Does Development Aid Work? by p4md

the project for modern democracy â&#x20AC;&#x201D; Does Development Aid Work? A report by Christopher N Howarth for the Global Development Challenge

December 2017

the global development challenge The Global Development Challenge, a research initiative of the Project for Modern Democracy, was set up in 2016 to investigate the effectiveness of foreign aid in promoting international development. This first paper surveys the broad and expanding academic literature on aid effectiveness. In a second paper we will explore the history of Britainâ&#x20AC;&#x2122;s contribution to international development, including the role and performance of DFID, and suggest possible directions for the future in the light of new challenges. We are grateful to the Bill & Melinda Gates Foundation (http://www.gatesfoundation.org) for their support for the Global Development Challenge.

the project for modern democracy The Project for Modern Democracy (http://www.p4md.org) is an independent, non-party think tank set up in 2014 to promote more efficient government and good citizenship. It is a company limited by guarantee (no. 8472163) and a registered charity in England and Wales (no. 1154924). Its first initiative was GovernUp (http://www.governup.org).

the author Christopher N Howarth joined the Project for Modern Democracy in January 2017. He graduated from Trinity College, Cambridge with a Double First in Classics and was awarded a Distinction in his subsequent M.Phil. From 2015-16 he was the Choate Fellow at Harvard University.

feedback We invite comments on this paper and suggestions for further research, in particular with regard to the role and performance of DFID and new directions for the future, the subject of the next research paper of the Global Development Challenge. Please contact Christopher N Howarth at christopher.howarth@p4md.org.

CONTENTS Acronyms

Tables and Figures

Foreword

Overview

what is aid? 1.1 Definitions . . . . . . . 1.2 Types of Aid . . . . . . 1.3 Size of ODA spending 1.4 The 0.7 per cent target 1.5 Trends in aid-giving . 1.6 Aid Allocation . . . . . 1.7 A Short History of Aid

. . . . . . .

does aid work? 2.1 How to Measure Aid’s Effectiveness . 2.2 Effectiveness by Modality . . . . . . . 2.3 Macroeconomic Effectiveness: Growth 2.4 Macroeconomic Effectiveness: Poverty 2.5 The Micro-Macro Paradox Revisited . can 3.1 3.2 3.3 3.4 3.5 3.6

. . . . . . .

19 19 21 22 24 26 26 27

. . . . .

41 41 43 53 60 66

aid cause harm? Aid Critics and Aid Sceptics . . . . . . . . . . Aid and Corruption . . . . . . . . . . . . . . . Impact on Institutions and Governance . . . Aid and the ‘Dutch Disease’ . . . . . . . . . . Aid Volatility . . . . . . . . . . . . . . . . . . Can Aid Cause Harm? Concluding Remarks

. . . . . .

69 69 70 72 75 78 80

. . . . . .

83 83 85 87 88 91 93

. . . . .

what does aid do best? 4.1 Aid’s Limitations: One Tool Among Many . . 4.2 Aid and Public Health . . . . . . . . . . . . . . 4.3 Sponsoring Research . . . . . . . . . . . . . . . 4.4 Helping Countries Rebuild After Conflict . . . 4.5 Stimulating Private Investment . . . . . . . . . 4.6 What Does Aid Do Best? Concluding Remarks

. . . . . .

Conclusion

References

ACRONYMS AMC

Advanced Market Commitment

CPI

Corruption Perceptions Index

DAC

Development Assistance Committee

DFID

Department for International Development (UK)

DIB

Development Impact Bond

FDI

Foreign Direct Investment

GDP

Gross Domestic Product

GNI

Gross National Income

GNP

Gross National Product

GPG

Global Public Good

ICAI

Independent Commission for Aid Impact (UK)

IEG

Independent Evaluation Group (World Bank)

IMF

International Monetary Fund

MDGs

Millennium Development Goals

MIGA

Multilateral Investment Guarantee Agency

NGO

Non-Governmental Organisation

ODA

Official Development Assistance

OECD

Organisation for Economic Co-operation and Development

PSGs

Peacekeeping and State-Building Goals

RCT/RE Randomised Controlled Trial/Randomised Evaluation SDGs

Sustainable Development Goals

SWAp

Sector-Wide Approach

TA/TC

Technical Assistance/Co-operation

UNDP

United Nations Development Programme

USAID

United States Agency for International Development

TA B L E S A N D F I G U R E S

Table 1

List of Sustainable Development Goals . . . . .

Figure 1 Figure 2 Figure 3 Figure 4 Figure 5

ODA Flows in Real Terms, 1960 to Present ODA as Percentage of GNI, 1960 to Present British Colonial Investment, 1946-1955 . . . Grants by NGOs, 2000-2015 . . . . . . . . . UK Aid Spending, 1960 to Present . . . . .

23 23 29 35 36

. . . . .

FOREWORD

For the first time in human history, the level of poverty in the world is falling. What is more, the international community has committed, through the Sustainable Development Goals agreed two years ago, to eradicating world poverty entirely by 2030. Although foreign aid is not the main driver of development, its distribution is expected to play an important role in ensuring that this target is met. In spite of this, aid faces growing pressure. Wealthy western governments have been cutting back aid programmes, and there have been blistering tabloid attacks on Britain’s aid spending. The current cross-party consensus that Britain should remain one of the few countries that meet the UN’s 0.7 per cent aid target is holding, but is vociferously challenged on the Right. Underlying the political debate is the crucial question: “Does aid work at all?”. Aid’s opponents often cite such sceptical economists as Peter Bauer, who argued in the 1970s that aid obstructed development by undermining the incentives for growth. The harshest criticism in recent years has come from Dambisa Moyo, who claims that foreign aid ‘has helped make the poor poorer, and growth slower’. This report concludes that these claims do not stand up to scrutiny. Even the more moderate suggestion that aid is mostly ineffective is based on only a partial reading of the academic evidence, and aid’s sceptics are in the minority among development economists. After surveying the results of almost 50 years of academic research, the picture that emerges is strikingly different to that implied by aid’s fiercest opponents. Yes, a few studies find little correlation between aid and economic growth or poverty rates. Yes, some aid initiatives fail. And yes, aid interventions can have unintended consequences, some of which can be negative. However, the clear majority of studies show that aid has a long-term, positive effect on a wide range of development-related indicators. Recent estimates suggest that modest amounts of aid can add as much as 1.5 per cent to a recipient country’s annual growth, greater than the UK’s forecast growth for each of the next 5 years. Over time, this adds up: one study suggests that the average developing country would be 30 per cent poorer today had aid not been given over the last 50 years. Aid also appears to be associated with

foreword longer life-expectancy, lower infant mortality, and an increased number of years spent in school. Aid’s opponents rely on just a handful of studies, almost all of which have been the subject of robust criticism. Yet even these present a far more nuanced picture than the headlines: the hardline claim that aid actually holds developing countries back is no longer within the scope of mainstream academic debate. The question today is not whether aid works, but how it can work better. The Nobel Prize-winning economist Angus Deaton argues that lifting trade restrictions would be more effective than giving aid. He’s right—but we should do both. Aid can never be the main driver of development. Trade, foreign investment, and even remittances are all far more important revenue sources for developing countries than aid. Rich countries can make the process easier by removing obstacles to development, for instance by lowering tariff barriers, fighting capital flight, and cracking down on tax havens. But aid has its own, unique advantages. As public money, it can be particularly effective in contexts where private investment is not so readily available, such as research into drugs and technologies needed mainly by poor countries. Aid can be doubly effective when offered to countries recovering from conflict. It can also help ‘crowd in’ greater volumes of private investment, potentially magnifying its own impact. Particularly striking are aid’s achievements in the field of public health. Smallpox killed over three times as many people during the twentieth century as both World Wars combined, but thanks to a partly aid-funded international effort to eradicate the disease, no one has died from smallpox for almost 40 years. The numbers infected with the debilitatingly painful Guinea worm parasite have dropped from 3.5 million in 1986 to just 25 people in 2016. Polio is widely expected to be eradicated by the end of 2018. Aid cannot claim to be perfect. Even its strongest supporters agree that serious issues remain with its allocation and delivery. The bewildering number of international aid agencies and their lack of coordination create inefficiency and duplication, which in turn put pressure on recipient government bureaucracies, significantly reducing aid’s potential to achieve its aims. Aid also remains a dangerously unpredictable source of income for developing countries, despite clear evidence that rapid changes in aid volume can harm recipients’ fiscal planning. And it is entirely legitimate to discuss how much aid a donor nation can afford.

foreword Yet these are arguments about the quantum of aid and how it should be distributed, not whether it should be given at all. Evidence shows that aid is a powerful force for good in the world, and has unquestionably saved or transformed millions of lives. The challenge for aid donors and recipients alike is to work together to improve aidâ&#x20AC;&#x2122;s efficiency and effectiveness, and continue the fight to make poverty a thing of the past. THE RT HON NICK HERBERT CBE MP Chairman The Project for Modern Democracy

OVERVIEW The subject of foreign aid excites strong and polarised opinions in public debate. At one extreme, many believe that aid is undoubtedly effective, should be devoted exclusively to poverty reduction, and that rich countries such as the UK have a historical and moral duty to devote at least 0.7 per cent of their national income to aid indefinitely. At the other extreme, sceptics claim that aid does little to help the developing world and instead fuels corruption, benefits wealthy elites, and undermines national sovereignty. The Sustainable Development Goals (SDGs), adopted by the United Nations in 2015, include the ambitious targets of ending extreme poverty and sustaining at least 7 per cent annual GDP growth in the world’s least developed countries by 2030. Although aid is not the main driver of development, it is expected that it will play a significant role in ensuring that these targets are met. The important question for both aid donors and aid recipients is to what extent aid works, and how its positive effects can be maximised. Aid is a complicated tool. Like a medicine, it can be highly effective when used in the right quantities and in the right contexts, but it can also have unintended side-effects and can occasionally cause harm in certain situations. Nonetheless, doctors still prescribe medicines because their benefits outweigh their known side-effects, and it could be argued that rich countries should continue to provide aid to the world’s poorest. As one of the most generous aid donors, Britain is a world leader in international development. Since 2013, Britain has been one of only a handful of nations to meet the UN’s official target of spending 0.7 per cent of national income on Official Development Assistance (ODA). Yet despite broad, cross-party support in Parliament, the level of aid spending in Britain has increasingly come under attack in the popular press, and public enthusiasm for the 0.7 per cent target is weak. Scepticism is not limited to the press. Aid’s opponents cite sceptical economists such as Lord Bauer and Sir Angus Deaton who have argued that aid can actually hold back the development of poor countries. Since 2009, much attention has been given to the economist Dambisa Moyo and her book Dead Aid, which claims that aid to Africa has done more harm than good and should be cut off altogether. Yet this view is, at best, based on a partial reading of the academic evidence, and aid’s sceptics are in the minority among development economists. A clear majority of studies have shown that aid has a long-term, positive effect on economic growth and poverty rates in developing countries, but these have seldom received the same level

overview of attention as negative findings. As the economists Jonathan Glennie and Andy Sumner argue in their 2016 survey of aid effectiveness literature, ‘[t]he public debate. . . has some way to go to catch up with the balance of the evidence’. Recent estimates suggest that moderate inflows of aid can be associated with as much as 1.5 per cent additional annual growth. Over time, this adds up: one study suggests that the average developing country’s citizens were 15 per cent richer in 2015 than they would have been had aid not been given since the 1960s. This does not mean that aid is as effective as it could be, and even aid’s strongest supporters agree that much could be done to improve aid’s allocation and delivery. The proliferation of donor agencies and the lack of co-ordination between them creates unnecessary waste and duplication, and aid flows remain a dangerously unpredictable source of income for developing countries. The form aid takes, its long-term strategy, the actions of its recipients and even the timing of its distribution all affect its chances of success. Yet these constitute hindrances to the overall effectiveness of aid and opportunities for aid agencies to do better rather than arguments against giving aid altogether. The challenge for aid donors and aid recipients alike is to maximise the positive impact aid can have while working to mitigate any negative consequences. This project aims to take a step back from the political aid debate and explore the large and ever expanding academic literature to determine what works, what does not, and what aid can do better in the future.

what is aid? The most important component of aid is Official Development Assistance (ODA), which is given by governments to promote the economic development and welfare of developing countries. The modern history of aid goes back to the late 1940s and the United States’ Marshall Plan, which helped rebuild Europe after the devastation of the Second World War by injecting huge amounts of capital. It was hoped that similar success could be achieved by giving aid to the developing world, yet it became clear over subsequent decades that development is a more complicated and long-term process than the reconstruction of war-damaged but otherwise fully developed countries. Donor countries have spent over USD 4 trillion on ODA since records began in 1960, although the amounts given by different countries vary dramatically. Whilst the US is by far the largest aid donor in absolute terms, its spending as a proportion of national income is half the average among wealthy nations, at just 0.18 per cent of na-

overview tional income. In percentage terms, the most generous nation in 2015 was Sweden, which spent 1.4 per cent of its national income on aid.

does aid work? In order to justify the sums of money spent on aid by wealthy nations, it is clearly essential that aid ‘works’. On the microeconomic level, individual aid interventions are usually very effective. Project success rates are typically in the region of 70-85 per cent, and rates of return—a measure of a project’s contribution to the wider economy— are often in excess of 20 per cent. Although some projects appear to be slightly less successful when looked at over longer time-horizons, suggesting that donors need to commit to ongoing sustainable involvement in their schemes, they can nevertheless be confident that the majority of aid interventions achieve their stated objectives. Some aid projects, particularly in the field of public health, have been spectacularly successful: the eradication of smallpox in the 1960s-1970s and the international effort to achieve the same for polio are cases in point. What has historically been more controversial is whether the success of aid projects on the microeconomic level translates to an observable impact on macroeconomic indicators such as the rate of economic growth or the number of people living on less than a dollar a day. Several early studies, though not all, failed to identify any such impact on growth, which was described by the economist Paul Mosley as the ‘micro-macro paradox’. Aid sceptics such as Lord Bauer argued that aid obstructed rather than promoted development, and a well-publicised 1996 study by Peter Boone claimed that aid merely fuelled consumption by elites in developing countries. But the high publicity given to negative studies has overshadowed the far larger body of evidence that identifies a positive and significant relationship between aid, growth and poverty rates. Boone’s study in particular has been decisively debunked: when all the available data were used, Boone’s own regressions actually showed a significant, positive relationship. Since the mid-1990s, a clearer understanding of the causes of economic growth, higher-quality data, and more sophisticated econometric techniques have given economists huge insights into aid’s impact on developing countries. Most estimates now suggest that moderate inflows of aid add around 1 to 1.5 per cent to a recipient country’s growth over the long-term. Further studies suggest that aid has reduced both the extent and the severity of poverty in recipient countries, and has lengthened lifeexpectancies, increased the average number of years spent in school, and reduced infant mortality. There is thus no ‘micro-macro paradox’: the success of individual aid interventions on the microeconomic

overview level is matched by their long-term positive impact on growth and poverty in the developing world.

can aid cause harm? Aid sceptics often use the instances in which aid can cause harm to argue that aid is harmful overall. There are undoubtedly situations in which aid can have negative side-effects, and these need to be managed in order to maximise aid’s effectiveness. It is commonly alleged that aid fuels corruption in the developing world. Whilst it is true that aid is often given to countries with high levels of corruption, many economists believe that corruption is more a consequence than a cause of poverty. One of the paradoxes of aid is that it is often least effective where it is most needed, and dealing with corruption is an unfortunate but inevitable consequence of working with the world’s poorest countries. Several studies suggest that aid can actually help to reduce corruption in recipient countries, and that at worst it is no more vulnerable to misuse than private investment. It is important for donors such as the UK to maintain their zero-tolerance approach to corruption. There is some evidence that aid can, in certain contexts, behave in a similar way to revenue from natural resources, which has long been recognised to have the potential to hinder sustainable economic development and democratic accountability by reducing governments’ reliance on tax revenues. Some forms of aid can also potentially harm recipient countries’ manufacturing and export sectors by pushing up the real exchange rate—a phenomenon known as the ‘Dutch disease’. Yet this effect is by no means universal, and it can be managed effectively if recipients are aware of the phenomenon and adopt appropriate policies to compensate. Aid ‘volatility’ remains a critical concern. Rapid increases or reductions in aid flows can be harmful, especially when they are unexpected. Although the 2005 Paris Declaration on Aid Effectiveness committed aid donors to improving the stability and predictability of aid flows, under half of UK aid in 2010 was disbursed on time. This is clearly one area where the effectiveness of aid could be improved.

what does aid do best? Maximising aid effectiveness has as much to do with recognising aid’s limitations as its capabilities. Aid flows constitute a relatively small proportion of the average developing country’s income. Workers’ remittances are three times as large as total aid flows, and in 2010 private investment in developing countries was four times the value

overview of ODA. Lowering tariff barriers for developing countries, combating tax havens and capital flight, and making it cheaper for nationals of developing countries to send home remittances could all potentially have more of an impact on development than aid. Nevertheless, aid can be seen to have an important role to play. Not only does aid have a long-term, positive impact on economic growth and poverty rates, but there are also situations in which it is more effective than other resource flows. Aid particularly benefits the lowest income groups in society, while trade and foreign investment tend to benefit richer groups. Moreover, aid is ideally suited to providing Global Public Goods, which are are often underfunded internationally. Health interventions are widely considered, by both aidâ&#x20AC;&#x2122;s proponents and critics, to be the area where aid has had the most observable success in the past, and the prevention of pandemics and eradication of diseases benefit the entire world. Research into topics which are unlikely to attract adequate private investment, such as treatments for diseases which primarily affect poor countries, is another such opportunity. Aid money can be used to reward the development of new technologies or drugs through prize funds or Advanced Market Commitments, helping to replace the absent market incentives and encouraging research into neglected topics. Aid is also particularly effective at helping countries recover after periods of conflict, partly because of the catastrophic loss of other sources of government revenue. But timing is importantâ&#x20AC;&#x201D;studies suggest that aid can be twice as effective for a short period after reconstruction has already begun, but may be less effective if provided too soon after the end of hostilities. Aidâ&#x20AC;&#x2122;s impact can also be magnified significantly if used as a lever to catalyse even greater flows of alternative sources of capital such as private investment. This can be done through a variety of mechanisms, including subsidies, guarantees, and results-linked payments. For example, aid could be used to build and maintain high-quality infrastructure in developing countries to help attract private investment, or to encourage job-creating industries to move to developing countries by offering capital or political risk insurance at below-market rates.

conclusion Sceptics assert that aid is a waste of money, at best ineffective and at worst actively harmful. Yet these attacks are not supported by the weight of academic evidence. Studies show that, in the main, aid has a sizeable, positive impact on growth and helps to reduce poverty in the developing world. Individual aid projects have a high rate of success, and millions of lives are saved or transformed every year.

overview The hard-line sceptical view that aid actually harms development is well outside the academic consensus and is supported by very few studies over the last few decades. Meeting the SDGsâ&#x20AC;&#x2122; targets of eliminating extreme poverty by 2030 and sustaining rapid economic growth in the worldâ&#x20AC;&#x2122;s poorest countries will be a tremendous challenge, and most of the effort will come from the developing countries themselves. But the eradication of smallpox and the huge progress made against polio, Guinea worm and other preventable diseases are testament to aidâ&#x20AC;&#x2122;s potential to transform the lives of millions of people, and rich countries such as the UK can support this process by continuing to provide generous levels of foreign aid. If aid is targeted appropriately, with relevant safeguards in place, the next few decades could see it contribute significantly towards the elimination of extreme poverty.

