All entries for Sunday 10 July 2005

July 10, 2005

Aid Is/Isn't effective

The recent G8 discussions on Africa's development have left many NGOs and think tanks disappointed with the new funds being promised. On the topic of increased aid, Jim of Our Word Is Our Weapon links to a study by Mark McGillivray of the World Insititue of Development Economics Research (WIDER) summarising literature implying the effectivness of aid and outlining trends in aid provision.

Contrary to studies published by the Cato Institute and The Globalisation Institute, the paper “finds overwhelming evidence that aid increases growth and other poverty-relevant variables. By implication, therefore, it can be inferred that poverty would be higher in the absence of aid.”

The apparent conflict between this study, and ones claiming the ineffectivness of aid are often attributed to differences in model specification, different datasets and the composition of aid measurments. Comment on which methods is most correct is best left to statisticians.

In any case acceptance that aid can generate economic growth isn’t reason to abandon all skepticism. To be honest, I’d find it extremely odd if several hundred billion dollars failed to yield any benefit whatsoever. What’s more important is whether such growth is self sustaining. Is it feasible, for growth to be driven by exogenous factors (i.e. western generosity) in the long run? If willingness to donate funds increases, are there real incentives for leaders to implement reform? These are questions aid advocates must answer. For donors, consideration of ‘value for money’ still has its place. We need to ask how much growth is needed to justify an extra billion pounds of aid; how much institutional change must we see before we accept further requests for aid, and so on. After all, the money being channeled abroad ultimately comes from your pocket and its money that could be used for other productive purposes.

An interview with Kenyan economist James Shikwati entitled For God's Sake, Please Stop the Aid! has been doing the rounds and is worth a look for an on-the-ground perspective on the issue.

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