Aid effectiveness: have we learnt anything? Sam Jones University of - - PowerPoint PPT Presentation

Aid effectiveness: have we learnt anything?

Sam Jones

University of Copenhagen

September 2015

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Definition Aid effectiveness research asks: has foreign aid been effective in raising welfare in recipient countries? Point of departure: there is a consistent mapping from higher incomes to higher welfare. So, economic growth is a fundamental final performance metric for aggregate aid.

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Definition Aid effectiveness research asks: has foreign aid been effective in raising welfare in recipient countries? Point of departure: there is a consistent mapping from higher incomes to higher welfare. So, economic growth is a fundamental final performance metric for aggregate aid.

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Definition Aid effectiveness research asks: has foreign aid been effective in raising welfare in recipient countries? Point of departure: there is a consistent mapping from higher incomes to higher welfare. So, economic growth is a fundamental final performance metric for aggregate aid.

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Outline

1

Introduction

2

Disagreements

3

Responses

4

Lessons

5

Implications

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Disagreements How have economists answered this question? “If you put two economists in a room, you get two opinions ... ... unless one of them is Lord Keynes, in which case you get three opinions.” (Winston Churchill)

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Disagreements How have economists answered this question? “If you put two economists in a room, you get two opinions ... ... unless one of them is Lord Keynes, in which case you get three opinions.” (Winston Churchill)

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Disagreements How have economists answered this question? “If you put two economists in a room, you get two opinions ... ... unless one of them is Lord Keynes, in which case you get three opinions.” (Winston Churchill)

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Foreign aid debates

Economists have been divided about the effectiveness of foreign aid, for decades. William Easterly, 2005 “Spending $2.3 trillion ... in aid over the past five decades has left the most aid-intensive regions, like Africa, wallowing in continued stagnation; it’s fair to say this approach has not been a great success.” Jeffrey Sachs, 2009 “Without foreign aid, Rwanda’s pathbreaking public health successes and strong current economic growth would collapse.”

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Foreign aid debates

Economists have been divided about the effectiveness of foreign aid, for decades. William Easterly, 2005 “Spending $2.3 trillion ... in aid over the past five decades has left the most aid-intensive regions, like Africa, wallowing in continued stagnation; it’s fair to say this approach has not been a great success.” Jeffrey Sachs, 2009 “Without foreign aid, Rwanda’s pathbreaking public health successes and strong current economic growth would collapse.”

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Foreign aid debates

Economists have been divided about the effectiveness of foreign aid, for decades. William Easterly, 2005 “Spending $2.3 trillion ... in aid over the past five decades has left the most aid-intensive regions, like Africa, wallowing in continued stagnation; it’s fair to say this approach has not been a great success.” Jeffrey Sachs, 2009 “Without foreign aid, Rwanda’s pathbreaking public health successes and strong current economic growth would collapse.”

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Foreign aid debates

Some would suggest we have learnt very little: Sebastian Edwards, 2014 “Overall, the results from this large body of research have been fragile and inconclusive.” Nancy Qian, 2014 “The empirical literature on the impact of foreign aid is perhaps

• ne of the most controversial ones in development and growth
• economics. ... [But] a large number of studies have emerged to

dispute the positive effects of foreign aid.”

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Foreign aid debates

Some would suggest we have learnt very little: Sebastian Edwards, 2014 “Overall, the results from this large body of research have been fragile and inconclusive.” Nancy Qian, 2014 “The empirical literature on the impact of foreign aid is perhaps

• ne of the most controversial ones in development and growth
• economics. ... [But] a large number of studies have emerged to

dispute the positive effects of foreign aid.”

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Foreign aid debates

Some would suggest we have learnt very little: Sebastian Edwards, 2014 “Overall, the results from this large body of research have been fragile and inconclusive.” Nancy Qian, 2014 “The empirical literature on the impact of foreign aid is perhaps

• ne of the most controversial ones in development and growth
• economics. ... [But] a large number of studies have emerged to

dispute the positive effects of foreign aid.”

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Why the disagreement?

Four reasons, at least:

1 Ideology: can the public sector stimulate growth? 2 Endogeneity: aid is (mostly) given to poor countries. 3 Extensive chains: aid → X → Y → growth. 4 Measurement: aid is not a homogeneous good.

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Why the disagreement?

Four reasons, at least:

1 Ideology: can the public sector stimulate growth? 2 Endogeneity: aid is (mostly) given to poor countries. 3 Extensive chains: aid → X → Y → growth. 4 Measurement: aid is not a homogeneous good.

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Why the disagreement?

Four reasons, at least:

1 Ideology: can the public sector stimulate growth? 2 Endogeneity: aid is (mostly) given to poor countries. 3 Extensive chains: aid → X → Y → growth. 4 Measurement: aid is not a homogeneous good.

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Why the disagreement?

Four reasons, at least:

1 Ideology: can the public sector stimulate growth? 2 Endogeneity: aid is (mostly) given to poor countries. 3 Extensive chains: aid → X → Y → growth. 4 Measurement: aid is not a homogeneous good.

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Outline

1

Introduction

2

Disagreements

3

Responses

4

Lessons

5

Implications

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Responses

Yes ... it is difficult to give a clean answer about aggregate aid effectiveness effectiveness. But, this is the case in other areas of economics. So, what should researchers do?: Change the question. Focus on parts of aid effectiveness where we can

• btain rigorous identification of causal effects.

> e.g., U.S. Food Aid and Civil Conflict, (Nunn & Qian, AER 2014) This kind of research is important and will continue.