1 1.1

W H AT I S A I D ? definitions

What is meant by the term ‘foreign aid’? Although aid is often discussed in the media and in policy circles as if it were a single discrete entity, aid is an extraordinarily broad term that encompasses a wide variety of activities and has no universally agreed definition. At its broadest, aid can be considered ‘all resources. . . transferred by donors to recipients’ (Riddell 2007, p. 17). This includes not only financial grants and concessional loans but also tools, machinery, food, buildings and infrastructure, medical equipment, and trained personnel. As Riddell (2014b) notes, a distinction is often drawn between humanitarian aid, which refers to short-term relief given to the victims of crises such as famine or conflict, and development aid, which may be defined as ‘that part of foreign aid whose purpose is to contribute to human welfare and development’ (see Riddell 2007, pp. 17-18). The vast majority—about 90 per cent—of official aid is in the form of development aid (House of Lords 2012), although Riddell (2009) notes that the proportion of aid used for humanitarian purposes has been increasing rapidly in recent years. The largest and most important component of aid is Official Development Assistance (ODA), which is used for both humanitarian and development purposes. ODA is defined by the OECD’s Development Assistance Committee (DAC) as the sum of grants and loans to developing countries and multilateral institutions which: 1) have the promotion of the economic development and welfare of developing countries as their main objective; and 2) are offered on concessional financial terms, defined as having a grant element of at least 25 per cent (OECD 2017f). To qualify as ODA, aid must be provided by the official sector of the donor country, and it may not be provided for military purposes. Private charitable donations or commercial investments, which in 2015 were worth over a quarter of the total ODA given that year, are thus not included in ODA figures, although official donors frequently distribute significant portions of their budgets through NGOs and charities. Properly, ODA is a subset of all aid, but since it is the definition used by most international bodies and the basis for almost all aid data, it is the measure of aid used in most studies of aid effectiveness. This paper will generally limit its focus to the effectiveness of ODA, and specifically to that portion of ODA used for development, rather than humanitarian, purposes.

what is aid? The DAC’s definition of ODA has been subject to some revision over time. Originally, a developing country was defined as a country which was neither a member of the OECD nor the Soviet Union or its satellite states (Ireton 2013, p. 214). After the collapse of the Soviet Union, the DAC divided all non-OECD countries into a twopart list. All countries that were above the World Bank’s threshold for high-income status, then about USD 9,000, were included in Part II, along with several of the more economically advanced countries of Central and Eastern Europe, countries of the former Soviet Union, and certain advanced developing countries. The Part I list comprised most of the countries classified by the World Bank as low or middleincome countries. Only countries listed in Part I were eligible for ODA; aid flows to Part II countries were recorded separately as Official Aid (OA). The distinction was eventually dropped, and the Part I list evolved into a single list of countries that were eligible for ODA. In 2006, the DAC stopped publishing data on OA. From 1979, the costs of administering ODA have been counted in the overall figure. Since 1988, ODA has also included official expenditures on resettling refugees in donors’ own countries, often referred to as ‘in-donor’ spending. Only expenditures during the first twelve months of a refugee’s residence are counted, although the interpretation of this rule varies between donors: some countries, such as Germany and the United States, begin counting the year a refugee’s asylum application is approved, while others, such as France and the United Kingdom, count from the date the refugee physically enters the country (DAC 2016c). In 2016, Australia, Japan, Korea and Luxembourg did not count in-donor refugee costs in their ODA at all. In 2016, in-donor refugee costs accounted for 10.8 per cent of global ODA spending, up from 9 per cent in 2015 and 4.8 per cent in 2014, with Austria, Germany, Greece and Italy using more than 20 per cent of their total ODA for refugee costs (OECD 2017a). Since the early 2000s, debt forgiveness has also been included in ODA, which led to an on-paper increase in ODA of almost USD 27bn between 2004 and 2005, even though much of this figure was made up of forgiveness of loans which had themselves previously been counted as ODA (Riddell 2007, p. 19). In February 2016, the DAC agreed to make several changes to the way ODA is measured in order to update it for current challenges. Prominent amongst these changes was the decision to make it easier for donors to use ODA to catalyse greater flows of public and/or private capital to developing countries (OECD 2015). In addition, it was decided that ODA could be used for some limited security-related purposes such as combating terrorism, but only through peaceful means. It should be remembered that aid is not the only resource flow that affects development, nor is it even the most significant. In 2010, ODA accounted for only 10.9 per cent of total official and private capital

1.2 types of aid flows to developing countries. Foreign Direct Investment (FDI) in developing countries dwarfs ODA spending, at USD 509 billion in 2010 against ODA’s 128 billion (House of Lords 2012). Remittances sent home by migrants working abroad are now three times as large as total ODA flows (World Bank 2016, p. 280). While much is made of the size of donor country aid spending, aid is still only a relatively small proportion of the income of most recipient countries, and expectations of what it can achieve on its own must not be unduly high.

1.2

types of aid

ODA can be broken down along several different strands. The first of these is the degree of urgency. As discussed above, aid provided to alleviate acute suffering during war or after natural disasters such as earthquakes or floods can be considered humanitarian or emergency aid, while aid intended to promote longer-term development objectives is often referred to as development aid. Authors sceptical of aid such as Dambisa Moyo (2009, pp. 7-8) usually exclude humanitarian aid from their criticism, although Riddell (2014b) notes that great failures and successes have occurred in both types of aid, and the line between the two is often more blurred than it appears. Aid can also be categorised by source, whether bilateral, multilateral or ‘multi-bi’. Bilateral aid is given directly to recipient countries by donor governments, and accounts for about three-quarters of all ODA. Multilateral aid, by contrast, is given to international institutions such as the World Bank, the United Nations Development Programme (UNDP) or Gavi, the Vaccine Alliance. Only aid given to multilateral organisations for general use is considered multilateral aid: if it is earmarked by a donor for a specific purpose, is it classed as ‘multi-bi’. Multilateral institutions are sometimes seen as more efficient and less politically motivated than bilateral agencies, although Deaton (2013, p. 277) comments that even a large multilateral institution such as the World Bank or the UNDP ‘cannot easily go against the wishes of its largest donors’. Individual donor nations choose how much of their budgets to distribute bilaterally and how much to donate to multilateral organisations. In 2016, Britain spent 63 per cent of its aid budget bilaterally, compared to the DAC average of 71.5 per cent (DFID 2016b, p. 4; OECD 2017e). The proliferation of different aid agencies, both bilateral and multilateral, has been a structural flaw of aid distribution since the very early days of international development. President Truman warned against it in 1949 at the very start of modern aid-giving, recommending that aid be distributed centrally by the UN; however, there are today over twice as many multilateral aid agencies as there are major bilateral donors (Riddell 2007, p. 77),

what is aid? and one study found that each recipient country receives aid from an average of 26 donors (Acharya, Fuzzo de Lima and Moore 2004). A third way of breaking down ODA is by its intended use. The three most important types, or ‘modalities’, of aid by this categorisation are project aid, programme aid, and technical assistance, also known as technical co-operation. Despite being the oldest variety of aid, most aid is still given in the form of discrete projects in sectors such as agriculture, infrastructure, education, and water supply. A typical aid project might set out to build a school or a clinic, vaccinate the children in a community against preventable diseases, or provide clean water and sanitation to a village. Programme aid comprises all aid not given in the form of specific projects, but is predominantly the direct provision of money or other resources to recipient governments (Cassen 1994, p. 123). The simplest form of programme aid is budget support, which provides recipient governments with revenue, sometimes tied to the fulfilment of certain conditions such as political or economic reforms. Other varieties include sectoral support, where aid funds are earmarked for specific line ministries such as education or health, and Sector Wide Approaches (SWAps), which use a combination of programme aid and projects to support a specific sector. Technical assistance refers to the provision of highly educated specialists such as engineers or economists, usually from a donor country, to give expert advice and train local workers. The relative effectiveness of the main aid modalities will be explored in detail in Chapter 2.

1.3

size of oda spending

Since 1960, DAC member states have spent just over USD 4 trillion on aid (Figure 1). In 2016, total DAC spending on ODA was USD 143bn, up from 132bn the previous year. The United States has been the world’s largest single donor every year since aid flows began; in 2016, it spent over USD 33bn on ODA, just under a quarter of total DAC spending that year. The second largest donor is currently Germany at USD 24.4bn, having slightly overtaken the UK in 2016. After the UK, which spent USD 20.1bn in 2016, come France and Japan, which spent just over USD 9bn each. Not all aid donors are members of the DAC: Saudi Arabia, for example, came close to overtaking the US as the world’s largest aid donor in the late 1970s and early 1980s, and was the fourth-largest provider of ODA in 2014. Because of the different sizes of individual donors’ economies, the picture changes dramatically when spending is viewed as a percentage of the donor’s Gross National Income, or GNI (Figure 2). Despite spending the most in absolute terms, the US spends half the DAC average on aid as a percentage of national income, at just 0.18 per cent. Norway was the most generous donor state in 2016, spending 1.1 per

1.3 size of oda spending

Billions USD (2014 prices)

140 120 100 80 60 40 20 1960

1970

1980

Total DAC Germany

2000

1990

2010

UK France

USA Japan

Figure 1: ODA flows in real terms, 1960 to present (selected countries). Source: OECD 2017d

Percentage of National Income

1.4 1.2 1 0.8 0.6 0.4 0.2 1960

1970

Norway Germany

1980

1990

Sweden United States

2000

2010

United Kingdom DAC Average

Figure 2: ODA as percentage of GNI, 1960 to present (selected countries). Source: OECD 2017d

what is aid? cent of its national income on ODA, followed by Luxembourg (1.00 per cent), Sweden (0.94 per cent, down from 1.4 per cent in 2015), Turkey (0.79 per cent), Denmark (0.75 per cent), the UK, and Germany (both 0.7 per cent, Germany for the first time). These were the only countries in 2016 to meet or exceed the internationally agreed target of spending 0.7 per cent of national income on aid.

1.4

the 0.7 per cent target

This target was established by a UN Resolution on 24th October, 1970. It has been repeatedly re-endorsed, notably at the 2002 International Conference on Financing for Development in Monterrey, Mexico, and again in 2005 at the G8 Gleneagles Summit and the UN World Summit. Despite this, only a handful of countries have ever met the target. Prominent amongst these are the Scandinavian countries: Sweden and the Netherlands have met or exceeded the 0.7 per cent threshold in almost every year since 1975, Norway has since 1976 and Denmark since 1979.1 In 2013, the UK met the 0.7 per cent target for the first time, and two years later the International Development (Official Development Assistance Target) Act 2015 enshrined the target in law (see Lunn and Booth 2016). Since the target’s introduction, the weighted average of DAC members’ ODA spending has never exceeded 0.4 per cent of national income. Rather ironically, the highest average figure ever reached was 0.54 per cent in 1961, almost a decade before the target’s introduction in 1970 (DAC 2016b, OECD 2017d). The origins of the 0.7 per cent target lie in the early 1960s, when the UN General Assembly expressed the ‘hope’ that the combined value of public and private capital flows from wealthy to developing countries could be increased from 0.83 per cent of rich country income, their value in 1960, to 1 per cent (see Clemens and Moss 2005 and DAC 2016b). This figure, which had first been put forward by the World Council of Churches in 1958, acquired academic support with the publication of separate studies which estimated that the world’s developing economies would require foreign capital on the order of USD 10bn a year during the 1960s in order for them to ‘take-off’ into sustained economic growth (Rosenstein-Rodan 1961; Chenery and Strout 1966). As Clemens and Moss point out, USD 10bn happened to be roughly 1 per cent of rich countries’ income in the early 1960s, and this seemed a reasonable and achievable target at the time. In 1969, the report of the Commission on International Development, also known as the Pearson Commission, recommended that at least 7/10ths of the 1 per cent figure should be provided by the official sector, with private investment making up the remainder. According 1 Sweden initially met the target in 1974, but revised GNP figures meant the target was narrowly missed until the following year (DAC 2016b).

1.4 the 0.7 per cent target to Clemens and Moss (2005), the 0.7 per cent figure recommended by the Pearson Commission was ‘the result of an arbitrary compromise based on what was thought politically feasible at the time’. This recommendation was taken up by the UN in its resolution the following year. Since the 1960s, the theories underlying the original estimates, including the Harrod-Domar model of economic growth (see Section 2.3), have been seriously challenged by subsequent scholarship. As Clemens and Moss (2005) observe, the 0.7 per cent figure is ‘based on a series of assumptions that [are] no longer. . . true, and [is] justified by a model that is no longer considered credible’. Although there is no longer any reason to suppose that 0.7 per cent of rich countries’ combined income bears any relation to the actual needs of the developing world, the target has acquired a life of its own as a universal benchmark for aid spending and donor generosity (Lunn and Booth 2016, p. 3). As with NATO’s official requirement that member countries spend at least 2 per cent of their GDP on defence, the fact that 0.7 per cent is a somewhat arbitrary figure does not detract from its usefulness as a way to encourage rich countries to commit their resources to international development at an agreed and comparable level. According to a former Director General of DFID, the 0.7 per cent target is now ‘essentially a burden-sharing issue for donors and a stick for developing countries to beat them with’ (Ireton 2013, p. 2). Although the 0.7 per cent target has been widely praised in the aid community for signalling a donor’s commitment to international development, the notion of using a fixed target to determine how much to spend on aid has also faced opposition. In 1970, US National Security Advisor Henry Kissinger wrote that ‘[t]he U.S. will avoid any pledges to meet the international targets relating foreign assistance to GNP’, and claimed that the US had an ‘aversion to targetry’ (see Clemens and Moss 2005, p. 10). More recently, a 2012 House of Lords Report stated that ‘we do not accept that. . . the UN target of spending 0.7% . . . of Gross National Income on aid should now be a plank, let alone the central plank, of British aid policy’, since it ‘it wrongly prioritises the amount spent rather than the result achieved’ and ‘makes the achievement of the spending target more important than the overall effectiveness of the programme’. Although the UK’s decision in 2015 to enshrine the 0.7 per cent target in law was supported by all major political parties, it has proven more controversial with the general public and is increasingly attacked by the right-wing press. In March 2016, an online petition entitled ‘stop spending a fixed 0.7 per cent of our national wealth on Foreign Aid’ and sponsored by John Wellington of the Mail on Sunday attracted over 200,000 signatures, twice the number needed to trigger a Westminster Hall Debate. Both sides were thereby given an

what is aid? opportunity to air their concerns, but the government affirmed that the status quo would prevail.

1.5

trends in aid-giving

The amount of aid given each year, both in absolute terms and as a percentage of donor income, has fluctuated over time in response to changing political circumstances, levels of public support, and geopolitical rivalries. As can be seen in Figure 1, total ODA rose steadily in real terms from the 1960s until the beginning of the 1990s. The end of the Cold War, which had seen the US and the USSR compete to reward their allies, as well as waning public enthusiasm, led to a dramatic fall in total aid volume, and in 1997 real aid spending had fallen to the same level as in 1983. There was a modest increase during the early 2000s, with the major spike in 2004-2005 mainly attributable to the inclusion of debt forgiveness in the definition of ODA rather than additional aid. After a period of stagnation in the early 2010s total aid is now increasing again, although this is mainly driven by a rise in aid for resettling refugees within donor countries. By contrast, aid to the least-developed countries fell by 3.9 per cent from 2015 to 2016 (OECD 2017a). Trends in aid spending shall be discussed in more detail in Section 1.7.

1.6

aid allocation

The allocation of bilateral aid varies greatly between donors. British aid policy has been primarily focused on poverty reduction since 1997 (see DFID 1997), although in 2015-2016 DFID’s Annual Report (2016a) also identified development objectives in fields such as Climate Change, Governance, Education and Wealth Creation. This was made law in 2002 by the International Development Act, which set out that British aid can only be used for poverty alleviation and cannot be tied to the provision of British goods and services. This is in stark contrast to USAID, which until 2012 could only procure goods and services from US companies. This restriction still applies to motor vehicles, US-patented pharmaceuticals and most US food aid, which must also be delivered on US-owned ships (Provost 2012). The core objective of Japan’s aid is to ‘ensure Japan’s own security and prosperity’, while Germany and the Scandinavian countries focus more on poverty reduction (see Riddell 2007, pp. 55-62). A well-known study by Alesina and Dollar (2000) found that there is significant variation in how different donors allocate bilateral aid, and that past colonial ties and geopolitical considerations have historically been at least as important as recipient needs. In particular,

1.7 a short history of aid the authors found that, at the time of the study, the US spent around of third of its aid on Egypt and Israel; that France focused its aid on former colonies and the Francophonie; and that Japan’s aid allocation correlated strongly with favourable voting behaviour at the UN. During the Cold War, the US and the USSR spent large amounts of money supporting sympathetic regimes with little regard to human rights abuses or autocratic systems of government. It was not until the collapse of the Soviet Union that Angola, for example, renounced its Marxist-Leninist one-party system, while the decline in US aid at the end of the Cold War contributed to the downfall of the staunchly anti-communist dictator Mobutu Sese Seko in Zaire (modern DRC). A 2002 paper by Alesina and Weder found no evidence that less corrupt governments receive more aid, except from Scandinavian donors. In addition, the fact that donors tend to give aid to countries rather than people means that small countries such as Mali, Samoa and Cape Verde receive significantly more aid per head than larger countries like India and China (Tarp 2006, p. 26; Deaton 2013, p. 277).

1.7

a short history of aid

1.7.1 Early Development Initiatives Prior to the establishment of the first modern aid organisations in the late 1940s there were several state-run development initiatives which may be considered the forerunners of modern aid (see Riddell 2007, pp. 24-7 and Ireton 2013, pp. 4-17). British colonial policy had long been influenced by the principle set down by Gladstone in the 1860s that colonies should be financially self-supporting wherever possible. However, in 1929 the Colonial Development Act set up a Fund, the CDF, of up to GBP 1 million per annum which could be used for the promotion of economic development in all British colonies except those deemed to possess ‘responsible government’, meaning a degree of self-government. By 1940, the CDF had contributed GBP 8.9 million to almost 600 separate schemes. It should be emphasised that self-interest rather than moral concern for the welfare of the colonies drove Britain’s development efforts during this period; indeed, a 1931 White Paper explicitly stated that the Colonial Office should prioritise CDF schemes which would deliver ‘the greatest and speediest benefit to this country’. The CDF was replaced in 1940 by the Colonial Development and Welfare (CD&W) Act, which provided up to GBP 5 million per annum for schemes ‘likely to promote the development of the resources of any colony or the welfare of its peoples’. The 1945 CD&W Act increased the amount of funding available to GBP 120 million for the period 1946-1956, with an annual cap of GBP 17.5 million. In 1950,

what is aid? a further CD&W Act added GBP 20 million to this figure and raised the annual maximum spend to GBP 20 million; in addition, it allowed the colonies with ‘responsible government’ to receive CD&W funds for the first time. Total CD&W expenditure in the period 1946-70 was GBP 362 million, though Ireton (2013, p. 17) notes that ‘CD&W funds were not sufficient. . . to make a material difference to the economic and social development of most of the colonies.’ Another source of development finance in the late colonial period was Britain’s Colonial Development Corporation (CDC), which was created in 1948 by the Overseas Resources Development Act. The CDC was intended to provide funding for ‘commercial-like activities’ which were of developmental value but which ‘could not be expected to yield a financial return sufficient to attract private risk capital’ (Ireton 2013, p. 11). The CDC was renamed the Commonwealth Development Corporation in 1963, and in 1969 it was permitted to invest outside the Commonwealth for the first time. In 1999 it was converted to a public limited company, the CDC Group, whose shares are entirely owned by the Department for International Development (DFID). CDC investments in the period 1946-55 totalled GBP 64 million, compared to 155 million from CD&W funds (Figure 3). For much of the colonial period Britain also provided funding in the form of grants-in-aid to colonies that could not ‘provide a minimum level of public administration’ without budgetary support from the British government (Ireton 2013, p. 6). Funds given through grants-in-aid grew from just GBP 750,000 in 1940 to 13 million in 1960, and constituted about 40 per cent of all British financial assistance to its colonies during the early 1960s. Grants-in-aid for the weaker colonies were, according to Ireton, ‘a more important source of financial support than history has given them credit for.’ Before the Second World War, France’s colonies had also been expected to subsist on their own resources; in fact, this had been a legal requirement since 1900. After the war, however, there was a radical shift in France’s policies towards its overseas territories, with a ‘huge effort. . . to develop overseas France with metropolitan funds’ (Hayter 1966). Loans, which had been the main source of development assistance before the war, were replaced with grants, and by 1960 France was spending over twice as much of its national income on aid as the UK (OECD 2017d). In addition to aid provided by national governments, voluntary agencies conducted humanitarian work for much of the colonial period. Charities founded in this period include Christian Aid, the Oxford Committee for Famine Relief (Oxfam), and Save the Children. Riddell (2007) draws particular attention to the role of churches, who, according to one estimate, provided between 40 and 60 per cent of health, education, water and food-related services in Africa during this period.

1.7 a short history of aid 1,200

Millions GBP

1,000 800 600 400 200

es In ve st m en t

lR ev en u

Pr iv at e

M ar

Lo ca

ke t

D &

Lo nd on

nt sin -a

Figure 3: British public and private colonial investment, 1946-1955. Grantsin-aid figure is approximate. Source: Ireton 2013, p. 16

1.7.2 The Bretton Woods Institutions and the Marshall Plan The history of modern foreign aid is usually traced to the establishment of the ‘Bretton Woods Institutions’ in late 1944. As the end of the Second World War drew near, delegates from some forty-five countries assembled in Bretton Woods, New Hampshire, USA to discuss a new international economic framework that would assist trade and economic cooperation between countries and help prevent a second Great Depression. It was realised that if Europe were to recover from its wartime devastation it would require large injections of capital to rebuild its damaged physical infrastructure and stimulate its economy. In order to achieve these objectives, the assembled delegates laid plans for the ‘Bretton Woods Institutions’: the International Bank for Reconstruction and Development (the World Bank), which would make loans for reconstruction underwritten by all member states, and the International Monetary Fund (IMF), which would promote the stability of the global financial system. Plans were also drawn up for an International Trade Organisation (ITO), which would provide a forum for negotiation and tariff reduction, although these were not realised until the creation of the World Trade Organisation (WTO) in the 1994. The World Bank made its first reconstruction loan to France on 9th May, 1946, followed by loans to the Netherlands, Denmark and Luxembourg in August 1947. As Europe began its rapid recovery

what is aid? after the Second World War, the Bretton Woods Institutions shifted their focus from reconstruction towards promoting the development of the world’s poorest countries, and they remain highly important as multilateral distributors of aid today (Riddell 2007, pp. 24-7). The role of the Bretton Woods Institutions in Europe’s recovery, however, was eclipsed by that of the United States. In June 1947, the US Secretary of State George Marshall gave a speech to the graduating class at Harvard University in which he outlined his comprehensive plan to rebuild Europe by injecting huge amounts of US capital into European economies. The following March, Congress passed his proposals into law and created the European Recovery Program, better known as the Marshall Plan. Between 1948 and 1952, the US spent USD 12bn (approximately USD 120bn in 2017 dollars) reconstructing Western Europe. Funding averaged more than one percent of US gross national product over the whole period, and at its peak the US was transferring between two and three percent of its national income to recipient governments, similar to the proportion of income spent on the Moon Landings in the 1960s and about ten times as much as the present share currently spent on aid. While most accounts of the Marshall Plan focus on its unprecedented, and indeed still unsurpassed, levels of spending, Paul Collier (2008) emphasises that the US also made several other important decisions that helped secure Europe’s recovery. First, the US reversed its previously isolationist attitude towards trade, security and national sovereignty and opened its markets to Europe, founding the General Agreement on Tariffs and Trade (1947); second, it stationed 100,000 troops in Europe to guarantee stability; and third, it helped found the United Nations and the Organisation for Economic Co-operation and Development (OECD) to facilitate international co-operation. The Marshall Plan is widely regarded as a tremendous success. In 1951, the size of each recipient country’s economy significantly surpassed pre-war levels, with average output 35 per cent higher than in 1938 (Eichengreen 2008, p. 57). According to Finn Tarp (2009), ‘[t]he impressive results achieved by the Marshall Plan fuelled highly optimistic expectations about the future effectiveness of foreign aid’. There are, however, some important differences between the reconstruction of post-war Europe and the process of development in countries that have never been industrialised. As Tarp observes, ‘post-war Europe was very well endowed with skilled people and institutional frameworks.’ The ‘fundamental missing element’ was capital, which the Marshall Plan provided (2009, p. 5). Moreover, the fund transferred to European economies never amounted to more than 3 per cent of the GDP of recipient nations. This may be contrasted with the situation in the 1990s when the average African country received 15 per cent of its national income in the form of foreign aid (Moyo 2009, p. 36; Easterly 2006, p. 39).

