blog as somewhat frustrated. His main assertion that, despite its negative media image, aid does indeed deliver growth is probably right. However, the negative profile that aid has attracted in the media is not without justification. Firstly, the proponents of aid have handled its communication badly. Secondly, aid has been put forward as the ONLY route to growth, to the unfair exclusion of other options such as Diaspora remittances, which are in some cases delivering more value to local communities than aid. Thirdly, in Africa, with which I'm particularly concerned aid and corruption have become intertwined in the popular mindset and that is because of the failure of those offering aid to demonstrate to the largely poor masses that the corrupt diversion of aid from genuine projects that should benefit the people to the private bank accounts of those who govern them occurred without complicity on the part of the donors. That is the primary source of the negative image of foreign aid both in the media and private circles. Kachi Okezie is the Publisher of Community Voice magazine, The Voice of Rural Nigeria.

Submitted by Finn Tarp on
Thanks for commenting on the post, but I should from the outset stress that the blog post was written by me (i.e. Finn Tarp), not by Justin Lin. Coming to your concerns, I agree that more has to be done to better communicate the existing evidence on "what works" and "what does not" based on both country specific experiences and results from scientific studies as the ones listed above. Limited communication (and misinterpreting the available scientific evidence) in this regard forms part of the reason behind the ongoing bad news about foreign aid. It is cognizant of this fact that UNU-WIDER, in collaboration with its donors, has launched its International Research and Communication Program (ReCom) with its major objective being to convey information about what works, what does not and where we need further evidence. Coming to your second point, foreign aid is not and cannot be considered the sole instrument for growth in developing countries. Of course not, and aid and other resources for growth should not be seen as mutually exclusive. Foreign aid can only play a complementary (additive) role to the already existing potentially growth enhancing instruments including resources from other capital flows like FDI and remittances. On your third point, the main issue in relation to aid and corruption is to distinguish between: "whether aid causes corruption" versus "whether aid is given to a country where corruption is a problem". In my opinion, the problem lies in the latter and there is hardly any evidence or argument to suggest the former. This is not to claim that no aid is being wasted due to corruption. For me the solution should not be to turn off the aid tap for the reason that the barrel is leaking. We should instead try hard to minimize or stop the leakage using every means available. Remember also that aid can also help to fix the leaking barrel for e.g., by helping to build strong institutions. On top of this, donors should make sure that their aid money is serving its intended purpose and ensure that there is a commitment on the side of the aid recipient to fight corruption. Unfortunately, quite often, in poor countries where aid is needed the most, corruption also appears to be a major problem. This makes donors face a hard choice between 'helping the poor' versus 'combating corruption'. In view of this, the discussion should be on how to strike a proper balance between helping the poor and reducing corruption.