Published on Africa Can End Poverty

Will the financial crisis reduce foreign aid?

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This question comes up frequently in discussions with policymakers, civil society and journalists. Two things need to happen for the crisis to lead to a significant reduction in foreign aid. First, the financial crisis has to lead to a major recession in donor countries. Second, the recession leads to such fiscal constraints that foreign aid is cut. Since the first is the subject of intense discussion among macroeconomists around the world (not all of whom agree) that a recession is inevitable, I looked into the second. How has foreign aid varied during previous recessions? According to my colleague Rocio Castro, “after a period of stagnation throughout the 60s, Official Development Assistance (ODA) has been on an upward trend since the mid 70s--except for the period of 1992-97 when it declined in real terms. This downward trend may have been linked to the economic recession of the early 90s, but it would be hard to tell to what extent.” This point is confirmed by a recent paper by Pamela Paxton and Steve Knack, which shows that aid is motivated largely by non-economic factors.

Official Development Assistance (ODA) in $ Millions

Source: World Development Indicators


Shanta Devarajan

Teaching Professor of the Practice Chair, International Development Concentration, Georgetown University

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