1.7 a short history of aid 1.7.3 1950s and 1960s: Technical Assistance and Infrastructure With Europe recovering from the Second World War, the early days of foreign aid spending were dominated by the USA, which still contributed over half of all official aid at the end of the 1950s (Riddell 2007, p. 27). Early aid was mostly in the form of technical assistance and specific projects; however, the idea of transferring resources or offering loans at concessional rates was increasingly discussed during this period (Tarp 2009, p. 5). The early part of the 1960s saw a shift away from technical assistance towards large-scale industrial projects and the building of roads and railways (Moyo 2009, p. 14). In January 1961, with average aid spending among DAC members at an all-time high of 0.54 per cent of national income, the UN resolved that the 1960s would be a ‘Decade of Development’ and called on all industrialised countries to increase this proportion to to 1 per cent. In fact, the opposite occurred: waning enthusiasm for aid led to declining percentage figures during the 1960s and early 1970s until they reached just 0.27 per cent in 1973. In an attempt to revive enthusiasm for aid spending and to make aid more effective in the future, a commission was established under the chairmanship of the former Canadian Prime Minister Lester Pearson to look back over the past 20 years of aid spending. The ‘Pearson Report’ (1969) made a number of important recommendations, including calling for developed nations to meet a revised target of 0.7 per cent GNI by 1975 (Clemens and Moss 2005, pp. 7-8). The report also warned that donor involvement in developing economies ‘needed to be carefully limited and institutionalized’, and that ‘the formation and execution of development policies must ultimately be the responsibility of the recipient alone’ (Pearson 1969, p. 127). 1.7.4 1970s: Fighting Poverty and Providing Basic Needs In 1970, the UN formalised the 0.7 per cent aid target and declared that the 1970s would be a second ‘Decade for Development’. The predominant objective of aid spending throughout the 1950s and 1960s had been helping aid recipients achieve economic growth in a ‘stateled planning tradition’ (Tarp 2009, p. 5). During the 1970s, the focus of the World Bank shifted from promoting growth towards reducing poverty itself (Riddell 2007, p. 32; Tarp 2009, p. 5). The US followed suit in 1973 and identified satisfying ‘basic human needs’ as the primary purpose of its aid-giving, and in 1975 the UK government produced a White Paper entitled The Changing Emphasis in British Aid Policies: More Help for the Poorest. This change in emphasis occurred alongside increased multilateralism in international aid efforts, with significant expansions of the UN, the World Bank and other international agencies.

what is aid? While average aid spending by DAC countries during the 1970s remained between 0.31 per cent and 0.36 per cent of GNI, funding for NGOs from non-official sources soared from USD 860m at the start of the decade to over USD 2.3bn at the end (Riddell 2007, p. 33). Total aid spending briefly fell in 1973 as a result of the oil embargo led by the Organisation of Arab Petroleum Exporting Countries (OAPEC), creating an economic crisis and temporarily constricting Western aid budgets. The rise in oil prices also affected developing nations: Ghana’s economy contracted by 12 per cent in 1975, and by 1977 its inflation had rocketed to 116 per cent. Oil-producing states made huge profits, and several became large and significant aid donors in their own right: indeed, from 1973 to 1982, Saudi spending on aid was second only to that of the US. A further effect of the high oil prices, which would become highly significant in the following decade, was that oil-producing countries deposited their surplus income in banks in America or Europe. These banks began to lend this money to developing nations at initially low, but floating, interest rates. 1.7.5 1980s: Structural Adjustment and Conditionality The beginning of the 1980s was marked by another oil crisis, as the 1979 Islamic Revolution in Iran, followed by the outbreak in 1980 of the Iran-Iraq war, caused oil production to drop and Western countries to fall into recession. In order to stabilise their economies and prevent inflation, central banks in the US and Europe increased interest rates, and many developing nations who had taken out international loans during the 1970s found themselves unable to keep up with the repayments. Latin America was particularly indebted, reaching a peak debt level of USD 315bn, or more than half the region’s GDP. The tipping point came in 1982 when Mexico’s finance minister Jesus ´ Silva-Herzog declared that his country would default on its loans. Other countries soon followed, precipitating the Latin American debt crisis (Moyo 2009, p. 18). In return for rescue packages of aid from the International Monetary Fund (IMF) and the World Bank, indebted nations in Latin America and elsewhere were required to reduce spending and to accept ‘structural adjustment’ measures including deregulation, privatisation, the removal of tariff barriers, and reducing the size of the public sector. These measures, which by 1989 formed part of a standard package known as the ‘Washington Consensus’, were the result of the ascendance of neoliberal economic doctrine during the 1970s. In a sharp rejection of the post-war consensus that the state should have the primary role in leading development and economic growth, the objective of reducing the role of the state became a point of principle and was increasingly promoted to the

1.7 a short history of aid developing world by the Bretton Woods Institutions and official aid agencies (Riddell 2007, p. 34). The imposition of structural adjustment reforms in the 1980s by attaching conditions to aid, known as ‘conditionality’, is still highly controversial. According to Jeffrey Sachs, neoliberal donor governments took the opportunity to promote ideologically motivated programmes in Africa such as privatised healthcare and education systems that ‘found no support at home’, and Riddell argues that recipients were required to ‘adopt policies well beyond those that were thought to be needed explicitly to make aid effective’ (Sachs 2005, p. 82; Riddell 2007, p. 36). Although Paul Collier refuses to equate what he considers the ‘limited reforms’ imposed by the World Bank and other institutions with ‘the neoliberal savaging of the state’ in the West, there is general agreement in the literature that conditionality was largely ineffective in securing genuine and difficult governance reforms because of the lack of any credible threat of removing aid if the promised reforms were not enacted. In Kenya, for example, the government promised, and reneged on, the same reform five times in order to receive aid money from the World Bank (Collier 2007, p. 109). The rise of neoliberal economics in the 1980s also affected attitudes towards development aid. The UK’s aid spending fell sharply as a proportion of national income after the election of Margaret Thatcher in 1979, and by 1989 Britain’s aid spending had fallen by 26 per cent in real terms (OECD 2017d). Thatcher was particularly influenced by the work of the British-Hungarian economist Peter Bauer, whom she ennobled in 1982. Bauer was highly critical of foreign aid, which he argued obstructed rather than promoted development. Although international donors were willing to restructure the developing world’s debt during the 1980s in order to avert economic catastrophe, debt continued to rise, and by the end of the decade the cost of servicing the USD 1 trillion of emerging-markets’ debt so far exceeded foreign aid that there was a ‘net reverse flow from poor countries to rich’ of about USD 15bn a year between 1987 and 1989 (Moyo 2009, p. 22). 1.7.6 1990s: Aid Fatigue, Revival, and Renewed Focus on Poverty A turning point in the history of foreign aid came after the end of the Cold War. With the US no longer competing with the USSR to support sympathetic regimes in Africa and elsewhere, its aid spending fell from 0.21 per cent of national income in 1991 to an all-time rock bottom of just 0.09 per cent in 1997 (OECD 2017d). Similar trends occurred amongst other Western donors, and average DAC spending also fell to an all-time low of 0.21 per cent in the same year. Percentage aid spending did not start to recover until the mid-2000s, and even with the economic growth of donor countries it was not un-

what is aid? til 2003 that absolute spending exceeded 1992 levels. As aid flows declined, there was also no increase in foreign investment towards Africa from private sources, in contrast to other developing regions such as Asia (Moyo 2009, p. 25). During this period, the importance of good governance and the problem of corruption also came to dominate discussions of international development, with studies such as Burnside and Dollar (1997, 2000) suggesting that good economic policies were essential for economic development. Another reason for the drop in aid spending in the early 1990s was a second wave of ‘aid fatigue’ amongst the public in donor countries, who were concerned that corruption and poor governance was prevalent in the developing world and were disappointed in the apparent failure of ‘conditionality’ (Tarp 2009, p. 6). Moreover, the argument that too much aid spending encouraged ‘dependency’ and inhibited growth was gaining popularity, fuelled in part by a widely-publicised 1996 study by Peter Boone that argued that aid had failed to stimulate growth or reduce poverty in recipient countries. Over the course of the decade, however, public opinion began to shift; in the academic world, Boone’s findings came under increasing scrutiny and were contradicted by other studies. The focus the development community had placed on growth since the 1980s gave way to a renewed emphasis on poverty reduction, and an awareness of the interconnectedness of an increasingly globalised world led donor governments to see that poverty and conflict ‘could have implications for all’ (Tarp 2009, p. 6). 1.7.7 Early 2000s: Making Poverty History and the MDGs Moyo characterises the early 2000s, during which the cause of aid was taken up by rock stars such as Bono, as the era of ‘glamour aid’. Public expectations for what aid could achieve were high: a highly influential 2005 book by Jeffrey Sachs entitled The End of Poverty argued that increased aid flows could bring about profound reductions in poverty, as did the campaign ‘Make Poverty History’. Against this background, Finn Tarp made the prescient warning in 2006 (p. 43) that ‘mobilising such optimistic expectations may in a few years. . . lead to frustration and an undesired backlash.’ The new millennium began with a spate of international conferences on international development, most notably the Millennium Development Summit in September 2000. This established eight Millennium Development Goals (MDGs) to be met by 2015, including the commitment to halve, between 1990 and 2015, the number of people living on less than USD 1.25 a day. These were based on the International Development Targets (IDTs) which had been adopted by the DAC in 1996. The Millennium Development Summit was followed, in 2002, by a UN conference in Monterrey, Mexico at which the 0.7

1.7 a short history of aid

Billions USD (2014 prices)

35 30 25 20 15 10 5 2000 2002 2004 2006 2008 2010 2012 2014 Figure 4: Grants by NGOs, 2000-2015. Source: OECD 2017c

per cent aid spending target was once again endorsed, although its impact on average DAC spending over the following decade was negligible. The Millennium Development Project, set up at Monterrey under the leadership of Jeffrey Sachs, called for a doubling of aid flows in order to meet the target and criticised the current international mechanisms for distributing aid (Riddell 2007, p. 44). A further call for donor nations to increase their aid budgets came with the report of Tony Blair’s Commission for Africa in 2005, which recommended that aid to Sub-Saharan Africa be increased from USD 25bn to USD 50bn by 2010, and to USD 75bn by 2015 (Riddell 2007, p. 45). While the ambitious targets called for by the Commission for Africa were not met —aid to Africa as a continent in 2010 was only USD 30.6bn (OECD 2017b)—global aid spending nevertheless rose significantly in absolute terms. The amount of funding distributed by NGOs also increased tremendously during the 1990s and 2000s: the increase in grants distributed by private agencies and NGOs between 2009 and 2010 was almost equivalent to that of the whole period between 2009 and 2001 (Figure 4). In addition to calls for more aid, there was a growing awareness of the importance of more effective aid during the early 2000s. After conferences convened by the OECD in Rome (2003) and Paris (2005), the international community agreed upon the Paris Declaration on Aid Effectiveness. This was formulated around the five principles of Ownership, Alignment, Harmonisation, Managing for Results and Mutual Accountability, and it identified twelve indicators by which progress could be measured. The Paris Declaration recognises that the decisions and actions of aid recipients are at least as important for aid effectiveness as those of aid donors, and action points are

what is aid?

0.7 Percentage of National Income

0.6 0.5 0.4 0.3

1960

1970

1980

1990

2000

2010

Figure 5: UK aid spending, 1960 to present. Source: OECD 2017d

thus divided between donors and ‘partner countries’. These commitments were affirmed in the Accra Agenda for Action, which was agreed at the third High Level Forum on Aid Effectiveness in Accra, Ghana in 2008. Building upon the foundations of the Paris Declaration, this agenda placed a renewed emphasis on recipient country ownership of development initiatives and on capacity development. Although the Paris Declaration has become ‘the conventional summary of what effective aid should look like’ (Glennie and Sumner 2016, p. 3), progress has been limited: according to the official monitoring report in 2011, only one of the 13 targets set for 2010 had been met. 1.7.8 Late 2000s and 2010s: Aid in the Time of Austerity Towards the end of the 2000s, and in particular after the global financial crisis of 2007-2008, public support for aid began to wane once again. A 2012 report by the Institute for Public Policy Research found little support for increasing levels of aid spending and suggested that ‘heart-string appeals’, which had dominated aid campaigns at the start of the decade, may over the long-term ‘reinforce the sense that aid has not worked’ (Glennie, Straw and Wild 2012, p. 23). If public support for aid is becoming increasingly fragile, this has not yet translated into change in public policy in the UK. After a drop in 2006-7, UK aid spending as a proportion of national income rose from 0.36 per cent in 2007 to 0.7 per cent in 2013, the first time the UK had reached the target (Figure 5). Meeting this target became law in 2015 and has remained stable since then.

1.7 a short history of aid Although the UK and Germany are currently the only G7 countries to meet the 47-year-old target, many smaller countries have spent significantly higher proportions of their national income on aid for much of the past half-century. Sweden, for example, first passed the 0.7 per cent threshold in 1974, and in 2015 spent double at 1.4 per cent, though in 2016 it dropped sharply to 0.94 per cent. 2015 was also the deadline for the completion of the MDGs, and although some goals were more successful than others, an estimated 21m lives were saved as a result of accelerated progress based on pre-MDG levels of poverty reduction. The first and most well-known goal, to halve the number of people living in extreme poverty, was more than achieved, with the number falling from 1.9bn in 1990 to 836m in 2015. In order to continue this progress, the UN adopted a resolution in 2015 proposing 17 new goals, containing 169 specific targets between them, to be met be 2030 (see Table 1). These are popularly known as the Sustainable Development Goals (SDGs). Considerably more ambitious than the MDGs and ‘the result of the most extensive and inclusive UN consultation in history’ (IDC 2016, p. 7), these goals include ending extreme poverty and hunger entirely, taking urgent action to reduce climate change, and achieving worldwide gender equality. The SDGs provide a unifying objective for all the world’s bilateral and multilateral aid agencies, and if met would be a singular humanitarian achievement. Meeting them, however, will require ‘an immense financial investment from a variety of sources’ and a significant acceleration of progress from current levels (IDC 2016, p. 13). The late 2000s and early 2010s saw the publication of several books aimed at a general readership from all corners of the aid debate. William Easterly’s 2006 book The White Man’s Burden rejected Jeffrey Sachs’ call for aid flows to be substantially increased and attempted to compare the motives for modern aid-giving with Kipling-esque justifications for imperialism. Although Easterly is often cited as an aid sceptic, he does not argue that aid is unnecessary or unhelpful, but rather that the international system of aid distribution is inefficient and places too much emphasis on ‘grand plans’ imposed from above instead of helping poor people to identify and solve their own specific problems at the community level. The following year, Paul Collier’s The Bottom Billion (2007) attempted to move the aid debate on from the question of how much aid is enough by arguing that other developmental ‘instruments’ such as concessionary trade agreements and international contracts can be more effective, although Collier stresses that aid does also play an important role. In 2009, Dambisa Moyo attacked aid vociferously in her book Dead Aid, arguing that aid is not only ineffective but actively harmful to development. Dead Aid attracted significant attention in the development community and beyond, but its conclusions are at odds with the general trend in the

what is aid?

17 Sustainable Development Goals Goal 1

End poverty in all its forms everywhere

Goal 2

End hunger, achieve food security and improved nutrition and promote sustainable agriculture

Goal 3

Ensure healthy lives and promote well-being for all at all ages

Goal 4

Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

Goal 5

Achieve gender equality and empower all women and girls

Goal 6

Ensure availability and sustainable management of water and sanitation for all

Goal 7

Ensure access to affordable, reliable, sustainable and modern energy for all

Goal 8

Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all

Goal 9

Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

Goal 10

Reduce inequality within and among countries

Goal 11

Make cities and human settlements inclusive, safe, resilient and sustainable

Goal 12

Ensure sustainable consumption and production patterns

Goal 13

Take urgent action to combat climate change and its impacts

Goal 14

Conserve and sustainably use the oceans, seas and marine resources for sustainable development

Goal 15

Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat desertification, and halt and reverse land degradation and halt biodiversity loss

Goal 16

Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels

Goal 17

Strengthen the means of implementation and revitalize the global partnership for sustainable development

Table 1: The 17 SDGs agreed by the UN in 2015 and to be met by 2030

1.7 a short history of aid academic literature and are supported by a rather partial reading of the evidence. 2013 saw the publication of The Great Escape by Angus Deaton, who two years later won the Nobel Prize in Economics for his work on consumption, poverty and welfare. Deaton argues that, with the possible exception of health-related aid, aid has been largely ineffective, and that removing unnecessary obstacles to development such as trade restrictions are more important than sending money. Deaton’s argument was challenged in 2015 by Steven Radelet in his book The Great Surge, which argues that the weight of the evidence shows that aid has had a ‘modest positive impact on growth’ over the long-term (Radelet 2015, p. 227). The next chapter will review the evidence behind these claims in more detail.

2 2.1

DOES AID WORK? how to measure aid’s effectiveness

The justification for aid rests on the simple assumption that it is effective at promoting development. If this assumption does not hold, if aid does more harm than good, or if there are other, more costeffective means of achieving the same outcomes, then the international development community would be better off focusing its efforts on other tools such as trade concessions, removing obstacles to the flow of remittances, or even getting ‘out of the way’ entirely (Deaton 2013). This chapter will explore the large academic literature on effectiveness of official development aid and seek to identify the validity of this assumption. Despite decades of research, a conclusive and satisfactory answer to the question ‘does aid work?’ has proven elusive. There are several reasons for this, and before general conclusions can be reached it is important to understand why this question is still being asked over sixty years since the distribution of aid began. Part of the difficulty is that development aid is not a single discrete category that can be evaluated in its entirety, but rather an umbrella term incorporating a wide variety of different activities. These range from the supply of vaccines and agricultural equipment and the construction of schools and clinics to government-to-government cash transfers and the provision of economists, engineers and consultants to recipient countries. Aid has also changed constantly throughout its history, and the conclusions that can be drawn about its effectiveness in one decade are not necessarily applicable to aid given in others. There is also the problem of what measure to use. Aid is given for a variety of interrelated objectives that make it impossible to assess its overall impact in terms of any one indicator. Attempts to quantify the effectiveness of aid solely through its impact on growth, for example, ignore the contribution aid has made to human welfare through the eradication or control of diseases such as smallpox, Guinea worm and malaria. Measuring aid’s effectiveness by its impact on the number of people living in extreme poverty, which is usually defined in terms of income, likewise ignores the contribution aid can make to quality of life or the alleviation of acute suffering. An equally important question for assessing aid’s effectiveness is when to measure it. As will be discussed further below, the success rate of aid projects is lower when measured after several years than when it is measured immediately after project completion. The macroeconomic impact of aid

does aid work? interventions may also take many years to materialise: for example, reducing infant mortality or increasing the number of children who receive a primary education may not translate into higher economic productivity for decades. A further problem in assessing the impact of aid is aid volatility. Aid is most effective when it is provided in stable, predictable quantities, yet for most recipients aid remains a highly volatile and unpredictable revenue source, owing to the large number of donors and their fluctuating aid budgets. This can make it harder to assess the potential impact of aid itself. The problem of aid volatility and unpredictability will be discussed further in Chapter 3. Despite these difficulties, there is general agreement in the literature that ‘aid has in many cases been highly successful at the microeconomic level’ (Tarp 2006, p. 29). As will be discussed below, project success rates are typically in the region of 70-85 per cent, and average rates of return are also very respectable. What has been more controversial is whether these small-scale successes translate to an observable effect on macroeconomic indicators such as growth rate and poverty headcount. Before the 1990s the evidence was mostly inconclusive, and in 1986 Paul Mosley termed this the ‘micro-macro paradox’. Over the past few decades, better-quality data and more sophisticated econometric techniques have improved economists’ understanding of aid’s macroeconomic impact, and the weight of evidence now suggests that aid does make a positive, though modest, long-term contribution to macroeconomic indicators such as growth and poverty levels. To account for all the difficulties described above, an account of aid’s effectiveness must examine aid’s impact on both the microeconomic level and on several macroeconomic indicators. It should also break aid down into different categories in order to assess the relative effectiveness of each. This chapter, therefore, will be divided into two parts. The first will survey the literature on the effectiveness of each of the three main modalities of aid—project aid, programme aid, and technical assistance—and evaluate the extent to which interventions in each category meet their immediate objectives. The second part will turn to aid’s effectiveness on the macroeconomic level and examine both the decades-old literature on the relationship between aid and growth and its newer counterpart on the relationship between aid and poverty. This chapter will limit its discussion to official aid for development purposes rather than humanitarian aid or development aid funded privately by NGOs.

