Non aid relationship 37

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We examine the effects of aid on growth– in cross-sectional and panel data–after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance. Even after this correction, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings, which relate to the past, do not imply that aid cannot be beneficial in the future. But they do suggest that for aid to be effective in the future, the aid apparatus will have to be rethought. Our findings raise the question: what aspects of aid offset what ought to be the indisputable growth enhancing effects of resource transfers? Thus, our findings support efforts under way at national and international levels to understand and improve aid effectiveness.

What does this paper add to the voluminous literature on aid effectiveness? Essentially two things. First, as is well recognized, aid flows are influenced by a country’s situation. Aid may go to those countries in the midst of a natural disaster – which would explain a negative correlation between aid and growth. It may also go those who have used it well in the past – implying, if growth is persistent, there will be a positive correlation between aid and growth. Since neither of these relationships is causal, it is important to isolate the exogenous component of aid. While a number of prior studies have attempted to “instrument” aid, we believe, for reasons explained below, that our methodology adds some value, despite limitations, which we discuss below.

Second, the cross-country aid-growth literature typically focuses on one aspect of the relationship.

We would like to stress at the outset what the paper is not about. The literature has sometimes followed a cycle in which one paper finds a result, and is followed by another paper with a twist, either overturning or qualifying the previous result, followed by another, and so on. This has had some undesirable effects on policy with advocates selectively using results to bolster their preferred view on aid. Our aim is not to target any particular result or paper. Rather, our approach is to say that if one were starting de novo to examine the aid-growth relationship and attempting to do it in a comprehensive and transparent manner, based on a reasonable (but by no means perfect) specification and mindful of the pitfalls, what would one find.

Our findings are relatively easy to report. We find little evidence of a robust positive impact of aid on growth, and this despite the fact that our instrumentation strategy corrects the bias of conventional (ordinary least squares) estimation procedures against finding a positive impact of aid. To be more concrete, in the cross-sectional analysis, we find some evidence for a negative relationship in the long run (40 year horizon), though this is not significant and does not survive instrumentation. We find some evidence of a positive relationship for the period 1980-2000, but only when outliers are included. We find virtually no evidence that aid works better in better policy or institutional or geographical environments, or that certain kinds of aid work better than others.

In the panel context, we unearth both positive and negative significant relationships between aid and growth, but these are very fragile, and small changes in model specification are enough to dilute the relationships.

The turn of the 21st century saw a significant proliferation and diversification in aid donors and non-governmental actors. The traditional donors in the DAC have been joined by

In order for aid to be productive and for economic policy reform to be successfully implemented in Africa, the relationship between donors and governments must change. Van de Walle argues that aid must be made more conditional and selective to incentivize states to take on reform and to generate the much needed accountability and capacity in African governments.