New Directions in Foreign Aid

Steven Radelet

Center for Global Development

June 6, 2005

Some Criticisms of Aid

1.  No effect on growth and development

2.  Poorly allocated

3.  Too many objectives

4.  Too bureaucratic

5.  Too little local ownership or participation

6.   Lack of harmonization & coordination

7.   Not performance-based

8.  Too little funding, and too little predictability in funding

Three Views on Aid and Growth

• No relationship, or a negative relationship

• Conditional relationship:

– Depends on recipients (good governance; strong policies)

– Depends on donors

• Positive relationship, on average, with diminishing returns

Disaggregating aid

Net aid

= gross aid – repayments

= “short-impact” aid +

“long-impact” aid +

humanitarian aid –

repayments

From: Clemens, Radelet, and Bhavnani, “Counting Chickens When They Hatch: The Short-Term Effect of Aid on Growth,” Center for Global Development

The relationship between aid and growth

Aid and Growth: Core result 2SLS

Short-impact aid 0.960(0.328)***

Short-impact aid squared -0.0588(0.0264)**

Log repayments -0.384(0.188)**

Log initial GDP per capita -0.0593(0.493)

East Asia 2.39(0.648)***

Institutional quality 0.333(0.114)***

Inflation -1.60(0.558)***

Budget balance 8.28(5.47)

Openness Sachs-Warner 1.41(0.456)***

Tropics -2.13(0.398)***

Log initial life expectancy 3.49(1.85)*

Civil war -2.19(0.891)**

Lagged civil war 1.86(0.730)**

Observations 368R -squared 0.388

Basic Aid Data (2004):Official Flows

• Global official development assistance (ODA) from major donors: $79 billion

• US: $19 billion – the largest

• 24% of the total

• US constitutes 40% of total donor income

• 0.16% of US income – 21st (of 22)

• Assistance to other countries (e.g., Israel, Russia) – not considered development assistance - $1.5 billion.

Largest recipients of US foreign assistance in 2004

(millions)• Iraq $2,944

• Afghanistan $875

• Egypt $602

• Colombia $500

• Russia $671

• Israel $499

• Ethiopia $410

• Jordan $372

• Sudan $351

• Peru $212

Some New Directions

• Less emphasis on traditional conditionality; more on selectivity and achieving results

• More emphasis on country ownership and local participation

• Much discussion (but less action) on harmonization & coordination

Two broad trends

• Budget, program, or sector-wide support (SWAps, baskets)

• Issue specific initiatives:– Global Fund – HIV/AIDS programs– Education for All

Millennium Challenge Account:

Basic concepts

• Select a small number of recipient countries based on their commitment to:– “Ruling justly”

– “Investing in people”

– “Establishing economic freedom”

• Provide them with large sums of money,

• Give them more say in designing aid-funded programs, and

• Hold them accountable for achieving results.

The 16 MCA Indicators Ruling Justly Control of Corruption World Bank Institute Rule of Law World Bank Institute Voice and Accountability World Bank Institute Government Effectiveness World Bank Institute Civil Liberties Freedom House Political Rights Freedom House Investing in People

Immunization Rate: DPT and Measles World Health Organizat ion Girls’ Primary School Completion Rate World Bank Public Primary Education S pending/GDP National Sources Public Expenditure on Health/GDP National Sources Economic Freedom Country Credit Rating Institutional Investor Inflation IMF

i

Regulatory Quality World Bank Institute 3 - Year Budget Deficit National Sources Trade Policy Heritage Foundation Days to Start a Business World Bank

Qualification Requirements

• Score above the median on:– 3 of 6 “ruling justly”

indicators. Countries must be above the median on corruption to qualify.

– 2 of 4 “investing in people” indicators

– 3 of 6 “establishing economic freedom” indicators. (Inflation: 15% rather than the median)

17 countries selected in 2004

Selected: Armenia, Benin, Bolivia, Cape Verde, Georgia, Ghana, Honduras, Lesotho, Madagascar, Mali, Mongolia, Morocco Mozambique, Nicaragua, Senegal, Sri Lanka, and Vanuatu

Exceptions:

Added: Bolivia, Georgia, Mozambique

Dropped: Bhutan, Guyana, Mauritania, Philippines, Swaziland, and Vietnam