2.2 effectiveness by modality

2.2

effectiveness by modality

The first rigorous attempt to review the rapidly accumulating published literature on the effectiveness of all forms of aid was Cassen and Associates’s Does Aid Work? (1986, 2nd ed. 1994), which was commissioned by an intergovernmental task force of the World Bank and the IMF and funded by donor governments. Overall, the report concluded that most aid is successful in ‘achieving its development objectives. . . contributing positively to the recipient countries’ economic performance, and not substituting for activities which would have occurred anyway’ (Cassen 1994, p. 7). However, it also observed that aid was not always successful, and that its performance varied widely across different countries and sectors. In the two decades following the publication of the first edition of Cassen’s report the aid debate has advanced rapidly with the development of more sophisticated econometric techniques and the availability of larger quantities of data. The most recent comprehensive survey of all the available evidence is Roger Riddell’s Does Foreign Aid Really Work? (2007) and its follow-up papers of the same name (2009; 2014a; 2014b). Expressing some dismay over the public demand for simple answers to the complex question of aid’s effectiveness, Riddell provides a ‘counter-blast to the simple sound-bite’. While, like Cassen, Riddell is broadly positive about aid’s ability to assist the developing world, he stresses that the sheer complexity of the systems in which aid operates and the difficulty of drawing firm conclusions from the data available prevents simple ‘yes/no’ answers from being given. Nevertheless, Riddell (p. 257) advises that ‘attention needs to focus far less on worries about whether in general it “works”, and far more on working out and implementing policies to make it work better’. Sections 2.3-2.4 will draw on the findings of Cassen, Riddell, and other authors to evaluate the effectiveness of the three main modalities of aid at achieving specific ‘outputs’; in other words, fulfilling their immediate objectives. In the case of project aid, this corresponds broadly to the effectiveness of aid on the microeconomic level, although the objectives of programme aid and technical assistance are generally more sector-level or country-wide. Subsequent sections will then broaden the scope of the investigation to consider the wider ‘outcomes’ of aggregate aid flows on the macroeconomic and crosscountry level in terms of growth and poverty rates. 2.2.1 Project Aid Though the proportion of aid given in the form of programme aid has risen over the past few decades, in most countries the majority of official development aid is still provided in the form of individual

does aid work? projects. The results of project aid are typically more tangible and quantifiable than those of other aid modalities: each project has its own set of objectives, and its success can theoretically be judged according to the extent to which it meets, exceeds, or falls short of them, as well as the wider impact the project has on the community, society, sector or country in which it is carried out. Evidence for the success of project aid comes mainly from the project completion reports conducted by the aid agencies carrying out the projects themselves. However, most projects are not evaluated, and according to Riddell (2014a, p. 5) ‘few official agencies and no NGOs undertake aid impact assessment in a systematic way’. Evaluating the success of aid projects is also complicated by the fact that there is no way to compare the situation after an aid intervention with what it might have looked like if no aid had been given. In addition, in the case of limited success it is not always straightforward to decide whether a project has been successful overall. For example, if a large number of children are vaccinated as a direct result of aid but the total number falls short of the target, it is unclear whether the project should be judged a success or a failure. Another source of evidence on the effectiveness of aid projects is the small number of independent evaluations carried out by organisations such as the World Bank’s Independent Evaluation Group (IEG) and the UK’s Independent Commission on Aid Impact (ICAI). Evaluations often measure the contribution a project makes to the wider economy by calculating a rate of return (Cassen 1994, p. 89). Projects with a rate of return of over 10 per cent, meaning that for every dollar invested there is an annual net economic benefit of 10 cents, are typically regarded as ‘successful’, while those above 15 per cent are ‘highly successful’ (Riddell 2007, p. 182). Although evaluations are a higher-quality form of evidence than project completion reports, relatively few are carried out: Riddell (2014b, p. 5) estimates that ‘considerably less’ than 1 per cent of all projects undertaken are subject to an in-depth evaluation. One of the recommendations of the aid critic William Easterly is that aid donors pool a small fraction of their budgets to fund an independent body to evaluate samples of each agency’s projects (2006, p. 323); however, there has been little progress in this direction. In recent years, there has also been growing support for using randomised control trials (RCTs) to assess the impact of aid projects. Similar to medical trials, aid RCTs compare one aid-receiving ‘unit’, such as a village or school, with a control group that does not receive aid to evaluate the contribution of the aid project. Proponents argue that RCTs allows donors and agencies to test which projects work and which do not, allowing for the most successful to be scaled up and the weakest to be phased out. Critics, on the other hand, contend that they are far less rigorous than their medical counterparts and

2.2 effectiveness by modality have limited use, partly because their samples are often small, and partly because ‘there is no reason to suppose that what works in one place will work somewhere else’ (Deaton 2013, p. 291). Despite a widespread perception in the media and amongst the general public that aid is often wasted, the evidence from project completion reports and evaluations is remarkably positive, with overall success rates ranging from 70 to 85 per cent. For example, by the end of 2006/7 about 75 percent of DFID’s projects were judged as successful (Ireton 2013, p. 261); in 2004, USAID reported a success rate of 84 per cent (Riddell 2007, pp. 181); and the average rate of return reported by the World Bank IEG for the period 1993-2002 was a very respectable 22 per cent (Tarp 2006, p. 29). A 2008 study by Ouattara and Strobl also found that project aid has a positive and significant effect on growth, albeit with diminishing returns as the level of aid increases. Project aid failure rates are typically 10 to 25 per cent, meaning that there will always be a ready supply of anecdotal evidence of aid failure for aid sceptics to draw on. A well-known early example is the Tanganyika Groundnut Scheme in the 1940s, a disastrous attempt by the British colonial government to grow peanuts in modern-day Tanzania despite their being totally unsuited to the terrain and climate (see Esselborn 2013). In more recent years, Tanzania has also seen the failure of aid projects to build roads, since the roads deteriorated through lack of maintenance faster than they could be built (World Bank 1998, p. 1). Nevertheless, these examples of aid waste are not representative of the general picture, and if aid were a form of investment these failure rates would seem very tolerable. Indeed, Tarp (2006, p. 27) argues that if projects were always successful this would suggest donors were being overly risk averse. Many of the most conspicuous and impressive successes of aid have been in health-related projects, as discussed below in Chapter 4.2. William Easterly suggests that the success of health aid projects is down to the way they are structured, since they involve ‘narrow, monitorable objectives that coincide with the poor’s needs and with political support in the rich countries for an uncontroversial objective like saving lives’ (2006, p. 213). Projects aimed at improving water supply and sanitation or providing infrastructure are also among the most effective, while agricultural projects receive the lowest scores for success. For example, in 2005, only 46 per cent the Asian Development Bank’s projects in the agricultural sector were given successful ratings, compared to 85 per cent of transport and energy projects (ADB 2005, p. 8). This does not mean that agricultural projects have necessarily been particularly wasteful or poorly run—factors such as climate and the inherent uncertainties of farming are likely to play a role, and just because a sector is risky does not mean it is unimportant for development. Indeed, Cassen finds that agricultural projects offer the highest rates of return. There is also regional variation: World

does aid work? Bank data suggest that projects in East Asia appear to be more successful than those in other regions, with a success rate of almost 90 per cent, while in sub-Saharan Africa, just under 70 per cent of projects are successful (Riddell 2007, p. 183). Nevertheless, there are several important reasons not to be complacent about the success of project aid. There are, of course, strong incentives for aid agencies not to report project failures (Deaton 2013, p. 290), and reported success rates may be exaggerated (Riddell 2007, p. 187). There is also a drop in the overall success rate when projects are evaluated a few years after completion instead of immediately. Cassen noted in 1986 that not enough was known about the longterm sustainability of projects, and writing two decades later, Riddell (2007, p. 186) cited data showing that project success rates could drop below 60 per cent when assessed over the long-term. Although sustainability appears to have improved recently, Riddell comments that the number of projects that are not sustainable remains ‘stubbornly high’ (see Riddell 2007, p. 186). The huge number of different official aid agencies, charities and NGOs carrying out projects in many developing countries also places a ‘heavy administrative burden’ on recipient governments (Deaton 2013, p. 293). According to Easterly (2006, p. 145), Tanzania’s government bureaucracy ‘produced over 2,400 reports a year for its aid donors, who sent the beleaguered recipient one thousand missions of donor officials per year’. Although these inefficiencies are unlikely to outweigh the benefits of successful projects, they make project aid less effective than it could be. According to Riddell (2007, p. 189), one estimate suggests that when the costs of inefficiencies are factored in, ‘the total rate of return on [World] Bank projects would fall by almost one-third’. A final problem with evaluating project aid according to its success at meeting its immediate objectives is that it ignores the unintended consequences, or ‘spillovers’, a project might have on the wider community (Deaton 2013, p. 292). Private provision of a service by an aid agency or NGO could undermine a recipient country’s government’s own efforts, and success in one community or population could have an adverse effect on others. For example, aid-funded clinics could draw doctors and nurses away from government-funded clinics with higher salaries, and donations of clothing or food could have an adverse effect on the local textile industry or farmers’ incomes. As a result, Deaton argues, high project success rates could theoretically ‘coexist with aid failure for the country as a whole’ (p. 292). This is one explanation of the apparent micro-macro paradox. Not everyone agrees that this paradox exists, however, and aid’s macroeconomic impact on growth and poverty rates will be explored later in this chapter.

2.2 effectiveness by modality Despite the issues of data quality and availability, the proportion of aid projects that are successful, as well as the rates of return typically achieved, appear to be high. Some sectors and types of project, such as the provision of water and sanitation, are more successful than others, though this does not necessarily mean less aid should be given to less successful sectors: a high rate of failure may be expected in certain high-risk environments, and donors should be willing to tolerate a degree of risk if it means a high rate of return. Proliferation of donors remains a problem, and aid could be made significantly more efficient if donors could work more closely with each other and with recipient governments to eliminate duplication of effort and reduce unintended ‘spillovers’. 2.2.2 Programme Aid Programme aid is, at its broadest, aid flows that are ‘not tied to specific projects’ (Cassen 1994, p. 123). In general, it refers to resources channelled directly to recipient governments, whether earmarked for specific sectors or line ministries such as health, education or infrastructure (sectoral support), or given to bolster the recipient government’s spending as a whole (general budget support). A common framework for distributing sectoral support that has emerged since the 1990s is the ‘Sector-Wide Approach’ (SWAp), in which a group of donors agree to support a ‘recipient-government-led, sector-wide strategy’, usually by pooling funds (Riddell 2007, p. 196). It is sometimes argued that programme aid is more efficient than project aid, which tends to be fragmented across multiple donors, and therefore cheaper for both the donor and the recipient (see Jelovac and Vandeninden 2008). Cassen (1994) also suggests that programme aid is less limited by a recipient country’s ‘absorptive capacity’ than project aid. This refers to the amount of aid a country can receive before its human resources and institutional framework become overstretched, preventing additional aid from being used effectively. While the demands of many different projects conducted by multiple aid agencies can be burdensome for country’s authorities, programme aid, Cassen argues, can help increase a country’s absorptive capacity by strengthening these very institutions. A common criticism of programme aid is that it can harm state capacity and create dependency by reducing the need for the recipient government to raise its own revenue through taxation (see Section 3.3). In addition, programme aid is far more vulnerable to misuse than other forms of aid. While all aid is fungible, meaning it can be used for purposes for which it was not intended, programme aid is especially easily diverted and can be difficult to trace. Moreover, donors have little oversight over how the funds they provide are spent. By providing general budget support, donors commit them-

does aid work? selves to funding a government’s entire spending plan, not just those parts of it relevant for development. Even programme aid given to specific ministries is technically fungible, as aid given to a country’s health budget could potentially free up resources for defence, although in practice larger donors discuss overall spending priorities with recipients and flagrant abuses are easily recognised. The 2012 Report by the House of Lord’s Select Committee on Economic Affairs was sceptical of the merits of all forms of programme aid and welcomed DFID’s decision to halve its bilateral general budget support by 2014/15, though it was concerned by a projected rise in sectoral budget support and the degree to which DFID’s multilateral contributions were used as budget support (p. 44). Assessing the impact of programme aid can be difficult because it is just one source of revenue for a government or line ministry, making it hard to isolate its contribution from that of other revenue sources. Even pooled aid funds in SWAps usually constitute less than half the budget for a sector. Moreover, as Ireton (2013, p. 259) notes, financial aid’s fungibility means that it ‘cannot be judged simply by looking at the sectors to which it was targeted.’ Nevertheless, one can measure to what extent programme aid achieves its most immediate objective of increasing government spending. If aid funds are given to a sector but spending on that sector does not increase, it implies they have been lost through fungibility, consumption, or loss of government revenue in the form of tax receipts. A 2006 cross-country study on budget support commissioned by a large group of bilateral and multilateral donors reported mostly positive results on a range of outcomes, and found that programme aid tended to improve the overall effectiveness of aid as a whole by indirectly improving coherence and harmonisation (Lister 2006). A 2008 report by the National Audit Office concluded that DFID’s budget support had generally ‘enabled partner governments to increase expenditure on priority areas’, ‘resulted in partner governments providing more services, particularly in health and education’, and ‘helped increase the capacity of partner governments to plan and deliver services effectively and to develop better poverty-focused policies’. A 2012 report by the Dutch Ministry of Foreign Affairs concluded that every additional percentage point of budget support ‘increases government expenditure by about 0.6 per cent, without leading to any decrease in tax receipts’, and that the ‘lion’s share’ of funds were ‘used for what they were intended’ (Jorritsma 2012). Another finding that emerges from the literature on programme aid is that, contrary to expectation, costs were not any lower than those for project aid; in fact, ‘[f]or both donors and recipients, transaction costs seem to have risen, not fallen’ (Riddell, quoted in House of Lords 2012, p. 43). Paul and Vandeninden (2012), however, argue that minimisation of transaction costs should not necessarily be seen

2.2 effectiveness by modality as an end in itself, as higher administrative costs may result in more effective aid (see also Young-Powell 2013). The difficulty in assessing the effectiveness of programme aid prevents firm conclusions from being drawn, but the available evidence suggests that it has been moderately successful at achieving its ‘bare minimum’ objective of increasing sector funding without being being diverted elsewhere or resulting in loss of tax revenue. Overall, Riddell (2007) concludes that programme aid has worked ‘reasonably effectively’ after some ‘initial teething problems’. 2.2.3 Technical Assistance The third major category of aid is technical assistance (TA), sometimes also known as technical co-operation (TC). This provides ‘skills, knowledge, know-how and advice’ through the supply of experts, usually nationals of wealthy countries, paid for by the aid donor (Riddell 2007, p. 202). Technical assistance typically accounts for about a quarter of aid spending across all donors. DFID spends less than the average: in 2011-12 DFID spent 12.6 per cent of its bilateral budget on technical assistance, and the proportion is decreasing. Technical assistance is a highly expensive form of aid. According to Riddell, ‘[t]he annual cost of paying and housing a foreign TA working, transporting them to the country in which they work and educating their children is commonly in excess of [USD] 250,000 a year, and can be far higher’ (2014b, p. 7). However, its costs would certainly be justified if there is evidence that technical assistance is necessary and effective. As with other forms of aid, there is no clear and unambiguous way to measure the effectiveness of technical assistance, and evidence is limited mainly to the published evaluations of aid agencies themselves. Cassen suggests that ‘[a] severe critic. . . might be predisposed to suspect the evidence’ as a result, although he ‘does not find the suspicion warranted’ as published reports ‘contain much frank discussion of problems and failures’ (1994, p. 145). In the debate over the effectiveness of technical assistance, what is fairly uncontroversial is that TA has been very successful in achieving its immediate objectives of ‘filling knowledge gaps. . . training local personnel and imparting knowledge (Riddell 2014b, p. 7). According to Cassen (1994, p. 143), TA provided for specific projects has a ‘very high success record’ (Cassen 1994, p. 143). Overall, Cassen’s report concludes that ‘the greater proportion’ of TA ‘has been reasonably successful’: about ‘one-half to two-thirds’ of evaluated projects are judged satisfactory, with ‘[o]utright failures. . . in 10-15 per cent of projects’ (pp. 240, 167). A simple example of an effective use of TA is a project that used the expertise of recently retired British customs officials to improve Mozambique’s customs service, resulting in goods’ being cleared 40

does aid work? times faster (Riddell 2007, p. 204). Cassen does also comment that TA is not always welcomed by recipient governments, adding that ‘often [TA] appears to be little more than tolerated as something the donors want, and is seen as the ‘price’ the recipient has to pay for the other types of aid which are more highly prized’ (Cassen 1994, p. 172). Cassen’s positive conclusion is based mainly on studies which evaluate TA by its ‘proximate or immediate’ objectives, which were the best evidence available to him at the time (Cassen 1994, p. 167). In the thirty years since the original publication of Cassen’s report, however, attention has shifted towards TA’s effectiveness at achieving wider or longer-term goals such as building effective institutions, strengthening state capacity (see Section 2.2.4 below), and developing the local skills that will eventually render the provision of expensive foreign expertise unnecessary. When evaluated in this wider sense, Riddell (2007, p. 203) writes, ‘there is a growing consensus—not least among many leading official donors—that TA, as traditionally given, has largely been a failure’. For example, a 1996 World Bank review of TA initiatives between 1971 and 1991 reported that less than a third were successful, and according to Denning (2002, p. 232) ‘[a]necdotal observation confirms that failure is consistent and widespread’. A report produced by the Dutch government on the success of their technical assistance programme indicates, as Riddell puts it, that ‘traditional TA appears to have failed massively’ (Riddell 2007, p. 206). Aid-growth studies that disaggregate aid flows by modality report mixed results: Annen and Kosempel (2009) find that technical assistance has a positive and significant impact on growth, except in countries where aid is highly fragmented; however, Ouattara and Strobl (2008) conclude that TA does not have a statistically significant impact on growth. This does not mean that technical assistance cannot be effective, and Riddell argues that in the cases where TA does work it is ‘when donors work closely together with each other and with recipientcountry governments and institutions to achieve clearly identified goals’ (2007, p. 211). One World Bank report (2004) gives examples where technical assistance has given returns of 100 to 1000 times its cost. Evidence also suggests that technical assistance can be instrumental in supporting failed states that are recovering, but only when it is provided after the turn-around has already begun (Chauvet and Collier 2006). Denning (2002) suggests that fostering knowledgesharing networks, including between developing countries themselves, may sometimes be more effective than sending foreign personnel; indeed, as digital communication and rapid knowledge sharing have now become the norm, it may be that traditional, physical forms of technical assistance are now somewhat redundant. Jones (2013) makes several recommendations on how to make technical assistance

2.2 effectiveness by modality more effective, including better communication and policy engagement. 2.2.4 Aid for Capacity Development One of the implications of the 2005 Paris Declaration and the 2008 Accra Agenda for Action was that strengthening recipient countries’ institutions is essential for long-term, sustainable development. This is well-recognised in the development literature: Acemoglu and Robinson (2012), for example, argue that inclusive political and economic institutions are necessary for sustained economic growth, which is itself a precondition for progress on almost all other development indicators (see Section 2.3). Weak and ineffective institutions such as inefficient bureaucracies or corrupt government agencies can, by the same measure, be major impediments to the development process. Strengthening public institutions and organisations, known as ‘capacity building’ or ‘capacity development’, is important both as a means towards achieving a wide range of developmental objectives and as an end in itself: as Glennie (2011) argues, ‘[i]ncreased capacity is what development is’. Although capacity development is most closely associated with the technical assistance modality, Riddell (2007, p. 180) comments that ‘a large and growing number of aid projects’ also involve ‘some form of capacity development as a constituent part of the project’. Over the past few decades, capacity development has become an increasingly important part of donor-funded aid programmes. According to the World Bank (2005a, p. 14), ‘[t]he concept of capacity development has evolved significantly—from a narrow preoccupation with training and technical assistance to dealing with the capacity of individuals, organizations, and the broader institutional framework in which they operate to deliver specific tasks and mandates.’ The history of capacity development has been a ‘chronicle of trial and error’ (OECD 2006, p. 15), from its origins in the period of decolonisation in the 1950s and 1960s, as donors researched public institution building, to the increased awareness from the 1980s onwards of the importance of country ownership. This was emphasised in the 2005 Paris Declaration on Aid Effectiveness, which states in paragraph 22 that ‘[c]apacity development is the responsibility of partner countries with donors playing a supporting role’. It is difficult to assess the overall effectiveness of efforts to build capacity in developing countries. Capacity development is a long-term process involving gradual cultural shifts within organisations and is almost entirely down to the decisions of individuals in developing countries themselves, rather than the actions of donors: as Glennie and Sumner (2016, p. 20) argue, ‘[s]tate building is an endogenous process and countries design institutions that are legitimate with re-

does aid work? spect to their own history, culture, beliefs and public expectations’. Capturing the effect of any particular input from the donor-side is challenging as organisations are complex systems which do not respond deterministically to outside influences and changes may only ‘become apparent in the years after any particular intervention’ (Glennie 2011). There have been clear successes, including DFID’s support to the Zambia Revenue Authority, which appears to have had a significant impact on its output (Jones and Associates 2006), and USAID’s support for Costa Rica’s juridicial system. The only one of the Paris Declaration’s 13 targets that was reached by the 2010 deadline was that at least half of technical co-operation flows should be used in line with national development strategies. Yet this achievement was underwhelming, since the figure was already at 49 per cent in 2005, and in 2010 had climbed to just 57 per cent (Riddell 2014b, p. 26). Moreover, Riddell (2007, p. 209) claims these successes ‘do not seem to be particularly representative of the whole’, with ‘few initiatives pointing to significant successes, and most being judged as having failed in a number of key areas and objectives.’ A report commissioned by DFID as an independent evaluation of its activities in sub-Saharan Africa found that ‘[n]one of the activities reviewed in Ghana, Kenya or Zambia resulted in clear evidence of improved organisational capacity within government, except in agencies where there was both sufficient clarity about, and government commitment to, their role and objectives’ (Jones and Associates 2006, p. xv). Riddell (2014b, pp. 7-8) also notes that ‘the World Bank has been honest enough to acknowledge that its efforts in this area, especially in Africa, have been extremely disappointing’. A 2012 study by Sanyal and Babu found that aid can be useful in helping countries develop capacity if their initial capacity is low, but that ‘excessive donor intervention’ in countries with moderate levels of capacity can have a potentially harmful effect. Overall, Riddell (2014b) concludes that aid has generally ‘not been at all successful in its efforts to build capacities’. Riddell (2007, p. 211) emphasises that ‘this should not lead one to conclude that [donor efforts to build capacity] cannot work’, and he observes that interventions are most likely to be successful when there is strong cooperation from recipients, when donors work closely with recipient governments, when there are clearly defined goals, and when adequate time horizons are used. But it is also clear, as noted by the Paris Declaration, that institutional change can only come from within recipient countries, and aid donors should not expect to have much direct influence over the development of institutional capacity. The remainder of this chapter will now explore the evidence on aid’s effectiveness on the macroeconomic level.