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Responses

Yes ... it is difficult to give a clean answer about aggregate aid effectiveness effectiveness. But, this is the case in other areas of economics. So, what should researchers do?: Change the question. Focus on parts of aid effectiveness where we can

• btain rigorous identification of causal effects.

> e.g., U.S. Food Aid and Civil Conflict, (Nunn & Qian, AER 2014) This kind of research is important and will continue.

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Responses

Yes ... it is difficult to give a clean answer about aggregate aid effectiveness effectiveness. But, this is the case in other areas of economics. So, what should researchers do?: Change the question. Focus on parts of aid effectiveness where we can

• btain rigorous identification of causal effects.

> e.g., U.S. Food Aid and Civil Conflict, (Nunn & Qian, AER 2014) This kind of research is important and will continue.

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Responses

Yes ... it is difficult to give a clean answer about aggregate aid effectiveness effectiveness. But, this is the case in other areas of economics. So, what should researchers do?: Change the question. Focus on parts of aid effectiveness where we can

• btain rigorous identification of causal effects.

> e.g., U.S. Food Aid and Civil Conflict, (Nunn & Qian, AER 2014) This kind of research is important and will continue.

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Responses

But should we stop here? No! “An approximate answer to the right question is worth a great deal more than a precise answer to the wrong question.” John Tukey We cannot easily generalize from narrow components

• f aid to answer the bigger question: does aid work?

If we don’t try, weak generalizations and anecdotes (ideology) WILL dominate. Thesis: recent research has provided new and consistent insights about aggregate aid effectiveness.

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Responses

But should we stop here? No! “An approximate answer to the right question is worth a great deal more than a precise answer to the wrong question.” John Tukey We cannot easily generalize from narrow components

• f aid to answer the bigger question: does aid work?

If we don’t try, weak generalizations and anecdotes (ideology) WILL dominate. Thesis: recent research has provided new and consistent insights about aggregate aid effectiveness.

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Responses

But should we stop here? No! “An approximate answer to the right question is worth a great deal more than a precise answer to the wrong question.” John Tukey We cannot easily generalize from narrow components

• f aid to answer the bigger question: does aid work?

If we don’t try, weak generalizations and anecdotes (ideology) WILL dominate. Thesis: recent research has provided new and consistent insights about aggregate aid effectiveness.

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Outline

1

Introduction

2

Disagreements

3

Responses

4

Lessons

5

Implications

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(1) Emerging consensus = aid has enhanced growth.

Study Period Spec. Beta S.E. Prob. RS08 ’60-’00 Linear 0.06 0.06 0.30 RS08 ’70-’00 Linear 0.10 0.07 0.17 MR10 ’60-’00 Linear 0.08 0.03 0.01 AJT10 ’70-’00 Linear 0.13 0.05 0.01 CRBB12 ’70-’05 Non-linear 0.15 0.06 0.01 KSV12 ’70-’00 Linear 0.05 0.05 0.32 NDHKM12 ’60-’06 Linear

• 0.02

0.01 0.14 B13 ’60-’00 Linear 0.12 0.04 0.00 HM13 ’71-’03 Linear

• 0.01

0.00 0.00 AJT14 ’70-’07 Linear 0.30 0.18 0.09 Mean Raw 0.19 0.05 0.00 Wghtd 0.12 0.02 0.00

Note: Means include other studies, not shown. RS08 is Rajan and Subramanian (2008); MR10 is Minoiu and Reddy (2010); AJT10 is Arndt et al. (2010); CRBB12 is Clemens et al. (2012); KSV12 is Kalyvitis et al. (2012); NDHKM12 is Nowak-Lehmann et al. (2012); B13 is Bruckner (2013), HM13 is Herzer and Morrissey (2013); and AJT14 is Arndt et al. (2014).

Source: Arndt et al. (forthcoming, WBER).

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(2) A positive effect on a range of other outcomes.

Change in the period average for outcomes due to 5% Aid/GDP ratio (1970-2007): Variable

Lower

Point

Upper

GDP per capita growth

0.02

1.51

3.00

Poverty headcount at $1.25 a day

• 30.70
• 15.52
• 0.35

Investment (% GDP)

2.86

10.85

18.85

• Av. years total schooling, 15+

0.59

2.81

5.02

Life expectancy at birth, total (years)

• 0.41

2.35

5.11

Infant mortality rate

• 31.61
• 14.37

2.88

Note: LIML estimator applied.

Source: Arndt et al. (2015).

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(3) Positive effects appear over long time frames.

Simulation evidence, growth increment due to 10% Aid/GDP .

Source: Arndt et al. (forthcoming, WBER).

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(4) Magnitude of effects is moderate.

Source: Arndt et al. (forthcoming, WBER).

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(5) Human capital upgrading is a key channel.

Period GDP per labour unit

100 105 110 115 120 125 10 20 30 40 50 60

• Physical capital

Human capital Human capital+ Source: Arndt et al. (forthcoming, WBER).

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Outline

1

Introduction

2

Disagreements

3

Responses

4

Lessons

5

Implications

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Implications

Emerging view of a consistent and positive pattern of aggregate effects due to aid. Reflects better data and careful attention to endogeneity. Evidence is not as clean as we might like – i.e., individual studies are fairly fragile [but this not unique to aid]. Clean and narrow studies highlight complex and heterogeneous effects of aid. Institutional effects are, perhaps, most challenging. Aid effectiveness can be improved. Donor behaviour is critical.

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