When Does Aid Foreign Work?

The policy debate around whether foreign aid—now $138.5 billion a year—works has been polarized between the “Oh yes it does” camp and those who respond “Oh no it doesn’t.”  Claims that aid is responsible for impressive improvements in human development over the past couple of decades are clearly not credible. Yet, equally difficult to sustain are claims that aid has been entirely useless. It’s more useful to ask when aid works, not whether.

Scholarly studies have been doing just that for at least a decade.  Andy Summer of Center for Global Development and Jonathan Glennie (director of policy and research at Save the Children) thought to take a look and review the state of thinking on aid effectiveness. Specifically, they looked at the cross-country, peer-reviewed, econometric studies that focus on assessing if or under what conditions aid is effective in achieving its stated outcomes, particularly those related to economic growth or social development. The resulting CGD Policy Paper is here.

The paper focuses on aid effectiveness. It considers peer-reviewed, cross-country, econometric studies, published over the last decade in order to propose areas with policy implications related to the conditions under which aid is more likely to be effective.  

They discuss the nature of evidence on aid and why assessing its impact is so difficult. They attempt to make some global-level generalizations, with caveats, on when aid is most likely to work, as opposed to just whether aid works or not. 

KEY FINDINGS

First, aid levels: aid is more likely to work in the correct dosage but is ineffective if too high or too low.

Second, domestic political institutions: aid is more likely to work if the institutions are in place—for example, political stability and not too much decentralization.

Third, the aid composition: aid is likely to be more effective in certain sectors and aid objectives and time horizons matter a lot.

Fourth, aid predictability and concentration: aid is likely to be more effective if it is not volatile and fragmented.

And finally, two big unknown areas where there is little convergence in the evidence:

The first is that aid supports growth when the recipient country is implementing certain macroeconomic policies generally described as ‘good’ or orthodox policies. 

Second is that there is no consensus that grants are better than loans (or vice versa) for aid effectiveness. 

Read the paper for conclusions...