While foreign aid generally has been successful in spurring growth it has, on
average, been far less effective in the geographical tropics, regardless of
implemented policies. That is the conclusion of new research by Carl-Johan
Dalgaard, Henrik Hansen and Finn Tarp, published in the June 2004
Economic Journal.
What this means is that allocations of aid based on rewarding countries with
better policies and institutions will unavoidably lead to lower foreign aid
inflows in poor, climatically challenged countries. From this perspective, the
researchers argue, the policy-based allocation rule pursued by leading donor
agencies may itself be a poor policy.
The United Nations General Assembly adopted the Millennium Development
Goals (MDGs) in 2000. These are ambitious goals. At the UN Meeting on
Financing for Development in Monterrey in 2002, the then World Bank Chief
Economist Nicholas Stern therefore argued that the challenge is to scale up
foreign aid donations. He outlined a framework for how to allocate aid well
and suggested the key guideline should be to reward countries with better
policies and institutions.
The World Bank recommendations follow a series of research studies,
including contributions by Craig Burnside, David Dollar and Paul Collier. This
work, which suggests that aid only works in countries with good policies and
institutions, has gained significant influence in the international donor
community. In fact, some important donor agencies are increasingly allocating
aid on the basis of policy performance.
Dalgaard et al argue that yes aid can work, even in a bad environment, but it
is the geographical realities of the country rather than whether it follows good
policies that determines its effectiveness. Hence, and this is critical, a
reward/penalty-based aid allocation system based on countries' policy records
is both unfair and inefficient.
Dalgaard et al also argue that the the World Bank's Country Policy and
Institutional Assessment Index (which evaluates a country’s policy and
institutional framework in 20 dimensions) correlates with the proportion of land
in the tropics and it is this, rather than good policies, which acts as the
catalyst for aid effectiveness.
At the heart of their paper is a much more rigorous theoretical framework for
analysing aid's effectiveness than has traditionally been the case. This
emphasises that strong fundamental structural characteristics, such as
institutions and climate-related circumstances, may compensate for a bad
policy environment.
This then raises the question as to what extent institutions are determined by
accidents of history, geographical factors or respond to current realities
including efforts to reform or change them.
ENDS
Note for Editors: ‘On the Empirics of Foreign Aid and Growth’ by Carl-Johan
Dalgaard, Henrik Hansen and Finn Tarp is published in the June 2004 issue
of the Economic Journal.
The authors are at the University of Copenhagen.
For Further Information: contact Carl-Johan Dalgaard on +45-35-32-44-07
(email: Carl.Johan.Dalgaard@econ.ku.dk; website:
http://www.econ.ku.dk/dalgaard/); Henrik Hansen on +45-35-32-44-05 (email:
Henrik.Hansen@econ.ku.dk; website: http://www.econ.ku.dk/hansen/); Finn
Tarp on +45-35-32-30-41 (email: Finn.Tarp@econ.ku.dk; website:
http://www.econ.ku.dk/ftarp/); or RES Media Consultant Romesh Vaitilingam
on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).