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July 2, 2005

Why aid fails

As the Live 8 concerts wind down, it’s worth asking: does aid make a difference? Not according to new research from the International Monetary Fund:

“[T]he bad news is that even if delivered with the best intentions and used carefully by responsible recipient governments, there are side effects like adverse impacts on competitiveness, which can offset aid’s beneficial effect on growth. The good news is that by paying careful attention to macroeconomic management and issues like absorptive capacity, perhaps aid may have a better chance of success. We have to be careful, however, given the past chequered history of aid, that we do not place more hopes on aid as an instrument of development than it is capable of delivering.”

This conflicts with the findings of a much-quoted 2000 World Bank study: it found that aid boosted growth in countries with good policy environments. But as Michael Stastny points out, that study was badly flawed:

[It] was critiqued pretty well by William Easterly in the Summer 2003 Journal of Economic Perspectives (see pdf here), where Easterly noted that the World Bank study offered the cautious conclusion that development aid can help when countries have good governance. This seemingly commonsensical result was quickly and widely adopted as gospel by policymakers such as Wolfensohn and Bush, and media such as The New Yorker and The Economist.
[But when] Easterly made small changes to the dataset period, its breadth, definitions of “aid”, “policies”, and “growth” (the main variables in Burnside and Dollar), all rendered the results insignificant. The very conspicuous conclusion was not robust to minor respecification—the aid showed no effect on growth under a variety of measures of good governance.
One example of a particular failure was Zambia. Notes Easterly:
“If Zambia had converted all the aid it received since 1960 to investment and all of that investment to growth, it would have had a per capita GDP of about $20,000 by the early 1990s. Instead, Zambia’s per capita GDP in the early 1990s was lower than it had been in 1960, hovering under $500.”

Africa, for all its international support, is spectacularly ill-equipped to make aid work. Which means the billions of extra dollars that Bob Geldof wants Wednesday’s G-8 meeting to deliver would almost certainly be wasted.

Posted by Stephen at 10:14 PM in Economics | Permalink | Comments (1) | TrackBack (0)

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Aid may not be the immediate resolution to Africas problems. However, what is the alternative? Live 8 is not only about aid, it's a political statement, it gives us back a voice, it allows us all to influence the decisions of our leaders(for a change). It will save lifes, it also plants positive seeds for the future. Regardless of the IMF or Worldbank statistics, we will make a difference.

Thankyou Bob Geldof and others.

Posted by: Aid at July 2, 2005 10:53 PM