2.3 macroeconomic effectiveness: growth

2.3

macroeconomic effectiveness: growth

Of all the macroeconomic development indicators, it is aid’s impact on growth that has attracted the most academic attention. Growth is important because it lies behind so many other aspects of development. The Harvard economist Dani Rodrik has stated that, historically, ‘nothing has worked better than economic growth in enabling societies to improve the life chances of their members, including those at the very bottom’ (2007). The rapid improvements in living standards in the industrialised world over the past two centuries were directly related to economic growth (see Radelet 2015; Deaton 2013), and of the 1.1bn people worldwide who were permanently lifted out of poverty between 1990 and 2013, 730m—67 per cent—owed this increase in their incomes to the rapid economic growth of China alone (World Bank 2017b). Growth is not, of course, the only goal of international development, but it can be considered an essential prerequisite. As Paul Collier writes, ‘[g]rowth is not a cure-all, but lack of growth is a kill-all’ (Collier 2007, p. 190). Whilst some economists have raised concerns that growth could widen inequality and benefit elites more than the poorest, there is strong evidence to suggest that growth is one of the surest routes out of poverty for all sections of society (see Deaton 2003, p. 10; Collier 2007, p. 11). A 2002 paper by David Dollar and Aart Kraay entitled Growth is Good for the Poor concludes that, in all societies, the incomes of the poorest rise in proportion to the national average income, and that attempts to promote specifically ‘pro-poor’ growth have been unsuccessful. These findings were reaffirmed in Dollar, Kleineberg and Kraay’s 2013 paper, Growth is Still Good for the Poor, which looked at data from 118 countries over four decades and found that the incomes of the poorest 20 per cent and poorest 40 per cent of the population rise in proportion to growth (see also Ravallion and Chen 1997; Besley and Burgess 2003; and Dollar and Kraay 2004). The 2012 report of the House of Lords Select Committee on Economic Affairs identified economic growth as the single most effective way to achieve aid’s development objectives and expressed surprise that it had not been more fully embraced by the aid community (p. 29). This section will therefore review the past four decades of literature on the link between aid and growth. Early studies on the relationship between aid and growth were often ambiguous. Part of the reason for this was a lack of high quality data, a failure to account for reverse causation or diminishing returns, and an overly simplistic understanding of the causes of economic growth. Since the mid-1990s, however, better data and more sophisticated econometric techniques have led to great insights into what aid can and cannot achieve. The debate on aid’s overall impact on growth has swung back-and-forth, with one paper refuting another before being challenged itself by new

does aid work? data or new interpretations of the evidence. The majority of studies, however, have found that aid does have a positive and significant effect on growth, especially when measured over the long-term. Early aid effectiveness studies were typically based on a model of economic growth developed in the 1930s and early 1940s known as the Harrod-Domar Model. This assumed that the key factor driving growth was the extent to which a country accumulates physical capital such as machinery and infrastructure. In essence, the more machines and roads a country has, the more productive its workforce can be, and the faster its economy can grow (see Easterly 2001). In order to acquire physical capital a country must invest a portion of its income, and so the Harrod-Domar model predicts that the proportion of income a country invests in physical capital is a key determinant of its economic growth. This appeared to offer an explanation of why poor countries grew so slowly. People in the poorest countries typically consume most or all of their incomes just to survive, meaning that neither they nor their countries have sufficient domestic savings to invest in the physical capital that would make them more productive. For example, a farmer who cannot afford a tractor has no way to increase his productivity and therefore income, condemning him to a ‘poverty trap’ (see Sachs 2005, p. 246). Most early aid effectiveness literature assumed that aid would work by filling this ‘savings gap’, providing countries with the resources to invest in physical capital and thus grow their economies. Another way a country can invest in physical capital is by using its export earnings to import it from abroad. In poor countries, however, these earnings are likely to be insufficient, and Hollis Chenery and Alan Strout argued in 1966 that this ‘trade gap’ is a second limiting factor on investment. Aid also fills this gap by providing a stream of foreign currency that can be used to buy imports. By filling both the savings gap and the trade gap simultaneously, Chenery and Strout argued, aid increases the rate of investment and allows the recipient’s economy to grow. Chenery and Strout’s ‘Two-Gap’ extension of the Harrod-Domar model was highly influential in aid-growth literature, not least because it made very simple and highly optimistic predictions about the effect of aid on growth. However, it made several simplifying assumptions that reduce its usefulness in assessing the impact of aid on growth. First, whilst it assumes that investment in physical capital is the key factor driving growth, economists now understand that growth is influenced by a ‘complex set of interdependent factors’ beside physical capital accumulation (Moreira 2005, p. 26). Second, it assumes that all aid goes straight into investment, whereas later studies have shown that aid increases consumption as well. Third, it assumes that there is a linear relationship between aid and growth; in fact, most evidence now shows that aid is subject to diminishing returns. For these reasons, most studies now use the more sophisti-

2.3 macroeconomic effectiveness: growth cated Solow-Swan growth model, which considers a variety of other factors to be additional determinants of the rate of economic growth including the rate of capital depreciation and the pace of technological change. Even so, William Easterly (1999, 2001) observes that as late as the 1990s the Harrod-Domar/Two-Gap model was still being used by International Financial Institutions such as the World Bank and the International Monetary Fund (IMF) to calculate how much aid a country ‘needed’ to achieve a target level of growth. Another reason identifying the link between aid and growth has been so difficult is that aid flows are only a relatively small proportion of most developing countries’ national incomes. As the 2012 House of Lords Report observes, aid has historically only constituted an average of 3.5 per cent of recipients’ GDP. At these levels it can be very hard to identify an impact on growth ‘bright enough to shine through the statistical fog’ (Owen Barder, quoted in House of Lords 2012, p. 23). Tarp (2006, p. 33) also suggests that, given the noisiness of the data and the constantly changing situations in which aid operates, ‘it should come as no surprise that the result is biased towards zero’. 2.3.1 Savings, Investment and Growth: The First Two Generations of Studies In their influential survey of the preceding three decades of aid-growth research, Henrik Hansen and Finn Tarp (2000) classify previous aidgrowth studies into three ‘generations’ according to factors such as their underlying growth model, the quality of data available to them, and the sophistication of their econometric techniques. Studies in the first generation, including Griffin and Enos (1970), Weisskopf (1972) and Papanek (1972, 1973) were based on the Harrod-Domar growth model and investigated the extent to which aid flows increased a country’s savings. The subsequent link from savings to investment and from investment to growth was assumed and generally not investigated in this generation. Overall, studies in the first generation of aid-growth literature found that aid did increase savings, though not by as much as the aid flow—in other words, some aid ‘leaked’ into consumption instead. Nevertheless, as long as increased savings did indeed lead to higher growth, as predicted by the Harrod-Domar model, then aid should have had a positive effect on growth. Whereas the first generation of studies examined aid’s effect on growth indirectly through savings, the second generation explored the link between aid and growth itself, some through investment, and some directly. It was still assumed that investment in physical capital was ‘the major direct determinant of growth’, although some studies used the more sophisticated Solow-Swan model (Hansen and Tarp 2000, p. 8). Hansen and Tarp conclude that among these studies ‘there

does aid work? is virtual consensus that there is a significant positive impact of aid on investment’ (p. 382). Of the 72 studies that tested the aid-growth link directly, 40 found a positive link and 31 showed no statistically significant impact, while only one found found a negative link. Arguing that many of the inconclusive studies were less robust, Hansen and Tarp conclude that the second generation of studies also show a positive link between aid and growth. 2.3.2 Panel Regressions: The Third Generation of Studies Not everyone agrees with Hansen and Tarp’s assessment of the early aid-growth literature: McGillivray (2005, p. 2), for example, suggests that much of it was ‘rather inconclusive’. Nevertheless, a clear turning point came at the start of the 1990s, which Hansen and Tarp consider the start of the third generation of aid-growth literature. Studies of this generation were characterised by larger and better quality datasets, more accurate growth models, and more sophisticated econometric techniques. One of the most influential and controversial early findings in this generation of research were those of Peter Boone (1996). Using panel data regressions based on a sample of over 90 countries over 20 years, Boone concluded that aid, on average, does ‘not significantly increase investment and growth’ and instead increases public and private consumption, particularly that of elites. Boone’s findings were publicised in an Economist article memorably entitled ‘[Aid] Down the Rathole’ (1994), contributing to the wave of ‘aid fatigue’ in donor countries during the 1990s. Despite the publicity Boone’s findings attracted, however, Hansen and Tarp argue that Boone’s study ‘must be characterized as an outlier in the literature’, as a broad range of other studies from the same period, including Hadjimichael et al. (1995), Durbarry, Gemmell and Greenaway (1998), and Lensink and White (2001) all find positive returns to aid. Moreover, Hansen and Tarp reveal that, on closer reading, Boone decides ‘in passing’ to reject part of his sample, and if the full sample is used the relationship between aid and investment becomes positive (Hansen and Tarp 2000). As Clemens et al. (2012) write, ‘Boone’s research, which is often cited as showing no relationship between aid and investment, actually shows a positive and significant relationship.’ Boone’s paper provoked a wave of responses and new economic regressions. By far the most influential of these was a study by the World Bank economists Craig Burnside and David Dollar (1997, 2000). Using a new set of data, Burnside and Dollar found that aid has a significant and positive impact on growth, but only in countries that already have ‘good’ economic policies, measured by the proxy variables of low inflation, low budget deficits, and low trade restrictions. In addition, Burnside and Dollar showed that the effectiveness of aid is subject to diminishing returns. These findings, which formed the

2.3 macroeconomic effectiveness: growth basis of the World Bank’s 1998 publication Assessing Aid: What Works, What Doesn’t, And Why, were well-received by the aid community as they simultaneously showed that aid worked when given to the right recipients and explained Boone’s apparent finding that aid did not work overall: previously, more aid had been given to countries with ‘bad’ policies than ‘good’ ones. If more aid were allocated in the future to countries with ‘good’ economic policies, Collier and Dollar (2001, 2002) argued, an additional 9.1m people could be lifted out of poverty per year, effectively doubling aid’s effectiveness at reducing poverty through growth. Burnside and Dollar’s findings were cited in the Economist (‘A Fresh Start?’, 2002) and the New Yorker (Cassidy 2002); the UK’s Department for International Development (DFID) wrote in its 2000 White Paper that ‘development assistance can contribute to poverty reduction in countries pursuing sound policies’, and President Bush’s Millennium Challenge Corporation used country performance indicators based on Burnside and Dollar’s findings to guide its allocation of USD 5bn of new aid funds. According to William Easterly (2003, p. 25), the response to the publication of the Burnside and Dollar study demonstrated an ‘unusually clear link running from a growth regression in an economic study to a policy outcome’. However, Burnside and Dollar’s findings have been the subject of intense debate, and their claim that aid effectiveness depends on ‘good economic policies’ has now been effectively disproven. Easterly, Levine and Roodman (2004) repeated Burnside and Dollar’s own calculations using newly available data and found that the positive effect of aid on growth vanished when using the enlarged data set, though the authors stressed that their criticism was directed more at Burnside and Dollar’s econometric analysis than their broader conclusions about aid’s effectiveness. While a few authors corroborated Burnside and Dollar’s findings (e.g. Svensson 1999; Collier and Dehn 2001; Collier and Dollar 2002, 2004), a far greater number of third-generation studies found that aid increases growth irrespective of how ‘good’ a recipient government’s economic policies are (see McGillivray 2005, p. 3 for a list of 26 studies to this effect). Overall, of the thirty-six studies conducted from 1997 to 2004, thirty-four concluded that aid had had a positive effect on growth (McGillivray 2005, p. 3). Hansen and Tarp (2001), for example, find that ‘aid increases the growth rate, and this conclusion is not conditional on the policy index established by Burnside and Dollar (2000)’. Dalgaard, Hansen and Tarp (2004) observe that ‘in the last few years. . . a gradually forming consensus view has emerged that aid is effective’, though they note that it does not appear to be equally effective everywhere.

does aid work? 2.3.3 Disaggregating Aid Flows: The Fourth Generation of Studies In 2004, Michael Clemens, Steven Radelet and Rikhil Bhavnani set out to explain why so much of the earlier literature, including Boone (1996) and Burnside and Dollar (2000), had found little evidence of aid’s overall impact on growth. According to Glennie and Sumner (2016, p. 51), this marked the start of the fourth generation of aidgrowth studies, which was partly characterised by a concern to disaggregate aid flows in order to examine the effectiveness of different types of aid separately. Clemens, Radelet and Bhavnani argue that earlier aid-growth studies were ‘flawed’ in two ways: they mistakenly expected growth to materialise within very short time horizons, and they only used data for aggregate aid without considering that certain types of aid, such as aid for disaster relief, are not intended to promote growth. In fact, many types of aid are more likely to be given to countries already experiencing negative growth, which could result in a misleading negative correlation between aid and growth if this is not accounted for—in other words, aid is a partly endogenous variable. Clemens, Radelet and Bhavnani accordingly discount emergency and humanitarian aid, as well as aid only likely to affect growth over a long period of time such as aid to support education or democracy. When only looking at aid that could plausibly have an impact on growth within the easily measurable period of four years, they find that this ‘short-term’ aid, about 53 per cent of total aid flows, has a large positive impact on growth and is not conditional on ‘good policies’. However, they also find that the positive impact of aid declines as the proportion of aid to GDP approaches 8 per cent, after which the impact of aid turns negative. William Easterly (2006) observes that at the time of writing there were already twenty-seven countries which received more than this level of aid. Clemens, Radelet and Bhavnani’s conclusion about the positive effects of ‘short-term’ aid was challenged in 2008 by Raghuram Rajan and Arvind Subramanian, who controlled for possible reverse causation and concluded that it had no positive effect on growth after all. However, after replicating Rajan and Subramanian’s study with a more sophisticated specification and making adjustments such as accounting for selection bias, Arndt, Jones and Tarp (2010) conclude that the data actually show that aid has had a ‘positive and statistically significant causal effect on growth over the long run’. Another fourth-generation study to disaggregate aid flows was Minoiu and Reddy (2009). This study found that aid intended specifically to promote development ‘has a positive, large, and robust effect on growth’, while all other forms of aid are ‘mostly growth neutral and occasionally negatively associated with economic growth.’ In 2012, Clemens et al. published a greatly revised version of their 2004 working paper in which they responded to their critics and attempted again to reconcile the widely divergent conclusions of ear-

2.3 macroeconomic effectiveness: growth lier aid-growth research. ‘Wearied readers’, they suggest, ‘would be right to wonder what produces diverse findings from apparently the same aid and growth data.’ Responding to the three most significant studies to date claiming that aid has a negligible effect on growth overall—Burnside and Dollar (2000), Boone (1996), and the critics of their 2004 paper, Rajan and Subramanian (2008)—Clemens et al. proposed that these studies had insufficiently accounted for the time-lag between aid receipt and its effect on growth and had made use of invalid or weak instrumental variables. After making the necessary adjustments, and otherwise keeping the studies in their original form, they found that the same data yield a positive, though modest, relationship between aid and economic growth in each case. Clemens et al. (2012) won the Royal Economics Society’s award for the best paper published in the Economic Journal that year (see Radelet 2015, p. 226 for further explanation). 2.3.4 Subsequent Developments The debate on the link between aid and economic growth is far from over, and indeed Clemens et al. (2012) was subsequently challenged in 2015 in a paper by David Roodman, who once again claimed to have reversed their findings and found little impact of aid on growth. However, the weight of evidence now suggests that aid has a modestly positive effect on growth over the long term, even if its effects are sometimes insignificant or occasionally negative over the short term. A 2012 paper by Frot and Perrotta suggested that if aid had not been given since 1963 the average developing country’s GDP would be about 30 per cent lower, and the average citizen 15 per cent poorer. Arndt, Jones and Tarp (2013, p. 27) estimated, based on existing literature, that sustained aid inflows of 10 per cent of a recipient country’s GDP were associated with a 1 per cent additional growth a year. In 2015, the same authors reached an even larger conclusion in their own study, which found that aid inflows of 5 per cent of GDP over the period 1970-2007 were associated with an average of 1.5 per cent additional growth, even if the effect were occasionally negative or insignificant in the short term (Arndt, Jones and Tarp 2015, p. 14). In addition, the authors found that aid also had a positive effect on some of the proximate causes of growth such as investment share of GDP, which was corroborated in a World Bank study by Galiani et al. (2014). Another World Bank study by Hirano and Otsubo (2014, p. 22), which used data covering 60 developing countries over two decades, found that aid benefits poor people in developing countries in two ways: ‘social aid significantly and directly benefits the poorest in society, while economic aid increases the income of the poor through growth’. In addition, the authors concluded that aid benefits the poorest income groups more than other segments of society,

does aid work? while trade and FDI tended to benefit the richest quintile the most. This presents an interesting counterpoint to the ‘Trade Not Aid’ slogan popular in the late 1960s, suggesting that aid has a unique role to play alongside other development ‘instruments’. Moolio and Kong (2016) have also recently identified a positive relationship between aid and economic growth in South East Asia. There have also been several recent reviews and meta-analyses which aggregate the findings of previous studies. In 2008, Doucouliagos and Paldam analysed the results of 68 published studies and claimed that the literature did not show a significant positive effect of aid on growth. In 2013, however, Mekasha and Tarp revisited the same studies and came to the opposite conclusion; Doucouliagos and Paldam’s negative result was, they argue, the result of several methodological errors including inaccurate data entry and inappropriate weighting of studies. A review by UNU-WIDER (2014) of 10 post-2008 studies also found that all but 2 estimates demonstrated a statistically significant positive relationship between aid and growth. A recent literature survey by Glennie and Sumner (2016, p. 54) concludes that ‘the assertion that aid generally contributes to economic growth. . . is now less contentious in the academic literature than is currently recognised in public policy debate’, and that ‘aid’s critics are currently in the academic minority.’ 2.3.5 Aid-Growth Studies: Conclusions The debate on the relationship between aid and economic growth is far from over, but important points of consensus have emerged. Most importantly, discussion has for a long time been more or less confined to whether aid has a modestly positive effect on growth or a statistically insignificant one, and there is very little evidence to support the ‘hard’ sceptical view that aid actively harms growth. It is, however, now understood that aid is subject to diminishing returns, and increasing it beyond a certain proportion of a recipient’s GDP may have a harmful effect. Expectations about what aid can achieve have also become more realistic. The days when it was thought that aid could be a ‘Marshall Plan for Africa’ are over, and aid is now recognised as just one development tool among many (see Collier 2007). Opinion is thus shifting away from the question ‘Does aid work?’ towards ‘How can we make aid work better?’.

