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Development Aid: A Mixed Track Record


Fredrik Thor

By

September 16th, 2016


Extreme poverty has never been lower in the history of mankind. 135 billion USD is spent on official development aid every year. However, to eradicate extreme poverty, is the answer to simply increase aid? Fredrik Thor investigates.


In the World Bank’s latest projection, it is believed that for the first time, less than 10% of the world’s population are living in extreme poverty, down from 37% in 1990. The biggest improvements can be seen in East Asia, especially China, where hundreds of millions passed the poverty line of 1.9 USD a day. Yet some areas are still struggling. For example, 43% of the population in Sub-Saharan Africa remains extremely poor.[1]

Proponents of development aid, most notably Columbia University’s Jeffrey D. Sachs and the United Nations, argue that extreme poverty could be eradicated with the right tools and resources, if developed countries pledge to give 0.7% of GNP for 20 years.[2]

According to the authors of “Poor Economics”, questions regarding poverty, development and aid tend to be big and philosophical.[3] Does aid work? Can rich countries really help poor countries in the end? Largely, the question of aid historically tends to divide economists into two camps as described by the authors Duflo and Banerjee; the supply side and the demand side. The supply side argues that aid does work because poor people are trapped in poverty, and resources in the form of aid can help break the cycle. The demand side argues that aid does not work, as there often is no structure or demand for the resources allocated. Instead, the focus should be on markets and incentives. Duflo and Banerjee instead believe that economists should focus on the small questions; to evaluate specific policies and social interventions in order to figure out what works, piece by piece. Instead of a big and generalised debate without clear answers, the answer to extreme poverty is more nuanced.

On the macro level, it is heavily contested whether on average, bilateral aid directed to governments, which forms about 80% of official development assistance,[4] has a positive effect on growth. Many metastudies cannot find a positive link between aid and growth.[5] On the other hand, influential papers that do show a positive effect tend to show only a small positive correlation, or contend that a good policy environment in the assisted country is a prerequisite.[6] Therefore, if we are altruistically motivated, the question of allocation of aid is evidently problematic. Nobel Laureate Angus Deaton described this paradox; that the countries in most need of assistance also tend to have a bad policy environment. Accordingly, the countries with the best policy environments are usually not the poorest and therefore not in most need of external help.[7] With the optimal aid allocation choice being for those countries in need that have sound institutions, this creates a tough dilemma given altruistic aims, as no choice of allocation according to this principle is ideal.

Development aid is still a tiny fraction of the world’s income. In 2014, it was around 0.29% of the OECD’s gross national income,[8] and the money governments do allocate to official development assistance is not always simply motivated out of altruism, as former colonies and strategic allies are usually overrepresented.[9] About half of official development assistance furthermore goes to either middle-income countries or autocratic countries, enlivening Deaton’s paradox.[10] Aid is therefore small and probably inefficient in many ways, and would need to be restructured in order for it to have a more significant impact. Furthermore, many countries spend significantly more on domestic social programs,[11] and have foreign direct investments many times exceeding the allocated development aid.[12] These activities should not be overlooked in terms of income and impact, as well as the ways they can be shaped to benefit people in extreme poverty.

It would therefore be worthwhile to change the direction from the current focus on monetary assistance to other proven factors that could alleviate poverty. We should not assume that all money spent on aid has a big impact and shift away from the paradigm of measuring aid simply in money spent. A lot of factors are involved in the decision making of aid allocation, including politics, which can have big implications on the outcome. On the receiving side, Deaton also believes that the social contract between citizen and government is weakened if aid becomes a significant part of the budget.[13] Much like the concept of rentierism in political science, where a state as a result of external economic rent becomes less dependant on other incomes such as tax, it can have negative effects on representation and democracy.[14]

However, this does not necessarily mean that development aid always is ineffective or should be discarded. Echoing the likes of Duflo and Banerjee in “Poor Economics”, in the last couple of years, there are new methods to find efficient policies on a micro level, such as measures of health and schooling. These can address issues other than national growth, which often serves as a success measure only evident in the long term. Health interventions such as malaria prevention and deworming have been shown to be very cost-effective;[15] and Angus Deaton, whilst a skeptic, still believes in some interventions such as vaccinations.[16] There are clearly ways to improve life conditions; but to help poor, undemocratic countries to grow solely through official development assistance remains problematic.

 

Image source: http://reuters.com

[1] Poverty Overview. (2016). Worldbank.org. Retrieved 13 September 2016, from http://www.worldbank.org/en/topic/poverty/overview

[2] UN Millennium Project | Press Archive. (2016). Unmillenniumproject.org. Retrieved 14 September 2016, from http://www.unmillenniumproject.org/press/07.htm

[3] Banerjee, A., & Duflo, E. (2012). Poor economics: A radical rethinking of the way to fight global poverty. PublicAffairs. p. 3.

[4] Deaton, A. (2013). The great escape. Health, wealth and the origins of inequality. Princeton: Princeton Univ Press. p.276.

[5] Doucouliagos, H., & Paldam, M. (2008). Aid effectiveness on growth: A meta study. European journal of political economy, 24(1), 1-24; Mosley, P., Hudson, J., & Horrell, S.. (1987). Aid, the Public Sector and the Market in Less Developed Countries. The Economic Journal, 97(387), 616–641; Rajan, R. G., & Subramanian, A. (2008). Aid and growth: What does the cross-country evidence really show?. The Review of economics and Statistics, 90(4), 643-665.

[6] Burnside, A. Craig and Dollar, David, Aid, Policies, and Growth: Revisiting the Evidence (March 18, 2004). World Bank Policy Research Working Paper No. 3251.

[7] Deaton, A. p. 273.

[8] Official Development Assistance | TRACKING SUPPORT FOR THE MDGS. (2016). Iif.un.org. Retrieved 16 September 2016, from http://iif.un.org/content/official-development-assistance

[9] Alesina, A., & Dollar, D. (2000). Who gives foreign aid to whom and why?. Journal of economic growth, 5(1), 33-63; Schraeder, P. J., Hook, S. W., & Taylor, B. (1998). Clarifying the foreign aid puzzle: A comparison of American, Japanese, French, and Swedish aid flows. World Politics, 50(02), 294-323.

[10] Deaton, A. p.276.

[11] Banerjee, A., & Duflo, E. (2012), p. 5.

[12] Ibid, p. 278.

[13] Ibid, p. 298.

[14] MacQueen, B. (2013). An introduction to Middle East politics. Sage. p. 191.

[15] Against Malaria Foundation (AMF) | GiveWell. (2016). GiveWell. Retrieved 16 September 2016, from http://www.givewell.org/international/top-charities/amf; Baird, S., Hicks, J. H., Kremer, M., & Miguel, E. (2015). Worms at work: Long-run impacts of a child health investment (No. w21428). National Bureau of Economic Research.

[16] Deaton, A. (2013). p. 306.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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