The impact of aid on economic growth in recipient countries has long been a subject for research and debate. It is important not only because of the very large amounts of public funds allocated to foreign aid programs but also because of the many important benefits that growth provides for developing countries. Yet, it is at least as important to consider whether aid works for the poor in recipient countries. The economics literature dealing with country-wide aid impacts has failed to empirically examine how aid affects the poor.
A new econometric study investigates whether aid works for the poor using estimates of the impact of aid on the living standards of population sub-groups within 48 developing countries. It found that while aid is associated with improvements in most of the nation-wide wellbeing variables under examination, its largest beneficial impact seems to be on education. The study also found, however, that the poorest 20 per cent of the population benefit on average the least from aid. Thus, empirical evidence is provided in support of the long held concerns that official aid does not effectively reach the poorest.
Does aid work? This question has been extensively researched, with the economics literature on aid effectiveness dating back some 50 years.
The empirical literature has been dominated by studies of the impact of aid on GDP per capita in recipient countries. This research has come a long way in recent years owing to better theory, data and empirical techniques. Aid works, according to this research, if per capita GDP growth would have been lower in its absence. Most studies conclude that aid has worked in this regard, some find that this impact is contingent on the quality of recipient country economic policies and others doubt whether aid has any positive impact on growth at all.
Debates over the impact of aid on economic growth in recipient countries will almost certainly continue. It is important that they be settled, not only because of the very large amounts of public funds allocated to foreign aid programs but also because of the many important benefits that growth provides for developing countries.
Yet many would argue that it is at least as important to consider whether aid works for the poor in recipient countries. The question is not whether aid works in terms of its impact on a national aggregate, such as per capita income growth, but whether it works for the poor. Higher growth in aid-receiving countries enables poverty reduction, which is a key objective for most donor governments. Informed public support for aid programs is also premised on the belief that they have this impact, not only on the poor in general but also on the poorest of the poor.
The economics literature dealing with country-wide aid impacts is silent on whether this inflow does indeed work for the poor. Not all people in aid-receiving countries are poor by international standards. Even if they were, what would then matter most if public support for aid programs is important is whether aid works for the poorest within them. Higher per capita incomes might be necessary to benefit the poor, but are not sufficient to improve their well-being over time or relative to other groups. Hence, even if we assume that aid does indeed contribute to higher growth, we cannot necessarily assume that aid benefits the poor in recipient countries.
Official donor agencies can have strong incentives to by-pass the poor, the very poorest in particular, in recipient countries. Donors need to achieve observable positive outcomes, which are especially difficult to achieve with the very poor. Even if there were incentives to target the poor, it is widely believed that the modes of operation of official donor agencies will not enable them to do so effectively. Added to this is the greater ability of richer groups to take advantage of opportunities that aid might directly or indirectly provide.
A new study investigates whether aid works for the poor using econometric estimates of the impact of aid on the living standards of population sub-groups within 48 developing countries. Sub-groups are delineated using data obtained from the World Bank’s Health, Nutrition and Poverty Data. Obtained from surveys conducted from the early 1990s to early 2000s, these data contain information on a wide range of achieved well-being indicators at the household level. The specific focus of this study is the impact of aid on the well-being levels of the poorest groups, defined as the bottom two wealth quintiles within each country. It seeks to establish whether these quintiles benefit from aid, and, if so, to what extent they benefit relative to the other quintiles. Well-being is measured using indicators of wealth and achievements in health and education and access to water.
The paper is an important contribution to the literature on foreign aid in two respects.
First, and most fundamentally, it takes the literature on the country-level impact of aid in an entirely new direction by examining sub-national as opposed to national data. Like previous studies, it is concerned with the impact of aid at the country level, but quantifies this impact by looking at different sub-groups of a country’s population.
Second, the paper is one of very few to look at the impact of aid on non-monetary outcomes. Aid can benefit people in many ways in addition to increasing incomes. Some of these additional benefits are arguably more important. Achievements in wealth, health and education are not only directly constituent and facilitative of well-being, but are core and universally-valued wellbeing dimensions. Each is worth having in its own right, but also enables people to exercise their reasoned agency. In this context, growth in income is of lesser importance, being a means to an end rather than an end in its own right.The paper, by looking at impacts on wealth, health and education, seeks to steer the economics literature on aid effectiveness away from growth to measures that better capture well-being.
The paper finds that aid is associated with improvements in most of the well-being variables under examination. To this extent its findings are consistent with the majority finding of the recent aid-growth literature, which is that growth would on average be lower in the absence of aid. The paper finds that aid seems to have its largest beneficial impact on education. The paper also finds, however, that the poorest quintiles benefit on average the least from aid. Empirical evidence in support of the claims that official aid does not effectively reach the poorest is therefore provided.
While many observers will be heartened by evidence that the poorest groups might at least benefit from aid, evidence of them benefitting least will be of significant concern. That the poorer groups in developing countries benefit least from aid is a critical finding and if supported by subsequent research findings has enormous implications for aid delivery, especially in light of the expected scaling-up of world aid flows. One obvious implication is that while aid might increase overall living standards in developing countries, this will be at the cost of the living standards of the poor falling further behind those of the rich in these countries.
If donor governments are concerned about this outcome then they clearly need to strive harder to ensure that the interventions they fund, now and in the future, better serve the poorest people in recipient countries. One means of achieving this is for donors to more effectively target health, given the findings of the paper. Alternatively, donor governments could allocate more funds to agencies that can be shown to better reach the poorest people in developing countries.