Changing the Conditions for Development Aid

A New Paradigm?

Neils Hermes, Robert Lensink

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9781138867277
• eBook ISBN: 9781317845058
• Edition: 1
• Topic: History
• Subtopic: Business General
• Index: History

In 1998 the World Bank published a report entitled "Assessing Aid: What Works, What Doesn't and Why". This report presents the results of an extensive investigation into the effectiveness of development aid. The main message of the text of the report is that development aid helps, but only when there is a good policy environment in the recipient countries, that is when there is sound macroeconomic management and when robust government institutions exist. It stresses that it is a myth to think that good policies can be bought by giving development aid: giving aid conditional on policy reforms does not lead to improved economic policies. The conclusion of the World Bank report is that aid flows should be directed only to countries with sound policies and that it should be focused more on supporting governments in reforming entire sectors, rather than on specific development projects. The "Assessing Aid" report has led to heated debates, both among academics and policy-makers, about development aid and aid policies. Many have questioned the methodology used, the results and the policy conclusions of the report. This book aims to contribute to the ongoing discussion about the future of development aid. In particular, it re-examines a number of issues that are crucial to the analysis and to the conclusions of the World Bank report. In this study the authors aim to put the discussion on the future of development aid into perspective and summarise the main findings of the other studies in this collection. They focus on two issues: the aid effectiveness debate before and after the Assessing Aid report, and the discussion on policy conditionality and good governance. Section II provides a brief survey of past research on aid effectiveness, that is, before publication of the Assessing Aid report and summarises the main findings of the World Bank report on aid effectiveness. In this study the authors aim to put the discussion on the future of development aid into perspective and summarise the main findings of the other studies in this collection. They focus on two issues: the aid effectiveness debate before and after the Assessing Aid report, and the discussion on policy conditionality and good governance. Section II provides a brief survey of past research on aid effectiveness, that is, before publication of the Assessing Aid report and summarises the main findings of the World Bank report on aid effectiveness.

Are There Negative Returns to Aid?

ROBERT LENSINK and HOWARD WHITE

I. INTRODUCTION

The World Bank report Assessing Aid argues that a reallocation of the existing aid flows to poor countries with sound management would lift 18 million more per year out of poverty [World Bank, 1998: 16]. This figure is based on calculations by Collier and Dollar [1999] who aim to determine a poverty-efficient allocation of aid. Their analysis assumes that aid becomes more effective when it is given to countries with sound policies and that aid, above a certain level of inflows, starts to have negative effects on growth (see Lensink and White [2000a] for a fuller discussion of Collier and Dollar).

The aim of this study is to examine whether empirical evidence supports the notion of negative effects of high aid inflows. We first document the phenomenon of rising aid levels (section II), before going on in section III to present some arguments to illustrate why high levels of aid can be bad for the recipient. The latter notion can be captured with the aid Laffer curve: that is, the benefits from aid increase with initial inflows but after a certain level begin to decline, so that the country would actually be better off with less aid. In section IV we attempt empirical estimation of the aid Laffer curve. Section V concludes.

II. THE EMERGENCE OF HIGH AID INFLOWS

During the last three decades aid to some developing countries has grown to very high levels. Whereas in the late 1970s only eight countries had aid to GNP ratios in excess of 20 per cent, and none higher than 50 per cent, by the first half of the 1990s 26 countries had aid ratios of 20 per cent or more, with four countries having ratios greater than 50 per cent.¹ Aid per capita has shown a similar trend, with the number of countries receiving over US$100 per person rising from 19 to 32 from the late 1970s to the early 1990s, 12 countries received in excess of $250 per person in the later period compared to five in the earlier.² The highest aid recipient in both periods, New Caledonia, saw its aid inflow rise from an average of $670 each year for each person in the 1970s to over US$2,000 a person in the first half of the 1990s. Aid donors worry that such high levels of aid may signify, or induce aid dependence, rather than lay the basis for self-reliant development as aid is intended to.

Tables 1 and 2 list those countries having over certain threshold values of aid flows, where aid flows are normalised by both GNP and population. Table 3 reports the cumulative distributions from these data. Two features are notable from these data. First, the number of countries receiving aid in excess of the threshold values shown has been increasing over time, with a doubling in the number of countries receiving aid of $50 or more per capita and a more than threefold increase in those receiving aid equivalent to at least 20 per cent of GNP. Second, there has emerged a group of ‘very high aid’ recipients, receiving more aid per capita than the income per capita levels of many developing countries. For several countries aid is 30 per cent or more of GNP. While none of these countries are large ones, the phenomenon of high aid is by no means restricted to micro-states: countries such as Israel, Mozambique and Nicaragua also feature in the tables.

An alternative presentation of these data is given by Table 4, which presents summary statistics of box plots. There is clearly a group of very high recipients. At the same time the median aid per capita has drifted up over time (from US$ 11 per person in 1975–79 to US$ 38 in 1990–95): by the later period the upper quartile had reached $80, so that one quarter of developing countries were in receipt of aid in excess of this amount. While the median aid to GNP ratio has not risen in the same way, the upper quartile has moved up, so that over one quarter of countries have aid ratios greater than 15 per cent in the 1990s.

These data thus clearly support both the proposition that a greater number of ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Changing the Conditions for Development Aid: A New Paradigm?
• On Aid, Growth and Good Policies
• Are There Negative Returns to Aid?
• Aid and Performance: A Reassessment
• ‘Good Governance’: The Rise and Decline of a Policy Metaphor?
• Assessing Aid and Global Governance
• Aid Illusion and Public Sector Fiscal Behaviour
• Abstracts
• Index