2.4

macroeconomic effectiveness: poverty

The relationship between aid and poverty reduction is particularly important, since for many in the development community the reduction of poverty is aid’s primary objective. The SDGs call for an end to

2.4 macroeconomic effectiveness: poverty extreme poverty by 2030, and since DFID’s foundation in 1997 it has been its ‘sole purpose. . . to eliminate or at least reduce poverty in the poorest countries of the world’ (Ireton 2013, p. 50). Yet compared to the voluminous aid-growth literature, studies on the direct relationship between aid and poverty are few and relatively recent. A 2000 World Bank handbook on poverty began by stating that ‘[d]espite the billions of dollars spent on development assistance each year, there is still very little known about the actual impact of projects on the poor’ (Baker 2000, p. vi). Before the millennium, studies on aid’s effectiveness tended to assume that the main way aid contributes to poverty reduction is by promoting economic growth, as discussed in the previous section. While there is much to commend a growth-led development strategy, growth is a ‘means to an end. . . not an end in its own right’ (McGillivray 2007), and some forms of aid may help to reduce poverty independently of their effect on growth. Aid’s direct impact on poverty itself is therefore an important ‘alternative criterion’ by which aid’s macroeconomic effectiveness can be assessed (Alvi and Senbeta 2012). Since the millennium, a number of studies have emerged that explore the aid-poverty link directly, and this section will review this small but growing strand of literature. 2.4.1 How to Measure Poverty Poverty is much harder to define than growth, and good quality, cross-country data on poverty are not abundant. The universal definition of extreme poverty most widely used by aid agencies and economists is an income of less than 1.25 US dollars a day, measured in 2005 prices at purchasing power parity. There are, however, several difficulties posed by defining poverty with an absolute line based on income. Not least, it is difficult to explain convincingly why the poverty line should be defined at this level, and it must necessarily be regarded as somewhat arbitrary. Income-based poverty statistics can also change widely depending on how they are obtained—for example, a minor change in a survey question in India resulted in an overnight halving, on paper, of the country’s official poverty statistics (Deaton 2013, pp. 254-255). As a result, aid-poverty studies tend to measure poverty both by income-based statistics and by a variety of other social indicators, which shall be discussed below. The most widely-used set of incomebased poverty measures, introduced by Foster, Greer and Thorbecke in 1984, are the headcount index, the poverty gap index, and the squared poverty gap index. The headcount index simply estimates the proportion of people in a population who live below a given poverty line. This is the simplest measure of poverty and is the measure most commonly used in the media; however, since everyone below the poverty line is counted equally, the headcount index reveals

does aid work? only the proportion and not the severity of poverty in a population. In other words, if the poor become poorer but the incomes of everyone else stay the same, the headcount index does not change. This could create the wrong incentives for a government or aid agency interested only in reducing headline figures of poverty, as spending small sums of money on the people closest to the poverty line, but ignoring the very poorest, would be the most cost-effective way of reducing the headcount index. The ‘poverty gap index’, therefore, improves on the headcount index by measuring the extent to which the incomes of the poor fall below the poverty line. It is calculated by finding the average income of each poor person, determining by what fraction this average income is short of the poverty line—so that someone earning three-quarters of the poverty line is said to be short by a value of 0.25—and multiplying this fractional shortfall by the headcount index (see Deaton 2003, p. 9). The poverty gap index is thus a measure of the depth or intensity of poverty within the proportion of the population that is poor. The squared poverty gap index is calculated in the same way, but uses the squares of the fractional shortfalls from the poverty line in poor people’s incomes. This puts more emphasis on the very poorest, as it assigns greater weight to people the further they are from the poverty line. This has the advantage of reflecting the degree of income inequality among the poor. For example, suppose 40 per cent of the population of two countries is living below an arbitrarily chosen poverty line of two dollars a day. The average income for this group is 1.50 dollars a day in Country A and 0.75 dollars in Country B. In this example, both countries would have the same headcount index (40 per cent), but the poverty gap would be much greater in Country B. If the average income of those below the poverty line in a third Country C were also 0.75 dollars a day but incomes were distributed more unevenly so that the poorest people were poorer, Country C would have the same poverty gap as Country B but a greater squared poverty gap. Other income-based poverty measures are also used such as the SenShorrocks-Thon (SST) index and the Watts index, but these are not as widespread in the aid-poverty literature as the headcount, poverty gap, and squared poverty gap indices. For an in-depth explanation of all the above, see World Bank (2005b), pp. 69-82. Income levels do not reveal everything about poverty, however, as access to ‘merit goods’ such as free primary education or health care are also likely to have a significant impact on the welfare of the world’s poorest (Arndt, Jones and Tarp 2015). Health and educational poverty, Deaton (2003) notes, were ‘effectively eliminated’ through public service provision in places such as Costa Rica and Cuba, despite their having relatively low income levels. Nobel Laureate Amartya Sen, in his 1999 book Development as Freedom, argues that

2.4 macroeconomic effectiveness: poverty development can be seen ‘as a process of expanding the real freedoms that people enjoy.’ Not being able to enjoy the benefits of education or health care, or being denied political participation or a full role in society, can thus all be considered different forms of poverty separate to income poverty. Moreover, many development successes have occurred in countries experiencing little or no income growth, including advances in life-expectancy in many African countries through malaria eradication, vaccinations, and clean water provision (Deaton 2003, p. 13). Most aid-poverty studies, therefore, also investigate aid’s impact on a variety of social indicators as well as the headcount index or poverty gap. McGillivray et al. (2011), for example, use various indicators of well-being taken from the World Bank’s Health, Nutrition and Poverty dataset in the categories of wealth, education and health; Nakamura and McPherson (2005) look at aid’s effect on life expectancy, primary school enrolment, and infant mortality; and Gomanee et al. (2003) investigate aid’s impact on scores calculated by the Human Development Index (HDI). 2.4.2 Results of Aid-Poverty Studies Early studies in the aid-poverty literature typically assumed that aid would reduce poverty indirectly, either through its impact on growth or by encouraging recipient governments to adopt ‘better’ or more ‘pro-poor’ policies. Collier and Dollar (2001, 2002) extended the controversial conclusion of Burnside and Dollar (1997, 2000) that aid increased growth in countries with ‘good’ economic policies into the realm of poverty by arguing that, if more aid were allocated to these countries, an addition 9.1m people could be permanently lifted above the poverty line each year. This argument rests on two assumptions. The first is that aid only increases growth in ‘good policy environments’, though subsequent studies have suggested that this thesis is fragile. The second is that donors have little or no influence over recipient government policies. Gomanee et al. (2003) and Mosley et al. (2004), however, present empirical evidence against this—donors do have some leverage over the spending policies of aid recipient countries. In addition, they find that recipient government spending on health, sanitation and education has a favourable impact on the welfare of the poor, measured in terms of infant mortality and scores on the Human Development Index. They argue, therefore, that aid donors should use their leverage to encourage recipient governments to spend more in these areas, and suggest that aid can be effective—albeit rather indirectly—in reducing poverty when it encourages and finances ‘pro-poor’ government spending. The rest of the studies discussed in this section investigate aid’s impact on poverty directly. This strand of research begins with Boone

does aid work? (1996), which is more widely known for its controversial conclusion that aid does not, on average, contribute to economic growth. Boone recognised that, theoretically, aid could still be effective at reducing poverty if it financed ‘greater provision of public services to the poor’; however, his results suggested that aid has no significant impact on measures such as infant mortality, adult illiteracy and life expectancy, and he concluded that aid must primarily enrich elites in recipient countries instead. As discussed in the previous section, Boone’s paper was strongly criticised for its methodological approach (most notably by Hansen and Tarp 2000 and Clemens et al. 2004, 2012), and his findings should be viewed with some scepticism. Studies since Boone (1996) have reported mixed results. Masud and Yontcheva (2005) follow Boone by investigating aid’s impact on infant mortality and adult illiteracy. Like Boone, they conclude that, overall, aid has no impact on either indicator, although they find that aid distributed by NGOs, as opposed to bilateral aid, does significantly reduce infant mortality. They also find that recipient government spending has a significant impact on both indicators. The authors suggest that the apparent ineffectiveness of official bilateral aid could be explained by its poor allocation, since at the time of the study more official aid was given, on average, to countries which already had lower rates of infant mortality. A similar study by Nakamura and McPherson (2005) used data from up to 49 developing countries to investigate foreign aid’s impact on life expectancy, primary school enrolment, infant mortality, and the headcount index and concluded that ‘there is little evidence of a positive impact of aid on poverty reduction’. A further study by Chong, Gradstein and Calderon (2009) using data from 1972-2005 found some weak evidence that aid helps reduce poverty in countries with better institutions, but concludes that, overall, aid does not have a statistically significant impact on poverty or income inequality. The majority of studies, however, have found that aid is effective in helping to reduce poverty in recipient countries, though the relatively small number of studies available prevents firm conclusions from being drawn. Using a panel dataset covering over 80 countries from 1960 to 1998, Asra et al. (2005) concluded that aid has a positive effect in reducing headcount poverty. The same study also found that aid becomes less effective at reducing poverty as it rises as a proportion of the recipient country’s gross national income, becoming ineffective when it exceeds 26 per cent of GNI. This finding, familiar from the aid-growth literature, is supported by Woldekidan (2015), who finds that aid made a significant contribution to reducing poverty in Ethiopia between 1975 and 2010, but that it was also subject to diminishing returns. Bahmani-Oskooee and Oyolola (2009), who looked at data from 49 developing countries between 1981 and 2002, also concluded that aid helps reduce headcount poverty.

2.4 macroeconomic effectiveness: poverty A further study, Alvi and Senbeta (2012), concluded that aid not only reduces headcount poverty but also poverty severity, as measured by the poverty gap and squared poverty gap indices. Moreover, while previous poverty literature often assumed that poverty reduction was driven by rising incomes, Alvi and Senbeta controlled for average income and showed that aid in fact helps reduce poverty ‘separately from the effects of aid on income’. In other words, regardless of whether aid increases growth, aid is effective at reducing the scale and severity of poverty in recipient countries. An interesting additional finding of the Alvi and Senbeta (2012) study is that multilateral aid, and aid in the form of grants, are more effective at reducing poverty than bilateral aid and loans. This could suggest that bilateral aid is not allocated optimally for the reduction of poverty, or that multilateral aid agencies are more effective at targeting the very poor. In addition to the studies finding a positive effect of aid on incomebased measures of poverty, McGillivray et al. (2011) find that it has had a positive effect on ‘well-being’ in developing countries. The researchers divided a sample population from 48 developing countries into five sub-groups based on wealth and examined the impact of aid on each using indicators in the categories of health, wealth and education. McGillivray et al. concluded that aid was associated with ‘improvements in most of the well-being variables under examination’ (p. 20). For example, a 10 per cent increase in aid resulted in 7.28 per cent increase in average years of schooling for the three richer subgroups and a 4.75 per cent increase for the two poorer sub-groups. In the field of health, it resulted in a 3.51 and 2.01 per cent decline in mortality rates respectively. The good news, the researchers concluded, is that aid appears to benefit the poorest in society, while the bad news is that it works ‘least for this group’. The policy implication of the study is that aid is beneficial on a range of social indicators, but that care should be taken to avoid widening existing social inequalities. Positive effects of aid on poverty, measured by both the headcount index and various social indicators, are also identified by Arndt, Jones and Tarp (2015, p. 14). In addition to finding that aid contributed to growth and the causes of growth, as discussed in the previous section, the study found that sustained aid inflows of about 5 per cent over the period 1970-2007 had reduced headcount poverty by an average of 15 per cent, increased the average time spent at school by 2.8 years, lengthened life-expectancy at birth by 2.35 years, and reduced infant mortality by 14 in every 1000 births. Glennie and Sumner (2016, p. 59) note that all six of the available studies on aid and educational outcomes (Arndt et al. 2015; Bircher and Michaelowa 2013; Christensen et al. 2011; d’Aiglepierre and Wagner 2013; Dreher

does aid work? et al. 2008; McGillivray et al. 2011) show a positive relationship between the two. 2.4.3 Aid-Poverty Studies: Conclusions Surveying the literature on the relationship between aid and poverty, Riddell (2014a) claims that ‘almost all’ aid-poverty studies suggest that aid helps reduce the numbers living in poverty. Based on the evidence discussed above, this conclusion may be too strong. Several studies find little association between aid and poverty rates, whether measured in terms of headcount index or a range of social indicators. Nevertheless, recent empirical work has been more ‘encouraging’ (Feeny and McGillivray 2016), and the weight of the evidence suggests that aid flows are associated with a modest impact on most poverty indicators. In addition, some common findings can be teased out of the literature. The greater effectiveness of multilateral aid (Alvi and Senbeta 2012), aid distributed by NGOs (Masud and Yontcheva 2005), or ‘pro-poor’ spending by recipient governments (Masud and Yontcheva 2005; Gomanee et al. 2003; Mosley et al. 2004) all suggest that official aid is not allocated optimally for the reduction of poverty (also argued by Collier and Dollar 2001, 2002). This is supported by the often-cited findings of Alesina and Dollar (2000) that donor governments’ strategic interests, and even the UN voting record of aid recipients, influence aid allocation as much as the needs of recipient countries. Another important finding is that aid’s effectiveness at reducing poverty is subject to diminishing returns. As with growth, poverty reduction is caused by many different factors. Aid flows are a relatively small source of income for most recipient countries, and aid cannot end world poverty on its own: growth, technological progress, and trade agreements are all arguably more important. Nevertheless, aid is an important ancillary tool, provided it is well-targeted and that expectations of what it can achieve on its own are appropriately modest.

2.5

the micro-macro paradox revisited

This chapter began with a discussion of Paul Mosley’s micro-macro paradox, which claims that there is little or no observable relationship between aid and macroeconomic indicators such as growth and poverty rates, despite the high success rate of individual aid interventions. Three decades after Mosley’s original 1986 paper, more sophisticated econometric techniques, more data, and a better understanding of how macroeconomic phenomena such as growth work have led to great insights into aid’s effectiveness on the macroeco-

2.5 the micro-macro paradox revisited nomic level. There is now a large and growing corpus of evidence supporting the view that aid has a positive and significant effect on annual growth rates, particularly when measured over the long-term. A small number of studies have challenged this view, and these have often attracted significant attention for being outliers, but almost all have been subject to robust criticism. The evidence on aid’s direct impact on poverty is more mixed, but the majority of studies also suggest that aid is correlated with poverty reduction on a wide range of macroeconomic indicators, including headcount poverty index, life expectancy, and infant mortality. The implications of these findings are highly significant: developing countries, and the people who live in them, would be substantially poorer today if aid had never been given. This is not to say that aid is as effective as it could be, and even aid’s strongest supporters agree that there is much that could be improved in how aid is allocated and delivered. The complexity of the macroeconomic environments in which aid is used means that it can have negative side-effects and unintended consequences, even if it has a positive impact on growth and poverty overall. Donors should therefore be wary of seeing aid spending as an unalloyed ‘good’: the form aid takes, the long-term strategy it is part of, who it is given to and even the timing of its distribution all matter if it is to be as effective as possible. The next chapter shall explore some of the possible negative side-effects of aid.

3 3.1

CAN AID CAUSE HARM? aid critics and aid sceptics

The main criticisms of development aid found in the academic literature can be divided into two categories: explanations of why it has not worked better, and claims that it has made things worse. This paper will label the authors in the first category the ‘aid critics’. These authors generally believe that aid is necessary and can be helpful when used appropriately, but that the way it is delivered is often wasteful and needs to be reformed. One of the most well-known of these is William Easterly, who criticises what he sees as the aid community’s focus on overarching targets that hold no one accountable for their completion and ‘top-down’, expert-led interventions that serve more to satisfy the wishes of donor-country politicians than the specific needs of the people they are intended to help (see in particular 2006; 2009). For Easterly, change can only come from within a developing country and aid donors should accept the limitations of what they can do from the outside and focus on empowering individuals and communities to help themselves. Roger Riddell, whose 2007 book thoroughly surveys the existing literature on aid effectiveness, describes himself as a ‘critical friend’ to the aid community. Although he is more positive than Easterly about the contribution aid has made to international development, he also outlines a number of reasons it has been less effective than it could be. Those in the second category can be labelled the ‘aid sceptics’ and have a pedigree stretching back almost as far as aid itself. Milton Friedman, for example, argued in 1958 that aid would strengthen governments ‘at the expense of the private sector’ and thus ‘reduce pressure on the government to maintain and environment favorable to private enterprise’, harming growth and preventing developing countries from becoming self-reliant. Aid sceptics believe that development aid is systematically flawed and can cause more harm than good, arguing that aid flows for the purposes of development should cease altogether. One of the most influential academic voices in the aid-sceptical camp was Peter Bauer, who argued that aid diverts resources and scarce human capital away from productive uses and towards wasteful ‘white elephant’ projects (see Bauer 1971). The economist Sir Angus Deaton, who received the 2015 Nobel Prize for his work on consumption, poverty and welfare, has also argued that development aid undermines essential political and legal infrastructure such as prop-

can aid cause harm? erty rights and state capacity, and that these negative consequences outweigh its potential benefits. Aid scepticism has recently been popularised by Dambisa Moyo, who claims that aid is not merely ‘benign—it’s malignant. No longer part of the potential solution, it’s part of the problem—in fact aid is the problem’ (Moyo 2009 p. 47). Interestingly, there is broad support among both the aid critics and the aid sceptics for humanitarian aid, which constitutes about 10 per cent of total aid flows (for example, Moyo 2009, p. 7). In fact, as Riddell (2014, p. 3) points out, the line between developmental and humanitarian aid is often very blurred and there have been some notable humanitarian aid failures as well as successes. Critics of aid point to several ways in which it can harm developing economies. The most important of these are that it can fuel corruption, undermine democratic institutions by making recipient governments more accountable to donors than to their own people, and cause recipient countries’ export sectors to shrink by increasing the value of their currencies. In addition, it is well-recognised that high unpredictability in the volume of aid given to a developing country can be damaging to its long-term growth. This section will explore each of these criticisms in turn. As with the literature on aid’s effectiveness, the evidence is not always conclusive, although there is general agreement that aid can do all of these things in certain circumstances. The important policy question is whether the potential adverse consequences of aid can be avoided, and if not, whether they are serious enough to undermine the many positive contributions aid can make.

3.2

aid and corruption

One of the most common complaints against development aid is that it allegedly fuels corruption, whether on a grand scale by enriching dictators or in the form of petty thefts and embezzlements along the chain of distribution. That significant levels of corruption exist in the majority of aid-recipient nations is well-documented. According to Sir Edward Clay, the High Commissioner to Kenya from 20012005, corruption ‘infected every institution of the state’ (quoted in House of Lords 2012, p. 50). One study by Reinnika and Svensson (2004) found that only 13 cents of every dollar spent by the Ugandan government on education between 1991 and 1995 actually reached schools, with Uganda far from being a unique example. The detrimental effect of corruption on development is also evident. Mauro (1995) shows that corruption significantly lowers investment, thereby reducing economic growth. Al-Marhubi (2000) finds a significant positive association between corruption and inflation. Lambsdorff (2003) finds that an improvement of six points on the Transparency Inter-

3.2 aid and corruption national’s Corruption Perception Index (CPI), equivalent to lowering Tanzania’s corruption levels to those of the United Kingdom, could increase income levels by about 20 per cent.1 Moreover, as Svennson (2000) and Alesina and Weder (2002) show, there is no evidence that donors allocate less aid to countries with lower levels of corruption. Data from the World Bank shows that the five top recipients of Official Development Assistance in 2013—Egypt, Afghanistan, Vietnam, Myanmar and Ethiopia—received an average score of 25/100 on the CPI. Transparency International considers a score of less than 50 to indicate a ‘serious corruption problem’— though it should be noted that almost 70 per cent of all countries fall into this category, including some DAC aid donors themselves. According to Easterly, the top fifteen aid recipient nations in 2002 had a median rating among the bottom fourth of governments world-wide, measured on indicators such as democracy and corruption. Giving aid to countries with high corruption is only justifiable if it does not result in more corruption than before. Identifying the precise relationship between aid and corruption is difficult, not least because very little data exists on the scale and prevalence of corruption. Jeffrey Sachs argues that corruption and poor governance is essentially a consequence of poverty, claiming that ‘Africa’s governance is poor because Africa is poor’, and that as countries get richer their corruption levels also decline (Sachs 2005, p. 312). A 2003 study by Jos´e Tavares concludes that aid potentially decreases corruption. Kangoye (2011, pp. 12-17) also finds that more aid is associated with less corruption, although higher unpredictability in aid volume is associated with more corruption (see Section 3.5). The same conclusion is reached by Chervin and van Wijnbergen (2010, p. 26). Another study finds that aid is positively associated with corruption in countries with competing ethnic or social groups, and negatively—though weakly—associated with corruption in more ethnically homogenous societies (Svensson 2000, p. 453). From this evidence it can, at the very least, be concluded that there is no firm evidence that aid ‘in general contributes to corruption’, or that ‘when aid has been withdrawn from countries, this result[s] in less corruption’ (Riddell 2014b, p. 20). The fact that aid is given to highly corrupt countries provokes different reactions from opposing corners of the aid debate. Hard-line aid sceptics argue that it shows that money given as aid is wasted. According to Dambisa Moyo, foreign aid ‘almost exclusively lands up in the hands of a “lucky” few’, and ‘at least 25 per cent’ of the USD 525 billion the World Bank has lent to developing countries since 1946 has been misused; however, no sources are cited and the evidence behind these claims seems highly doubtful. Aid critics such as William 1 Measured on the old 10-point scale, as opposed to the 100-point scale used since 2012.

can aid cause harm? Easterly do not claim that donors should stop giving aid as a result of corruption but rather argue that instances of corruption show that the way aid is allocated and distributed is flawed. As a solution, Easterly suggests ‘dropping the obsession with always working through the government’ and favouring modalities less prone to corruption (Easterly 2006, p. 137). A 2012 House of Lords Report likewise recommended reducing the amount of aid given as budget support since this is more easily diverted from its intended purpose. Authors more sympathetic to aid observe that corruption is simply part of the reality of dealing with the world’s poorest countries and weakest governments and is not a phenomenon unique to aid: there is, for example, ‘no evidence to suggest that aid fuels corruption more than private sector engagement in poor countries’ (Riddell 2014b, p. 20). One of the paradoxes of international development is that aid is often the least effective where it is needed the most. For example, failing states in which there is little or no government capacity to oversee aid spending are likely to experience high levels of corruption, but these are also the countries most in need of external support. This suggests that seeking solely to maximise aid’s effectiveness may not be the best way to allocate it.

