What Do We Know About Foreign Aid – at the Aggregate Level?

Finn Tarp UNU-WIDER

Overview

• Introduction • Aid, growth and development: what do we

know? • Poverty: what do we know about

developments since 1990? • Looking post-2015

A reference – 2000

Recent WIDER research on foreign aid

• : A comprehensive research, documentation and communications initiative (initiated in early 2011)

– Motivated by our desire to understand better four key questions about aid: • What works? • What could work? • What is scalable? • What is transferrable?

Point of departure

• Aid is diverse and complex – no single individual can encompass it all => rely on

global network of researchers and policy practitioners

• A sizeable research output now available under 5 core themes (incl. 200 WIDER WPs) – see http://recom.wider.unu.edu/ – this presentation meant to provide a ”big picture”

perspective – after which we will focus more specifically on aid and fragility

Aid, growth and development: what do we know?

Where to begin? • The macro aid and growth literature • Probably the most controversial theme

– Many critical voices: Peter Bauer, Bill Easterly, Dambisa Moyo and others

• They often frame and strongly influence the development debate and there is frequently talk of a micro-macro paradox? – What do we mean by that? – Aid and macroeconomics – Aid, political economy and institutions

• But is it true that the impact of aid “evaporates” as we move from the project (micro) level up to the macro economy? What can we say on balance about aid’s aggregate impact?

It is difficult! • Aside from ideological debates….. • A thorny econometric challenge: attribution

somewhat elusive – Progress typically associated with less aid – Causality not so easy to establish, so debate ripe

with rhetoric: • Africa, aid, Africa still not developed….. • Anecdotes….

– We need a credible counterfactual (what would have happened without) -> we use statistical methods

Back to basics • What does lack of statistical significance mean? • “Absence of evidence” vs “evidence of absence” • Just because economists have had a hard time at the macro level does not in and by itself prove aid

impact is not there • Time has been passing: the macro-evidence now piling up – and, yes we can say quite a lot – based

on WIDER research • A brief summary:

– Cross country (vs. Rajan & Subramanian): Journal of Globalization and Growth + update and unpacking: World Development

– Time series – 36 individual African countries (Juselius): Oxford Bulletin of Economics and Statistics

– Time series (vs. Dreher, Klasen, et al.): World Development – Meta (Doucouliagos and Paldam): Journal of Development

Studies – Simulations –> heterogeneity….BUT OVERALL RESPECTABLE

RATE OF RETURN

Poverty: what do we know?

Poor nations: some questions and answers

Q. Why are some countries poor? A. Poor countries produce very little.

Q. Why do poor countries produce so little? A. Poor countries employ rudimentary technology, possess limited stocks

of human and physical capital, and weak institutional structures.

Q. Why do poor countries lack the wherewithal to produce? A. Poor countries have not managed to accumulate over time.

Growth is a long run and fragile process of accumulation. What does this mean for the analysis of aid and development?

Poverty is falling – but remains a huge challenge

•Since 1990: people living on less than $1.25 has fallen in every region, including sub-Saharan Africa:

– In 1990 ≈46% (or ≈2 billion people) were extremely poor

– Estimates predict that that the MDG target of cutting extreme poverty by half will be achieved by 2015

– Still: ≈1 billion people (≈14%) remain in extreme poverty

– Fragile states not on track to reach MDGs

0 10 20 30 40 50 60 70

Developing Regions

Northern Africa

Sub-Saharan Africa

Latin America and the Caribbean

Eastern Asia (China only)

Southern Asia

Southern Asia excluding India

South-Eastern Asia

Western Asia

Oceania

Caucasus and Central Asia

2008

1990

% of people living on less than $1.25 USD (2005 PPP)

Under-five mortality rate: 1990-2010

0

20

40

60

80

100

120

140

160

180

200

1990 2010

Sub-Saharan Africa

Southern Asia

South-Eastern Asia

LAC

Eastern Asia

Developed countries

Primary school enrolment, 1990-2010 (%)

1990 2010

Boys Girls Boys Girls

Developing world 84 75 91 89

Sub-Saharan Africa 57 50 78 74

Latin America and the Caribbean 88 84 96 95

Eastern Asia 99 96 97 97

Southern Asia 83 66 94 91

South-Eastern Asia 94 91 95 96

Western Asia 87 79 94 89

Developed Regions 95 95 97 97

Growth has been poverty reducing

Poverty increasingly associated with middle-income countries (often with high levels of inequality)

0

10

20

30

40

50

60

70

80

90

100

1990 2008

% o

f glo

bal p

over

ty

Low-incomeCountriesMiddle-incomeCountries

0 20 40 60

South Asia

Sub-SaharanAfrica

East Asia

Latin America

MENA

% of global poverty

2008

1990

People living on less than $1.25 USD a day (2005 PPP)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1981 1990 1999 2008

Latin Americasub-Saharan AfricaEast Asia

Inequality remains a major challenge

Inequality measured by mean-log deviations of income

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Gap between high-and low-income

countries

Gap between high-and upper-middleincome countries

Income gap between country groupings

Constant 000 US$ (2005 PPP)

1980 2010

Looking post-2015

The new faces of the development challenge • To the extent the existing aid system was designed at all,

it was designed to improve the livelihoods of poor people in poor countries.

• Much has been achieved. Many countries (including former fragile states) have “graduated” and new donors have emerged (Republic of Korea).

• And looking beyond 2015: in 10 years 36 of 68 current IDA recipients will graduate out of IDA – Especially the large countries will graduate: India, Vietnam,

Pakistan, Nigeria, Ghana and Kenya – Population in IDA eligible countries will fall from 3 to 1

billion)

So: should we worry about aid post-2015?

• Aid’s critics would say no – Some even say growth will rise if aid is eliminated,

others say aid has no effect • The weight of the existing up-to-date analytical

and big-picture evidence clearly suggests this is unfounded: – Aid has (on average) helped countries grow and

reduce poverty over the past decades • But while progress has been realized major

challenges remain which future aid efforts must address

Key challenges moving forward

• Aid must post-2015 adapt to emerging national and global contexts, including how to deal with: – Increased complexity (on supply side) – The new geography of poverty – Global public goods (climate, health) – And a “hard core” of fragile states (including building state

capability): TODAY’S FOCUS • Much of this is unknown territory -> the need for

high quality policy research • With ReCom UNU-WIDER hopes to have helped

move this agenda forward in a constructive manner