Abstract
Overseas aid, originally conceived as short-term emergency help to enable colonies to become economically self-sufficient, remains, 70 years later, a vital prop to the economies of many developing countries, and is now starting to be supplied by developing-country governments themselves. An important reason for its survival is the tendency of aid flows to be relatively stable and reliable during times of crisis while non-concessional flows (bank lending, bond lending and foreign direct investment [FDI]) are subject to panic outflows. At the beginning, aid disappointed expectations, because too many donors failed to realise how much aid would leak into wasteful consumption; however, during the 1990s and 2000s this waste has been controlled somewhat and aid, on the balance of evidence, has been more productively used, in part because of changes in the structure of aid away from investment in equipment and towards technical assistance, humanitarian operations and budgetary support.
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Notes
- 1.
Poverty, leading to poor health and low income, leading to low savings and low productivity, and thence to poverty once again.
- 2.
This example is imaginary but corresponds well both to the savings, GDP growth and population growth rates at that time prevailing in the developing world, and also to the numbers used by Arthur Lewis in his famous statement (Lewis 1955, p. 1) that ‘the fundamental problem in the theory of economic development is to understand how a country saving only 5 per cent of national income converts itself into a 12, even 15, per cent saver’.
- 3.
Source: World Bank, Operations Evaluation Department, Annual Reviews of Project Performance Audit Results, various. These data relate only to ‘IDA projects’, in other words projects qualifying for concessional aid from the Bank because they were located in the poorer developing countries (at the time countries with a per capita income of less than $1000). Developing countries with a higher per capita income than this borrow on market (non-concessional) terms from the Bank and so are not classified as aid recipients from this source.
- 4.
It may be objected that if donors do their job and monitor the use of aid properly, then this kind of switching cannot happen. But it can, and does, as long as the recipient government has money left in its capital budget which can be switched to the purpose desired by the donor. Suppose the donor awards the recipient $50 million which, it insists, must be spent on a network of health centres. The recipient objects and says it wants to spend the money on a football stadium. The donor objects to this use of the aid and threatens to walk away. The recipient replies, ‘OK, we give in’, takes $50 million from its development budget to build the health centres, and then spends the $50 million offered by the donor to build the football stadium. This is fungibility, of a kind that has occurred thousands of times and which explains the room for manoeuvre which the recipient has between points B and C on Fig. 4.1. The only constraint on it is when the domestic development budget runs out, making switching impossible. As we relate in Section 4.2, this actually happened in a number of African countries in the 1980s and 1990s – in the process increasing the bargaining power of donors and, as a result, very possibly increasing the measured effectiveness of aid.
- 5.
- 6.
Notably the concentration of FDI in the developing world into mines and plantations owned by nationals of rich countries (especially the US) who then used their leverage in the World Bank and related institutions to make sure that rich countries captured the lion’s share of such investments. Note that this aspect of multinational corporations reinforces Papanek’s point (page [4] above) that there are reasons for expecting the effectiveness of concessional aid to exceed the effectiveness of FDI.
- 7.
This approach continues up to the present in works such as Moyo (2009).
- 8.
Typically these credits were conditional on an IMF stand-by or extended facility already being in place; indeed, through the 1990s the IMF itself, in pursuit of greater control over the adjustment process, became an aid donor in its own right, offering credits known as Enhanced Structural Adjustment Facilities or ESAFs; see Bredenkamp et al. (1999). For a full list of the conditions applied by the Bank to adjustment lending at this time, see Mosley, Harrigan and Toye (1995), especially volume 1, chapters 2, 3 and 4.
- 9.
Indeed, the language of conditionality was dropped from the millennium onwards, not only by bilateral donors such as DFID (2013) but by multilaterals; even the IMF began at this point to moderate its language.
- 10.
For a sceptical view of this notion of bipartisanship see chapter by Stewart in Ranis et al. (2005).
- 11.
See Sachs (2007); the Bill and Melinda Gates Foundation have also had a strong emphasis on malaria eradication in Africa.
- 12.
See the two left-hand columns of Table 5, page 839, in Burnside and Dollar (2000) – which estimate, by OLS and 2SLS methods respectively, that if aid as a percentage of GNP is regressed against growth of GNP, using the standard controls employed in Table 4.3 but not any other aid variable, then its measured impact on growth is insignificant, small and, for what this is worth, negative.
- 13.
These findings, in the new millennium when the effects of aid on growth started to be questioned (see Dollar and Kraay (2002) and the surrounding debate), came to embrace ‘softer’ objectives of aid such as poverty reduction, as well as aid flows (see for example Mosley et al. 2004), which shows that aid flows have a positive effect on poverty reduction as well as on growth, providing that the pattern of public expenditure is also pro-poor (and in particular is oriented towards social expenditures, in particular health and education).
- 14.
Using 2SLS estimation methods, Bräutigam and Knack (2004, table 3) derived the following result:
$$[\begin{array}{*{20}{l}} {\begin{array}{*{20}{l}} {{\rm{ValueofICRGqualityofgovernanceindex}} = 10.2*** - 0.78***{\rm{initialvalueofICRGindex}}}\\ {\left( {4.25} \right)\left( {0.14} \right)}\\ { - 4.11--2.3*{\rm{politicalviolence}} - 0.08**{\rm{aid/GNP}},{\rm{n}} = 32,{{\rm{r}}^2} = 0.60}\\ {\left( {1.26} \right)\left( {1.91} \right)\left( {2.42} \right)} \end{array}} \end{array}$$ - 15.
See for example Rajan and Subramaniam (2008) table 8 (which divides the results according to type of aid and lag structure), 9 and 10. The method of estimation used is generally GMM (now split into two variants, difference-GMM and system-GMM).
- 16.
- 17.
Maybe 9 or 10 countries in the Far East, including China; in Latin America, only Brazil and arguably Mexico; in Africa, only Mauritius; in other words, only about a dozen in total, plus Europe and North America.
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Mosley, P. (2017). Overseas Aid as an Instrument of Development Finance. In: Giorgioni, G. (eds) Development Finance. Palgrave Studies in Impact Finance. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-58032-0_4
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