3.3

impact on institutions and governance

Another common criticism of aid is that, as an ‘unearned’ source of revenue separate from taxation, it can undermine a government’s accountability to its people and have a detrimental effect on the development of political institutions and democracy (Easterly 2006, chap. 4; Moyo 2009, pp. 52-60; Deaton 2013, pp. 294-307). Evidence that good institutions are essential to development is given by Acemoglu and Robinson (2012), Dollar and Kraay (2003) and Rodrik (2004), while Sachs’ (2005) view that good institutions are a result, rather than a cause, of development is ‘now a minority view’ (Moss, Pettersson and van de Walle 2006, p. 3). If aid can be shown to hinder the development of good institutions, it could have ‘negative implications over the very long-term (Jones and Tarp 2016, p. 266), whatever its other benefits. Theoretical models for how aid can hinder the development of good institutions assume that it behaves similarly to income from natural resources such as oil or minerals. The ‘natural resource curse’ is a well-known phenomenon in political science and is commonly given as one explanation for the lack of democracy in low-income, oil-rich countries in the Middle East and North Africa (see Ross 2001). A commonly cited model of how it operates is given by Acemoglu and Robinson (2006), who take as their starting point an autocratic state where political power is held by a small, wealthy elite. The larger,

3.3 impact on institutions and governance poorer, group of the population stands to gain from democratisation and wealth redistribution, while the elite would lose their privileged position. Although the poorer majority lacks political power, their relative size and the threat of revolution gives them some influence on the decisions of the elite. The elite is faced with three options: acquiesce to popular demands for democratisation and wealth redistribution; buy support through targeted concessions and hand-outs; or increase repression in order to prevent rebellion. As the second and third options are expensive, democratisation is most likely to occur in states without substantial income sources. Conversely, if the state has access to a steady and significant source of income such as natural resource rents, the elite is more likely to pursue strategies of repression or appeasement instead of giving up power. An alternative model of how income from natural resources harms public institutions suggests that they reduce the need for the regime to raise revenue through taxation, thus lowering the government’s accountability to its citizens and weakening the incentives for it to build effective public institutions. According to the Business Council for Africa UK, ‘[l]arge amounts of budgetary support by their very nature tend to undermine the democratic process by intervening between the government and its electorate because the government is neither accountable to, nor dependent on, the electorate for that part of its revenue’ (quoted in House of Lords 2012, p. 43. Proponents of this view argue that when a government wishes to collect taxes it is forced to seek a degree of popular consent, if not through political representation then at least by providing a minimum level of good government and showing respect for basic rights (see Shleifer 2009, p. 385). Conversely, if a government can raise revenue in other ways, a lower level of popular consent is necessary and democracy and human rights suffer. This situation is labelled ‘no representation without taxation’ by Michael Herb (2005) in an inversion of the famous American revolutionary slogan. The important question for donors and policymakers is whether there is a ‘foreign aid curse’ comparable to the natural resource curse. Br¨autigam and Knack (2004) find that higher aid levels in Africa are associated with both lower levels of governance and a lower tax share of GDP, suggesting that aid flows reduced recipients’ reliance on tax revenue. Knack (2004) finds no evidence that aid contributed to the wave of democratisation in the 1975-2000 period, although the paper does not suggest that aid was actively harmful to it either. A 2006 review of existing economics and political science literature on the relationship between aid and institutions by Moss, Pettersson and van de Walle suggested that, theoretically, ‘large and sustained volume of aid’ could have ‘negative effects on the development of good public institutions in low income countries’ (2006, p. 18). Although this study did not rely on any empirical data, several empirical studies

can aid cause harm? have subsequently emerged. Using panel data from 108 aid-recipient countries in the period 1960-1999, Djankov et al. (2008) concluded that aid not only has a strongly negative impact on political institutions, but that ‘aid is a bigger curse than oil’. A more moderate conclusion was reached by Busse and Groning (2009), who looked at ¨ a sample of 106 countries and concluded that aid had a small, but still negative impact on a selection of governance indicators. Rajan and Subramanian (2007) measure aid’s impact on governance indirectly by examining the interaction between aid and the growth rate of industries that are dependent on governance quality, and conclude that ‘in a country that receives more aid, governance-dependent industries grow relatively more slowly’ (p. 325). Dutta, Leeson and Williamson (2013) argue that both the optimistic and pessimistic views of aid’s impact on political institutions ‘may overstate the power of aid—aid does not have the ability to make dictatorships democracies or democracies dictatorships’; however, they do find that aid tends to have an ‘amplification effect’, making ‘democratic countries more democratic and already dictatorial countries more dictatorial’ (pp. 222-3). Wright (2009), however, argues that foreign aid can support democratisation even within dictatorships, but only if the dictator stands a good chance of winning subsequent elections. In the past few years, a case to the contrary has started to emerge. Altincekic and Bearce (2014) argue that there is no ‘foreign aid curse’ with respect to democracy, and identify three ways in which aid flows can be distinguished from income from oil or other natural resources: it is less fungible, more subject to donor demands on what it can be spent on, and more unpredictable. Kersting and Kilby (2014) find that aid has a positive effect on democracy in the long-run. Jones and Tarp (2016) use new and more extensive data on aid flows in the period 1983-2010 and find that aid has had a small, but positive effect on political institutions. After disaggregating aid flows according to type, they conclude that this positive effect is mostly driven by stable flows of aid specifically given for the purpose of improving governance. The authors do not conclude that their findings are ‘definitely causal’, but at the very least they ‘provide no grounds to claim that aid has had a systematic negative net effect on institutions, on average’ (p. 275). A recent paper entitled Aid is Not Oil (Bermeo 2016) finds that aid was associated with decreased democratic change during the Cold War, but that aid from OECD countries has not had this effect in the post-Cold War period. The source of aid is important: in a 2011 paper, Bermeo found that aid from democratic countries increases the probability of a recipient country’s undergoing a democratic transition, while the reverse is true of aid from authoritarian donors. The literature on the relationship between aid, political institutions and democracy is young in comparison to the literature on economic

3.4 aid and the ‘dutch disease’ growth. As can be seen from this brief review, the findings are somewhat mixed: before 2010, most studies suggested that aid does have a detrimental effect on institutional development in the same manner as natural resource revenue, while over the past few years a growing body of evidence has challenged this view, arguing that aid given by donors who prioritise democratisation can have a positive effect on institutions over the long-run. As Jones and Tarp (2016) note, the complexities of the political situation in each recipient country means that expecting a ‘simple, monotonic relationship’ between aid and institutional quality might be overly simplistic, and the priorities of both recipient and donor governments, the composition of a donor’s aid and the manner in which aid is given all play a role in determining aid’s impact on institutional development. Overall, more research is needed before firm conclusions can be drawn.

3.4

aid and the ‘dutch disease’

The question of whether there is a ‘foreign aid curse’ along the same lines as the resource curse is not limited to its effect on institutions and governance. Some aid sceptics, including Dambisa Moyo (2009, pp. 62-3), argue that large inflows of aid can harm a recipient country’s export sector, and thus its long-term development prospects, by causing its real exchange rate to appreciate. This phenomenon, known as the Dutch Disease, is commonly associated with windfalls from natural resources such as oil or diamonds. The term was coined by the Economist in 1977 to explain how the discovery of North Sea natural gas in 1959 contributed to the country’s deindustrialisation. A recent example of a country suffering from Dutch Disease is Ghana, which discovered oil in 2007 and began extraction at the end of 2010. Between 2011 and 2016, economic growth slowed down from 14 to 3.6 per cent. Growth in agriculture, which employs about half of the country’s labour force, fell from 5.3 per cent in 2010 to 0.8 per cent the following year, dropping still further to 0.04 per cent in 2015. Given the harmful effects substantial income from natural resources can have on a developing country’s economic development (Collier 2007, pp. 38-52), it is important to investigate whether aid can have the same adverse effects. A theoretical explanation of Dutch Disease was given in a 1982 paper by J. Peter Neary and W. Max Corden. The economy of a country experiencing an export boom can be divided into three sectors: the booming export sector, such as oil or mineral extraction; the nontradable goods sector, including construction, education, healthcare and services; and the traditional export sector, such as manufacturing or agriculture. Dutch Disease can be seen as a shift in resources from the production of exportable goods towards the non-tradeable

can aid cause harm? goods sector: in other words, the natural resource boom causes traditional export-based industries to decline, while spending on domestic goods and services increases. Neary and Corden propose two processes by which this happens (see also Ebrahimzadeh 2003). The first is the ‘spending effect’. Suppose a country discovers large deposits of diamonds. Mining and selling the diamonds brings in large quantities of foreign currency. In order to spend this money domestically it must first be exchanged for the local currency. If the country has a fixed exchange rate this increases the country’s money supply: incomes rise, and higher demand pushes up prices. One unit of foreign currency can now buy fewer goods and services in the country than before, meaning that the ‘real’ exchange rate, the ratio of the price level abroad and the domestic price level, has gone up. If the country has a floating exchange rate, the mechanism is different but the outcome the same: the increased demand for local currency pushes up the nominal exchange rate, and thus the real exchange rate. An overvalued real exchange rate makes it more expensive for the traditional export sector to sell its products abroad, and it begins to decline. At the same time, there is a ‘resource movement effect’: resources are diverted from producing tradable goods for export to producing non-tradable goods and services for domestic consumption. Since resource extraction typically does not create many jobs, more jobs are lost than created and unemployment rises. It is worth asking why a reduction in exports is necessarily a bad thing for a developing country. As Barder (2006) points out, ‘it is not intrinsically to a country’s benefit to make something for somebody else to consume’. Exports are only useful insofar as they provide a source of income with which to pay for necessary imports. If a country can pay for imports using income from natural resources or indeed aid instead, this reduces the need to build an export industry and frees up resources to make products for domestic consumption. If the inflow of resources were permanent, the move away from the production of exportable goods could be seen as a natural and sensible reallocation of resources to more productive uses. Nevertheless, resource booms, and inflows of foreign aid, are usually not permanent, and a decline in the export sector may harm a country’s long-term development prospects. Export-led growth has been, according to Barder, ‘the main path out of poverty for millions of people in the last three decades’ (2006, 8). According to Jones and Olken (2005), the majority of growth take-offs since the Second World War have been associated with ‘large and steady expansions in international trade’. Part of the reason for this is that trade increases productivity as a result of international competition and provides access to ideas and technologies from abroad. As a result, Rajan and Subramanian warn that any adverse effects on a country’s exports

3.4 aid and the ‘dutch disease’ ‘should prima facie be a cause for concern about the effects of aid on growth’ (2011, 20). A number of studies find a strong association between inflows of aid and decline in a country’s export sector, usually its manufacturing and agricultural industries. Elbadawi (1999), using panel data from 62 developing countries, found that aid inflows were associated with appreciation of the real exchange rate. Rajan and Subramanian (2005; 2011) found that countries that received large amounts of aid experienced slower growth in their export-based industries relative to the rest of the economy and that this was the result of appreciation of the real exchange rate: specifically, a 1 per cent increase in the ratio of aid-to-GDP was associated with a 0.2-0.3 shrinkage of manufacturing as a share of total GDP. A 2005 study by Arellano et al. based on data from 73 aid-recipient countries also found that aid had a ‘large negative impact on the output of the tradable goods sector’ (p. 31). Sundberg and Lofgren (2005) suggest that if aid to Ethiopia were to double from 20 to 40 per cent of GDP, Ethiopia’s exports might fall from around 14 per cent of GDP to just 8 per cent over ten years, with a 20 per cent appreciation of the real exchange rate (pp. 11-13). There is substantial evidence, therefore, that Dutch Disease can and does occur as a result of aid. However, a number of studies reveal that it does not occur everywhere, and that recipient countries are often able to manage any adverse effects by making sensible policy decisions. For example, a 2005 study by the IMF on five African countries that had recently experienced a surge in aid found no evidence of a Dutch Disease effect on exports as a result of aid inflows in any of the countries studied. In fact, in most countries there was a significant real exchange rate depreciation in the years during which aid surged, from 1.5 per cent in Mozambique to 6.5 per cent in Uganda (p. 23). Similar findings were reported by Ouattara and Strobl (2004) and Issa and Ouattara (2008), who found that aid inflows to 12 countries in the CFA franc zone and to Syria were strongly associated with a depreciation of the real exchange rate, and that Dutch Disease was not observed at all. Makhlouf and Mughal (2013) found that in Pakistan, remittances were associated with Dutch Disease, but aid was not. In addition, Nkusu (2004) argues that Dutch Disease need not occur in countries with enough unemployment to absorb the aid-induced increased domestic demand for non-tradable goods and services. Policies that may mitigate any adverse effects from Dutch Disease include using the additional income from aid to buy imports, which would help prevent appreciation of the real exchange rate, or investing it in the supply side in ways that improve productivity and growth (IMF 2005; McKinley 2005; Adam and Bevan 2003). Indeed, Barder (2006) suggests that previous studies on the relationship between aid and Dutch Disease have failed to take into account the fact that certain types of aid investment can increase a country’s produc-

can aid cause harm? tivity, and that this may offset and negative Dutch Disease effects. The IMF recommends considering the possible effects of Dutch Disease on a case-by-case basis, suggesting that a country with a fragile export sector ‘may wish to consider carefully the level of aid it can absorb without triggering too much real appreciation’, and ‘may also wish to seek aid in forms that are less likely to induce real appreciation’ (IMF 2005, p. 60). Overall, there is evidence to suggest that large inflows aid can result in real exchange rate appreciation and reduction in exports, but that it can also be managed effectively with appropriate policies. Indeed, in some countries, particularly in Africa, foreign aid has been associated with a depreciation rather than an appreciation of the exchange rate. Moreover, any adverse effects of Dutch Disease have to be balanced against the benefits that aid can bring to a country: as Barder (2006) argues, the welfare of a nation’s citizens is not only measured in economic output, and even a negative impact on output ‘is not a sufficient reason to think that aid may do more harm than good’ (p. 11). Dutch Disease should remain a matter of concern for aid donors and every effort should be made to avoid or mitigate its effects, but it does not constitute a robust argument against the giving of aid per se.

3.5

aid volatility

Aid is most effective when it is provided in a sustained and predictable manner (Riddell 2007, p. 228-9). In practice, however, this has not always been the case. US aid to Haiti, for example, increased twenty-fold between 1950 and 1960, fell by 75 per cent by 1969, increased again seven-fold by 1977, was halved, tripled, halved again, and eventually tripled once more between 2002 and 2009 (Desai and Kharas 2011). Aid inflows can be an alarmingly fragmented and unpredictable source of revenue for developing countries, compounded by the fact that the average recipient country receives aid from around 26 separate donors, each with their own changing allocation priorities and fluctuating aid budgets (Acharya, Fuzza de Lima and Moore 2004). According to Bul´ırˇ and Hamann (2003; 2008), aid flows are substantially more volatile than most recipient countries’ tax revenues, and a study by the Brookings Institution found that aid is three times as volatile as revenues from exports (Kharas 2008). Moreover, the situation does not seem to be getting any better: even though the Paris Declaration on Aid Effectiveness in 2005 contained a determination to make aid flows more stable, aid volatility appears to have worsened in the years immediately following the declaration (Bul´ırˇ and Hamann 2008), and an OECD survey in 2008 found that only 45 per cent of aid was disbursed on schedule.

3.5 aid volatility Aid volatility is not always bad, nor is it always unpredictable. Fluctuations in aid volume can be discussed with recipient countries in advance (Andrews and Wilhelm 2008), and changeable volumes of aid can sometimes provide a ‘cushioning’ effect against trade and climactic shocks (Collier and Dehn 2001; Chauvet and Guillaumont 2006). As Kharas (2008) notes, it is also important that humanitarian and food aid increase rapidly after crises such as natural disasters or conflicts, and the possibility of reducing aid to corrupt governments or increasing it in the wake of reforms gives donors some useful leverage in promoting policies good for development. Nevertheless, there is unusual agreement in the literature that volatility in aid flows can have a significant negative impact on development over the long-term, especially when these fluctuations in volume are unpredictable as well. Unstable aid flows can harm development in several different ways. Hudson and Mosley (2007) suggest that it can lead to a ‘proliferation of half-complete projects’, a high degree of staff turnover, and an uncertain policy environment which can deter investment. Kharas (2008) argues that uncertain government revenues can hinder fiscal planning and investment. Agenor (2016) also suggests that volatility could reduce the incentives to invest in skills and training in countries which derive substantial proportions of their incomes from aid. These theoretical concerns are supported by a large and growing body of empirical evience. Kharas (2008) shows that volatility of aid flows not only has a negative effect on growth, but also leads to volatility in inflation, the real exchange rate, and fiscal policy. Kharas claims that the cost of aid volatility in recent years has been equivalent to the value of about 15 per cent of total aid and about 1.9 per cent of the average recipient’s GDP, and that the negative income shocks created by unexpected loss of aid revenue to developing countries are as significant and as frequent as those that were caused in developed countries by the two World Wars, the Great Depression and the Spanish Civil War (pp. 8-9). Chervin and van Wijnbergen (2010) also examine the impact of aid volatility on 155 countries over the period 1966-2001 and conclude that aid volatility is significantly and negatively correlated with growth, though they find that aid itself is still positively associated with growth overall. Markandya, Ponczek and Yi (2010) also find that volatility harms growth, but add that its effects vary according to type of recipient: sub-Saharan Africa is strongly affected by volatility, while middle-income countries or countries with strong institutions do not appear to be affected. Aldashev and Verardi (2012) suggest that doubling the volatility of aid could reduce a country’s growth by a whole two-thirds, especially in countries with a large number of bilateral donors (pp. 3-4). Although there is general agreement among economists that aid volatility is bad for growth, Kharas (2008) comments that ‘aid volatility has not been taken seriously by policymakers’. According to a

can aid cause harm? 2010 Parliamentary Report on UK aid spending, ‘the predictability of aid flows remains low with just under half of all aid disbursed on schedule’ (p. 22). The 2011 Paris Declaration Monitoring Survey likewise found that only 43 per cent of total ODA flows was predictable in 2010, compared to 42 per cent in 2005 when reducing aid volatility was made an official target. One potential explanation for this is that guaranteeing aid flows over the medium-to-long term reduces the donor’s ability to exert influence over recipient governments or of diverting flows if they are used for corrupt purposes. Another is that aid agencies are under pressure to make projects ‘sustainable’ as soon as possible and to take every effort to avoid creating ‘aid dependence’. Nevertheless, these findings suggest that aid agencies should be cautious about weaning recipient countries off aid too suddenly, and that increases in aid should likewise be spread over manageable time horizons. Donors should work closely with recipients to ensure that predictable volumes of aid are given over a stable time frame and that disbursements are made on-time as much as possible. Project sustainability is not always achievable in the short-term, and international development is a far slower-run process than is often politically desirable. None of these concerns is a reason for not providing aid, as volatility constitutes a hindrance on the positive impact of aid rather than a harm in its own right. Instead, they are an opportunity for foreign aid to be made more effective in the future.

3.6

can aid cause harm? concluding remarks

As with almost any policy tool, aid can have potentially negative consequences in certain contexts. Aid initiatives do not operate in a vacuum but in complex social, political and economic environments, and the benefits of aid in one area must be weighed against the potential for negative ‘spillovers’ elsewhere. Yet while there is some evidence to support each of the potentially negative effects of aid outlined above, none is so severe that it undermines the overall positive impact of aid discussed in the previous chapter. Although large quantities of aid are given to highly corrupt recipients, the evidence appears to suggest that aid can help to reduce corruption in a recipient country, and that aid is at least no more prone to misuse than private investment. There is some evidence that aid may hinder the development of political institutions in certain environments, but recent evidence has challenged this finding, and the situation is likely to be more complex than a straightforward causal link. Aid can also lead to Dutch Disease effects, but these are not universal and can be managed effectively if recipient countries adopt appropriate policies. The most serious and well-documented problem with aid as currently

3.6 can aid cause harm? concluding remarks given appears to be the potentially harmful impact of unpredictable aid flows on growth. Donors clearly have room for improvement in this regard, especially since increasing the predictability of aid flows was a stated goal of the Paris Declaration in 2005. The key difference between the aid critics and the aid sceptics is the way they interpret these findings. Aid sceptics have generally emphasised the possible harmful effects of aid and ignored its many benefits, while aid critics treat these criticisms as areas for improvement. Aid is a complicated tool. Like a medicine, it can be effective when used in the right quantities and in the right contexts, but it can also have unintended side-effects, and it can cause harm when used inappropriately. Nonetheless, doctors still prescribe medicines because their benefits outweigh their known side-effects. The challenge for aid donors and aid recipients alike, therefore, is to maximise the positive impact aid can have while working to mitigate any negative consequences in order to make it as effective as possible.

4 4.1

W H AT D O E S A I D D O B E S T ? aid’s limitations: one tool among many

Although the majority of studies find that aid is effective at stimulating economic growth and helping to reduce poverty overall, some forms of aid appear to be more effective than others. Often the areas in which aid appears to have the most impact are those in which other sources of capital are less likely to be available, including helping countries rebuild after conflict or providing global public goods such as public health and research. Focusing aid on the areas where it can have the most impact is important since aid flows are relatively small in comparison to other sources of revenue to developing countries such as private investment or remittances. In 2010, the average low or middle income country received 0.64 per cent of its national income from aid (World Bank 2017a). The total value of remittances received by developing countries that year was 2.5 times ODA, increasing to three times ODA in 2015 (World Bank 2016, p. v). Greater still was foreign direct investment, which was almost four times the value of ODA in 2010, at over USD 509bn. Greatest of all was trade, with developing countries’ total export earnings worth more than 40 times total aid flows (data from House of Lords 2012, p. 16). As a result, in the words of Paul Collier (quoted ibid.), ‘[a]id is almost a sideshow in the portfolio’. Even aid’s strongest supporters acknowledge that ‘aid is not the main driver of development success’ (Radelet 2015, p. 214); instead, it is best seen as one development instrument among many (see Collier 2007). Making aid as effective as possible, therefore, has as much to do with recognising aid’s limitations as its capabilities. In order for aid’s scarce resources to be used as efficiently as possible they should ideally complement other resource flows or other methods of promoting development. One way to do this is to use aid to provide goods and services that are underfunded by other sources of revenue, especially public goods such as health interventions and research. Another is to use aid as a lever to stimulate yet greater flows of other forms of revenue for developing countries such as private investment. This chapter shall explore some of the ways in which aid’s positive impact can be maximised. It is not a comprehensive list, but instead identifies a few broad ideas on which the academic literature offers a general consensus.

what does aid do best? 4.1.1 Global Public Goods As a form of public money, aid is particularly well-placed to provide public goods, and many of the suggestions in this chapter will fall into this category. Public goods are commonly defined as goods that are non-rival and non-excludable; in other words, consumption by one group does not reduce consumption by another, and no-one can be excluded from benefiting from them. Classic examples of public goods at a country-level include flood control systems, street lighting, or clean air. Although everyone in a community benefits from public goods, the incentives for any individual person or organisation to provide them on their own may be insufficient, as it is always in every individual’s best interest to ‘free ride’ on the expenditures of others. A common solution to this problem for most countries is to pay for public goods out of public money, most commonly taxes. It is far more challenging, however, to provide public goods that benefit many different countries; Global Public Goods (GPGs). These could include measures to combat climate change and rising sea levels, the development of vaccines, or measures to prevent the spread of pandemics. Fighting this kind of problem is highly expensive and requires extensive negotiation between multiple actors in order to spread the cost burden. As a result, in the words of Birdsall and Diofasi (2015), ‘standard economic theory suggests that global public goods will be underfunded, because in a world of sovereign nations, no single nation can capture fully the benefit of its own spending’. Since ODA can be thought of as a form of global public money, it is uniquely placed to help provide GPGs and development-related public goods, especially if it can be provided on a multilateral level to improve co-ordination and to minimise the proliferation of donors. At present, an estimated 8 to 10 per cent of total ODA is spent on GPGs (Development Initiatives 2016; Birdsall and Diofasi 2015). The UK is already the fourth-largest contributor of ODA towards GPGs, although it spends significantly less than Germany, which takes first place (Development Initiatives 2016). Increasing the amount of ODA the UK spends on GPGs could be an efficient way to allocate aid resources. Birdsall and Diofasi (2015) argue that GPGs are ‘excellent investments’, noting that an investment of less than one billion USD in early warning systems for natural disasters in developing countries could save 4 to 36 billion USD a year (see Hallegatte 2012). Moreover, as the 2016 Development Initiatives report comments, ‘[t]he future financing of GPGs overlaps considerably with the financing of a number of related SDGs’, since the 2030 Agenda for Sustainable Development places a ‘greater emphasis on goals that are global in scope and holds a higher degree of universality in its coverage’ than its predecessor, the Millennium Development Goals (MDGs).

