Foreign aid has been a much explored topic in both the economics and political science literature. While the extensive strands of studies have helped us understand the role of foreign aid and the impact that it might have, ambiguous conclusions remain in the literature. This edited volume is an attempt to pull together the relatively recent established findings related to foreign aid.
Perhaps the greatest debate in the literature in this context is the impact foreign aid can have on development outcomes of recipient nations, including economic growth. An extensive set of studies have argued that aid boosts economic growth for recipient nations by helping them escape poverty traps and promoting development (Sachs et al. 2004; Sachs 2005a, b). Yet, the dominant argument in the literature is aid has been ineffective in promoting growth (Easterly 2007a, b; Rajan and Subramanian 2008). Earlier strands of studies disagreed on the impact of foreign aid as they categorized the outcome as black or white, that is, the impact being ‘always good’ or ‘always bad’ for recipient nations. More recent studies have explored wide areas of gray, suggesting that aid effectiveness can be very much dependent on the macro and institutional environment of recipient nations and, thus, the notion of categorizing the outcomes in absolute terms of ‘good’ or ‘bad’ may not be correct.
Another extensive literature has explored aid’s impact on economic and political institutions, sparking another debate as the conclusions have been ambiguous. In the context of political institutions, studies emphasizing the optimistic view of aid argue that foreign aid can have a positive effect on developing countries’ political institutions by making them more democratic (see, for instance, Dunning 2004; Goldsmith 2001). The alternative view stresses that aid is not only unable to promote democracy, but it can actually degrade it (see, for instance, Bueno de Mesquita and Smith 2010; Smith 2008; Djankov et al. 2008; Rajan and Subramanian 2007; Bräutigam and Knack 2004; Bauer 2000).
Evidence in the context of foreign aid’s effectiveness on economic institutions is similar. Studies concluding that aid does not increase economic freedom are plenty (Young and Sheehan 2014; Knack 2001). In fact, these studies find that aid decreases economic freedom. Heckelman and Knack (2008) find that aid decreases freedom in the 1980s, but aid does not significantly impact economic freedom in the 1990s. IMF involvement may also reduce economic freedom (Dreher and Rupprecht 2007; Knedlik and Kronthaler 2007). Yet, studies like Boockmann and Dreher (2003) show that the number of World Bank projects increases economic freedom.
Other than institutions and economic growth, foreign aid can also have a significant impact on specific development outcomes like health, education, and sanitation. Both micro and macro studies document the success and failure stories of foreign aid with regard to specific development outcomes.
Aid effectiveness is also dependent on donor motives of nations providing aid. In both the economics and political science literature, the significance of politics and leaders in molding development policies for their countries has moved to prominence (see, e.g., Jones and Olken 2005, 2009; McGillivray and Smith 2004; Dreher and Jensen 2013; Potrafke 2009, among others). Yet, until recent times, literature on development aid has ignored the important role that politics can play in shaping aid allocation to recipient nations. Studies assumed motives of donors to be unitary and did not account for differences of ideologies of governments, political and economic incentives, and how political leadership can shape allocation of aid. Recently, a vast number of studies have explored donor motives for aid allocation and have found factors like political and economic motivations, political favoritism, and donors’ ideology to be playing crucial roles in such allocations. The type of aid allocated matters a lot in this context and has a direct impact on development outcomes.
This volume not only summarizes the conclusions in the literature about aid’s impact on specific development outcomes but also highlights the role of donor motivations, importantly, political preferences and incentives, in aid allocation as well as the role of private aid in affecting development outcomes. A distinguishing feature of this book is that it deepens the reader’s understanding of the impact of foreign aid on development outcomes based on the latest findings in the research literature over the past decade. A strong viewpoint that has been existing in the economics literature, especially with regard to economic development, polarizes the perception of foreign aid as being either beneficial or damaging, as a blessing or a curse. As an unfortunate consequence, many readers perceive aid’s impact based on the work of scholars who are assessing the impact of aid in light of such polarities.
This book sheds light on the recent studies that have tried to deepen our understanding of the ambiguous relationship between aid and its aftereffects. It highlights the work of scholars who have developed more layered and nuanced findings with regard to aid’s impact on a variety of development outcomes, for example, donor characteristics, political motives behind aid giving, evaluation of aid projects, and their effectiveness including the differential impact based on type of aid.
The edited volume is divided into four sections. Section I summarizes some specific development outcomes with regard to foreign aid in the micro and macro context as well different types of aid that can be donated for different purposes. Chapters in this section discuss aid’s conditional impact on growth, how types of aid affect outcomes, and how examining health aid at a sub-national level can help us find answers with regard to aid’s effectiveness, efficiency, and equity.
In Section II, chapters discuss the role of politics in aid allocation, especially with regard to aid agencies and their motivations in donating aid. One such chapter included evaluates aid agencies, compares them in terms of best practices, and talks about their challenges. Another chapter explores factors that affect World Bank Project evaluations. The final chapter under Section II summarizes donor motives for aid allocation to recipient nations.
Section III discusses foreign aid’s impact on institutional quality of recipient nations. The included chapters document aid’s impact on political rights of nations, summarizes the inconclusive findings in the literature about aid’s impact on economic and political institutions, and also talks about the relationship between state capacity and foreign aid inflows.
Section IV summarizes the role of private aid like remittances and the effect such capital inflows can have on development outcomes. This section further makes the readers aware of how to think about private aid and the limitations they can have.
Section I: Foreign Aid and Macro and Micro Development Outcomes
Chapter 2 by Jia is titled “Foreign Aid Conditionality and Economic Growth.” Burnside and Dollar (2000), one of the most influential papers in the ‘conditional’ aid effectiveness research agenda, concludes that aid can positively influence growth in healthy policy environments, sparking one of the most debated topics in development economics and among policymakers. Easterly et al. (2004), using the exact methodology over a larger dataset, overturn BD’s findings, weakening the significance of the aid-policy-growth association. This chapter summarizes, compares, and contrasts the academic work debating whether foreign aid’s effective is conditional on the policy and institutional environment. Overall, the chapter sheds light on the aid-policy-growth debate by empirically demonstrating how both...