Aid Effectiveness - Related Research On Aid Effectiveness

Related Research On Aid Effectiveness

Micro-Macro Paradox

The major findings by Paul Mosley and others conclude that it is impossible to establish any significant correlation between aid and growth rate of GNP in developing countries. One reason for this is the fungibility and the leakage of the aid into unproductive expenditure in the public sector.

However, at a micro level, all donor agencies regularly report the success of most of their projects and programs. This contrast is known as the micro-macro paradox.

Mosley’s result was further confirmed by Peter Boone who argued that aid is ineffective because it tends to finance consumption rather than investments. Boone also affirmed the micro-macro paradox.

One challenge for assessing the effectiveness of aid is that not all aid is intended to generate economic growth. Some aid is intended for humanitarian purposes; and some may simply improve the standard of living of people in developing countries.

The micro-macro paradox has also been attributed to inadequate assessment practices. For example, conventional assessment techniques often over-emphasize inputs and outputs without taking sufficient account of societal impacts. The shortcomings of prevalent assessment practices have led to a gradual international trend towards more rigorous methods of impact assessment.

Research by Burnside and Dollar (2000)

Burnside and Dollar provide empirical evidence that the impact of aid on GDP growth is positive and significant in developing countries with "sound" institutions and economic policies (i.e. open trade, fiscal and monetary discipline); but aid has less or no significant impact in countries with "poor" institutions and policies. As economists at the World Bank, Burnside and Dollar advocated selectivity in aid allocation. They argue that aid should be systematically allocated to countries conditional on "good" policy.

Burnside and Dollar’s findings have been placed under heavy scrutiny since their publication. Easterly and others re-estimated the Burnside and Dollar estimate with an updated and extended dataset, but could not find any significant aid-policy interaction term. New evidence seems to suggest that Burnside and Dollar’s results are not statistically robust.

Studies and Literature on Aid Effectiveness

One problem of the studies on aid is that there is a lack of differentiation between the different types of aid. Some type of aids such as short-term aid do not have an impact on economic growth while other aids used for infrastructure and investments will result in a positive economic growth.

The emerging stories from aid-growth literature are that aid is effective under a wide variety of circumstances and that nonlinearities in the impact of aid reduce the significance of the aid-growth relationship. However, returns to aid show diminishing returns possibly because of absorption capacity and other constraints. Also, geographically-challenged countries would display lower effectiveness with respect to aid and that should be taken into account in allocation.

Therefore, the challenge to aid allocation is to identify and eliminate the overriding institutional and policy constraints that will reduce the impact of aid on growth. The real challenge is thus to develop a framework of ‘growth and development’ diagnostics to help identify the constraints. Stefan Schmitz believes that reporting duties, results-orientated action and ongoing performance assessments are essential for the sake of aid effectiveness, but political will must be already there for this to happen. Comprehensive thinking

Aid has quadrupled in the last 25 years, with the majority of aid still coming from official donors, and emerging giants such as China and India. In addition, money is being spent in different ways, for example on global programmes to combat specific issues, such as the control of malaria or measles. Overseas Development Institute work on argues for a redress of the way in which aid is provided through:

• Redesigning aid architecture and improving aid effectiveness
• Reforming public finance management
• Strengthening resource allocation and use at sector and local levels
• Improving national policy and planning processes

Research on the Accra Agenda for Action and Paris Declaration

Research by the Overseas Development Institute based on in-person interviews with senior politicians and government officials in Ethiopia, Sierra Leone and Zambia suggests that the Accra Agenda for Action (AAA) and Paris Declaration on Aid Effectiveness's indicators are too narrowly defined and lack depth. The principles of "predictability" and "transparency" are highlighted as lacking depth and important sub-dimensions not given enough emphasis, for instance on adaptation to local contexts. The interviews revealed recipient governments felt "predictability" meant donors should provide funding within the quarters scheduled, the Paris Declaration work on an annual basis and makes no distinction between the first and fourth quarter. Also mentioned, were the differences between pledges and actual commitments, the need to speed up the approval process and the need to make explicit and achievable conditions on the aid, to prevent withholding of funds when minor conditions are not fully achieved. Transparency in the reasons for donors' decisions was also seen as very important, the need to be 'frank' about why less funding was disbursed than committed, why feedback from the recipient government was not taken on board, and why a given percentage of funds was earmarked for certain activities such as technical assistance (TA). The resulting conclusion from these interviews and other studies is that repeatedly, the three most important issues for donor recipients are:

• depth of commitment to development
• responsiveness to country circumstances, and
• support for recipient-driven policy

Those donor agencies highlighted by aid recipients as particularly attentive to these issues are the African Development Bank (AfDB) and the World Bank, followed by the United Nations Development Programme (UNDP) and the Asian Development Bank (AsDB).

Beyond Aid

There are also an increasing number of studies and literature that argue aid alone is not enough to lift developing countries out of poverty. Whether or not aid actually has a significant impact on growth, it does not operate in a vacuum. An increasing number of donor country policies can either complement or hinder development, such as trade, investment, or migration. The Commitment to Development Index published annually by the Center for Global Development is one such attempt to look at donor country policies toward the developing world and move beyond simple comparisons of aid given. It accounts for not only the quantity but the quality of aid, penalizing nations that given large amounts of tied aid.