4.2 aid and public health

4.2

aid and public health

In an increasingly interconnected world, the prevention of epidemics or the development of treatments and vaccines for communicable diseases holds an importance for the entire global community. Diseases can spread and cross borders rapidly: Spanish Flu killed 50 to 100 million people in the two years following the end of the First World War, and outbreaks of bubonic plague have periodically decimated populations since Antiquity. Global public health is therefore an important global public good, particularly for the developing world. Public health is also an area in which aid has historically been hugely effective: as a recent Policy Exchange report observes, ‘[d]evelopment aid targeted at improving public health has a much clearer track record of success than pure economic aid’ (Dupont 2017, p. 33). Even aid’s harshest critics have generally conceded that health-related aid interventions have often been highly successful. Angus Deaton (2013) notes that the number of people worldwide receiving antiretroviral drugs for HIV has more than tripled as a result of aid, from one million people in 2003 to ten million in 2010, and that ‘aid has saved millions of lives in poor countries’ (p. 307). William Easterly also claims that ‘health is the area where foreign aid has enjoyed its most conspicuous successes’ (2006, p. 213), and he suggests that this may be partly for structural reasons: health interventions typically have ‘narrow, monitorable objectives’ with easily observable outcomes and strong feedback structures, all of which Easterly believes are essential for foreign aid to be successful. Many of the most successful and well-publicised achievements of health-related aid have been in so-called ‘vertical’, or disease-specific, initiatives. A Working Group set up in 2003 by the Center for Global Development documented a large number of these successes in their 2004 book Millions Saved: Proven Successes in Global Health (3rd ed. 2016). Amongst these, they note that vaccination campaigns in seven African nations have almost eliminated measles as a cause of childhood death in the region, with cases falling from 60,000 as recently as 1996 to just 117 in 2000. Dramatic reductions have also been made in cases of river blindness (onchocerciasis), and a campaign to promote oral rehydration therapy in Egypt led to infant deaths from diarrhoea falling by 82 per cent between 1982 and 1989. In addition, a global campaign to eradicate Guinea worm disease, a debilitatingly painful parasitic infection caused by drinking contaminated drinking water, has reduced the number of cases of the disease worldwide by over 99.99 per cent, from approximately 3.5 million cases in 1986 to just 25 in 2016. Asia has now been declared free of the parasite, and rapid progress is being made in eradicating it from sub-Saharan Africa, the only region in which the disease is still found. This campaign, which was led by the Carter Center and the Centers for Disease Control

what does aid do best? and Prevention, received funding from a wide range of bilateral and multilateral aid organisations. Steven Radelet also notes that malaria deaths fell by 47 per cent worldwide between 2002 and 2013, with the vast majority of lives saved being children under the age of five. Aid spending on malaria prevention had increased from USD 149m in 2000 to almost 1.2bn in 2008, and Radelet claims that ‘there is little doubt that these lives would not have been saved without aid’ (2015, p. 212-13). By far the most impressive ‘vertical’ health initiative was the total eradication of smallpox between 1966 and 1980, roughly a third of which was funded by aid. Smallpox killed an estimated 300m people in the 20th-century, three times as many as both World Wars combined, even though a successful vaccine—in fact, the first ever vaccine—had been available since 1796. In addition to the incalculable number of lives that eradicating smallpox has saved, it was also stunningly cost-effective: according to one estimate, the USA saves the total value of its contributions to the smallpox eradication effort every 26 days (see Glassman and Temin 2016). Following in the footsteps of the smallpox eradication campaign, the Global Polio Eradication Initiative was established in 1988 and hopes to make polio the second disease in human history to be eradicated entirely. Since there is evidence to suggest that a 10 per cent reduction in cases of malaria in a malaria-intensive country is associated with 0.3 per cent additional growth (Gallup and Sachs 2001), fighting preventable diseases is not only important for human welfare, but has important long-term implications for development as well. Public health is thus a public good that aid has been extremely effective at providing. Even so, there is still far more that aid could do to improve public health in the developing world. Each year, a third of all potential healthy life years are lost to disease (Roser 2017), and the rise of antimicrobial resistance (AMR) to diseases such as tuberculosis poses a grave additional threat over the next half-century. A recent World Bank report estimated that the projected rise in AMR could create economic losses over the 2015-2050 period totalling USD 85 trillion in GDP and 23 trillion in trade, and suggested that there could be an additional 24.1m people living in extreme poverty by 2030 as a result (Ahmed et al. 2017). Focusing more aid resources on global public health, including the total eradication of diseases such as polio, Guinea worm, elephantiasis, and blinding trachoma, could be highly beneficial both for human welfare and for economic development. Evidence on the success of ‘horizontal’ health initiatives, which aim to strengthen a country’s existing healthcare institutions, is more mixed than for vertical initiatives, and Deaton draws attention to the fact that success in one area of public health may draw resources away from other areas that attract less donor interest. Nevertheless, horizontal initiatives should not be neglected as countries must build

4.3 sponsoring research up their own health services in order to develop in a sustained way. As with project aid, lower observable success rates for horizontal initiatives do not necessarily mean that aid is ineffective, as often the impact aid has on complicated systems can only be seen over the long-term. Overall, there is unusual agreement across the aid debate that aid is particularly effective in the field of public health. Despite this, only 16 per cent of ODA spent on GPGs in 2014 was spent on health, compared to the 62 per cent spent on the environment (Development Initiatives 2016). Donors could therefore have a significant impact by increasing their efforts in this area.

4.3

sponsoring research

Another global public good that aid can help provide is ‘[t]he generation of knowledge through research with potential worldwide use’, such as advances in medical knowledge or the development of new means of refrigeration or water purification (Development Initiatives 2016). As Angus Deaton observes, many of the greatest improvements in people’s welfare in developing countries have been through the free transfer of knowledge, such as germ theory of disease, or of new technologies such as the seed drill (2013, p. 315). Once a treatment for a disease has been discovered it can be shared immediately and cheaply: for example, the discovery of oral rehydration therapy during a cholera outbreak in a refugee camp in 1973, and its subsequent application in situations elsewhere, prevented millions of deaths around the world by reducing the mortality rate of diarrhoea by 93 per cent. Costing only a few cents a dose, oral rehydration therapy was described in 1978 by The Lancet as ‘potentially the most important medical advance of this century’. The private sector has played a crucial role in the development and production of the vast majority of medicines used today. Using patents to grant pharmaceutical companies an effective monopoly on the sale of a new drug for a limited period after its discovery provides companies with the incentive to fund research into new drugs. This model, however, breaks down when there is insufficient demand for a treatment to make research into it commercially viable, either because only a small number of people need the treatment, or, more troublingly, because the disease in question affects mainly poorer people who could not afford the cost of the treatment. This situation is clearly morally objectionable: the relative wealth of sufferers of a disease should not affect their chances of obtaining effective medication. Deaton suggests that aid money could be used to reward pharmaceutical companies for developing treatments for neglected diseases. An ambitious version of this scheme is outlined by the philosopher

what does aid do best? Thomas Pogge (2002), who proposes a global ‘Health Impact Fund’ which would reward pharmaceutical companies according to the benefits, measured in terms of Quality-Adjusted Life Years (QUALYs), that their drugs bring. Reward payments would replace profits from sales of the drugs, which would be sold roughly at cost. This scheme, however, would pose numerous practical difficulties, not least the question of how to measure a drug’s true impact. A similar, but more achievable, incentive structure can be created by the establishment of prize funds to reward successful research into pre-selected topics. The UK’s Longitude Prize, for example, offers GBP 10m to any individual, charity, private company or research institution that successfully develops a ‘diagnostic test that helps solve the problem of global antibiotic resistance.’ The Prize is named after a similar fund of GBP 20,000 that was set up by the British Government in 1714 to reward anyone who could find a portable, practical way to calculate geographical longitude from any reference point on the globe. In 2015, the UK spent GBP 12.1bn on aid, the equivalent of 1,210 modern Longitude Prizes. If enough money were set aside in one go or over a number of years, prize money could be taken out of the interest and the prize would be self-sustaining. A third strategy, known as an Advanced Market Commitment, is that ‘aid could be used to commit resources for the purchase of vaccines’ for diseases such as AIDS, malaria and TB ‘as a spur to the private development of such a vaccine’ (Kenny 2006). As with a prize fund, the guarantee that vaccines will be purchased by donor governments helps replace the absent market incentives for research and development (see Barder, Kremer, Levine 2005). In 2014, two billion USD of total ODA was spent on research, accounting for 15.5 per cent of all ODA spent on GPGs that year (Development Initiatives 2016). Given the transformative potential of new knowledge and innovative technologies, increasing the amount of aid money used to fund research into new technologies and medical treatments could potentially generate very high returns. Moreover, this is an objective uniquely suited to aid since it addresses an instance of market failure where other sources of revenue are less likely to be available.

4.4

helping countries rebuild after conflict

According to Donaubauer et al. (2016), it is ‘widely believed’ that aid can also be ‘particularly effective’ in helping countries recover after periods of conflict. An influential 2004 study by Paul Collier and Anke Hoeffler, which used data from 27 countries recovering from conflict in the 1990s, found that aid was ‘unusually productive’

4.4 helping countries rebuild after conflict in post-conflict situations and typically contributed around two percentage points to economic growth for a short period following the resolution of a conflict. The study was clear that this ‘temporary growth spurt’ was in addition to the growth that would have been expected without aid. Liberia, for example, suffered a brutal civil war for much of the 1990s and the early 2000s in which almost 1 in 12 Liberians were killed. After the end of the war in 2003, Liberia made a ‘remarkable recovery’, experiencing 8 per cent annual economic growth between 2005 and 2013 (Radelet 2015). According to Liberia’s President Ellen Johnson Sirleaf, foreign assistance—as well as the ‘billion of dollars of private investment’ that was stimulated by donor support—was invaluable to Liberia’s recovery. Without it, President Sirleaf claims, Liberia ‘might have even plunged back into conflict’ (Radelet 2010, p. 6). In the study, Collier and Hoeffler suggest that aid’s effectiveness in postconflict situations arises from the fact that war-torn countries need to rebuild damaged buildings and infrastructure despite a huge loss in government revenue. The capital needed for economic reconstruction, therefore, has to be supplied from outside. Since other external sources of revenue such as foreign investment are unlikely to be available immediately because of the high risks associated with post-conflict situations, foreign aid thus fills a very important gap. Collier and Hoeffler’s original 2004 study was broadly corroborated in 2005 by Kang and Meernik, who found that GDP growth increases by 0.007 per cent per year for every dollar per capita given in foreign aid. Kang and Meernik warned that aid is a ‘necessary, but not sufficient, condition for post-civil war recovery’, and emphasised that over the long-term ‘economic growth is premised on sound economic policies, private investment, and other auxiliary factors such as human capital’. Elbadawi, Kaltani and Schmidt-Hebbel (2008) also found that aid’s tendency to push up the real exchange rate—as discussed earlier in Section 3.4 on Dutch disease—is very limited in post-conflict environments, making aid more effective than usual. A 2014 study by Garriga and Phillips also found that aid can help attract greater flows of foreign direct investment, as in the case of Liberia, since ‘the decision to send aid to a country signals the donors’ trust of local authorities’. This effect, however, is only observed so long as aid is not perceived to have been motivated by donors’ geostrategic interests; indeed, the authors observe that aid from the US in particular ‘seems to function as a warning sign, and not a security guarantee’ to investors because of the US’s historic tendency to give aid for geostrategic purposes. A similar qualification was made by Girod (2012), who found that aid can help reduce infant mortality after conflicts, but only in countries which are of low strategic interest to aid donors. Timing is important, however, if post-conflict aid is to be as effective as possible. According to Collier and Hoeffler, the period in

what does aid do best? which aid is most effective does not begin immediately, but starts roughly four years after the resolution of a conflict and ends after seven. Flores and Mooruddin (2009) also identified timing to be a crucial factor in determining the success of post-conflict aid, finding that aid ‘speeds time to recovery’ when it is provided within the first three years after the end of hostilities, but can retard recovery when given after seven years or more. A similar finding was reported by Elbadawi, Kaltani and Schmidt-Hebbel (2008), who reported that ‘aid disbursed after attainment of peace promotes higher growth than during conflict or at the very end of the postconflict period’. In a 2010 World Bank working paper, Collier, Chauvet and Duponchel find that supervision ‘is a crucial determinant of the success of projects’ in the post-conflict period. The particular importance of aid after a conflict is also highlighted by the authors’ recommendation that privatesector projects ‘should wait’ for a few years after conflict resolution, since they face a ‘higher probability of failure in the first years of peace’. A recent paper by Donaubauer, Herzer and Nunnenkamp (2016) examines the effectiveness of post-conflict aid in different sectors, finding that aid can be effective at improving social infrastructure such as ‘education, health, water and sanitation, and governance’ after a conflict, but that it appears to be ineffective at improving economic infrastructure such as ‘transportation, communication, energy, and finance’. As a result, they argue that there is not only a need for ‘timely and predictable aid’, as discussed in the previous chapter, but also ‘careful sector-specific targeting of post-conflict aid’, with greater priority given to social infrastructure such as schools, sanitation facilities and helping to rebuild civil society. Donaubauer, Herzer and Nunnenkamp’s findings appear to be at odds with those of Collier, Chauvet and Duponchel (2010), who find that World Bank projects in the transport and urban sectors appear to be particularly successful, while projects in the education sector are less so. More research is clearly needed to resolve this ambiguity. The majority of the evidence thus supports the view that aid can be particularly effective in post-conflict environments. Peacekeeping and post-conflict reconstruction are not only essential for economic development but are also global public goods, and aid is betterplaced to provide these than other sources of revenue. Aid given to fragile states in sectors linked to the Peacekeeping and State-building Goals (PSGs), which were established in 2011, is still insufficient (Belgian Development Agency 2015), and this is consequently an area in which donors could consider increasing their support.

4.5 stimulating private investment

4.5

stimulating private investment

Aid’s impact can also be magnified significantly if used as a lever to stimulate even greater flows of alternative sources of capital. In recent years, the role aid can play in ‘crowding in’ private investment has received significant attention from the development community. A recent DAC Communiqu´e notes that the ‘private sector is fundamentally important in driving growth, creating jobs, generating wealth, and increasing public revenues through taxation’, and argues that ‘[p]ublic resources, appropriately and effectively deployed, can mobilise significant private investment for development’ (DAC 2016a). At present, involvement of the private sector is relatively low in the world’s poorest countries because ‘returns are too low to attract investment given their risk’ (Barder and Talbot 2015, p. 24). Barder and Talbot divide the ways that aid can be used to correct this market failure and attract greater volumes of private investment into three categories: subsidies, guarantees, and paying for success. Subsidies Aid donors can subsidise the involvement of the private sector in developing countries by offering capital at below-market rates (Barder and Talbot 2015, p. 9). Development finance institutions such as DFID’s CDC Group (formerly the Commonwealth Development Corporation) already make loans to the private sector for investments that promote development, but they typically seek commercial rates of return: as the CDC’s chairman put it, its mission is ‘to do good without losing money’ (Pilling 2017). Paul Collier (2013) suggests that using aid money to provide concessional loans could encourage job-creating industries to move to poorer economies. Concessional finance from Multilateral Development Banks to the private sector in developing countries has increased significantly since the late 1990s: according to Perry (2011, p. 4), loan disbursements increased from USD 3bn in 1998 to 12.2bn in 2009. More broadly, aid can be used to subsidise the provision of infrastructure and other public goods which make it easier for private firms to operate in developing countries. Small, isolated economies (SIEs) such as landlocked countries or remote islands often lack the highquality infrastructure needed to connect them to the global economy. Paul Collier (2013) argues that if international donors were to commit to providing SIEs with both the upfront and the maintenance costs of roads and other infrastructure, this would lower the costs of engagement with the global economy and help attract private investment. Herzer and Grimm (2012) argue that if aid were ‘more systematically used for investment’ in infrastructure, research, and training a better-skilled workforce, private investment ‘would likely respond positively’. The authors note that, at present, aid tends to

what does aid do best? be negatively correlated with foreign investment overall, suggesting that more needs to be done to encourage the use of aid as a lever for private investment. Simon White (2005) argues that different approaches are required depending on the recipient country’s situation. In fragile states, White suggests that aid aimed at encouraging private investment should focus on state-building, strengthening the rule of law, and maintaining political and economic stability. In countries that are already experiencing growth, White recommends ’supporting the reform of the policy, legal and regulatory framework. . . and improvements in tax regimes’ (2005, p. 41).

Guarantees Guarantees encourage private investment by ‘shifting some or all of the costs of failure to the public sector’ (Barder and Talbot 2015, p. 6), thus lowering investors’ risk. For example, aid can be used to provide political risk insurance, which protects against eventualities such as conflict or political upheaval. This is currently offered by the World Bank’s Multilateral Investment Guarantee Agency (MIGA) and the United States’ Overseas Private Investment Corporation (OPIC); however, Collier (2013) argues that these institutions are not currently financed in a way that allows them to make a commercial loss, meaning that they are forced to offer insurance at commercial rates. Aid could be used to make political risk insurance cheaper for potential investors, provided that their activities are seen to be beneficial for development. According to Ramachandran et al. (2014), the seven largest development finance institutions issued USD 11.5bn of guarantees in the 2013 financial year, of which only USD 3-3.5bn was in the form of political risk insurance.

Raising Returns by Paying for Success Alternatively, aid can encourage private investment in developing countries by ‘provid[ing] a subsidy that is linked to specific measures of a firm’s success or performance’ (Barder and Talbot 2015, p. 9). This includes AMCs, as discussed in Section 4.3, and Development Impact Bonds (DIBs), which link returns to defined development goals. The first DIB was designed by Social Finance UK in 2010, and succeeded in cutting recidivism among inmates from Peterborough Prison by 9 per cent (Social Finance 2017). As of 2014, a similar scheme is being run in Rajasthan, India to increase girls’ access to education. Barder and Talbot argue that paying for success costs the aid donor roughly the same as subsidies and guarantees, but that it offers better value for money, since it rewards investors according to the benefits their projects have for developing countries.

4.6 what does aid do best? concluding remarks

4.6

what does aid do best? concluding remarks

Aid is a scarce resource, and in most cases constitutes only a small proportion of the income developing countries receive from abroad. Development is a slow process and many of its essential prerequisites, which include an educated and productive workforce, strong institutions, and a diversified economy, require sustained investment in many different areas over a long period of time. Wealthy countries should not limit their development efforts to providing aid: lowering tariff barriers to developing countries, using diplomacy to foster regional stability, combating capital flight, and working with the private sector to ease the flow of remittances could all potentially have an even greater impact on growth and poverty reduction. Nevertheless, aid plays an important ancillary role in international development, and using it to complement alternative sources of revenue to developing countries can help maximise its efficiency and effectiveness.

CONCLUSION Sceptics assert that aid is a waste of money, at best ineffective and at worst harmful. Yet the majority of studies show that, in the main, aid has a measurable, positive impact on economic growth and helps to reduce poverty across a range of indicators. Individual aid projects have a high rate of success, and millions of lives are saved or transformed each year by aid-funded initiatives. There is more agreement between aid’s proponents and its critics than is often assumed, with both sides making constructive suggestions for how aid spending can be improved. Serious challenges for the development community remain, including the proliferation of aid agencies, the lack of coordination between development agencies, and the persistently high levels of aid volatility. Nevertheless, the hard-line sceptical view that aid actually hinders development is well outside the academic consensus and is supported by very few recent studies, if any. Aid is only one development tool among many, and it should be part of a wider development strategy shared by both donors and recipients. Concessionary trade policies, efforts to combat capital flight, and private sector involvement can all potentially have a greater impact on the world’s poorest countries than aid. But aid also has unique advantages: as public money, it is well-placed to help deliver GPGs such as public health and research, and it can help fragile countries to rebuild after periods of conflict. If used appropriately, aid can also stimulate additional private resources for development, greatly magnifying its own impact. Moreover, aid particularly benefits the poorest sections of society, while the benefits of trade and FDI are skewed towards richer income groups. Meeting the SDGs’ targets of eliminating extreme poverty by 2030 and sustaining rapid economic growth in the world’s poorest countries will be a tremendous challenge, and most of the effort will come from developing countries themselves. Nevertheless, the eradication of smallpox and the huge progress made against polio, Guinea worm and other preventable diseases are testament to aid’s potential to save and transform millions of lives, and rich countries such as the UK can support this process by continuing to provide generous levels of foreign aid. If aid is targeted appropriately, with relevant safeguards in place, the next few decades could see it contribute significantly towards the elimination of extreme poverty once and for all.

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