Foreign aid under good policy environment

ASSESING AID

What Works, What Doesn't, and Why

A World Bank Policy Research report, Nov.1998, Chapter 1

Sharkhuu MunkhbatODA Policies in Global Development StrategyNov 8, 2012

MONEY MATTERS - IN A GOOD POLICY ENVIRONMENT

2

I. Introduction

II. Different Countries, Different Fortunes

III.Importance of good Economic Management

IV. Aid impacts: Growth

Poverty

Private investment

V. Bilateral and Multilateral Aid

VI. Focused Aid

VII. Conclusions

Table of Contents

3

• Has aid reduced poverty, increased per capita income and promoted private investment?

• In the reality, this does not happen. Some countries benefit more than others.

• The reason: Aid effectiveness largely depends on the institutions and policy frameworks in recipient countries.

• Good economic management: Aid leads to higher private investment, rapid growth and a faster decline in poverty.

• Poor economic management: Aid has little effect on development.

I. Introduction

4

The economic and social development in the developing countries has been very different.

Some countries did very well and achieved high growth and less poverty. Some countries didn't

Three categories: fast growers, slow growers and no growers.

II. Different Countries, Different Fortunes

5

Good institutions such as the strength of private property rights, the rule of law and quality of civil society affect long term growth.

A stable macro-economic climate such as good fiscal, monetary and trade policies are crucial for investment and growth.

Good economic management provides a fertile environment for growth.

III. Importance of good Economic Management

6

Countries with good economic management can grow faster

7

Lower-middle income countries grow faster than middle income countries. Good management attracts a lot of FDI, technology transfer from advanced economies and investment with high return to capital and that leads to high growth.

Such countries grow slowly at all income level. Poor countries have the potential for rapid growth if they put good policies.

Good management group

Poor management group

8


Weak relationship between aid and per capita growth in developing countries.


9

It would be mistake to interpret this as evidence that aid reduces growth. Two problems:

1. Other factors that affect growth should be considered.

2. In some cases aid may be given to countries that are growing slowly.

Some countries received a lot of assistance and grow slowly, while other countries received little aid and grow faster.


10


Aid has a positive effect on growth in countries with good economic management.

With poor economic management, aid decreases growth by 0.3 percent.

With good economic management, an additional 1 percent of GDP in aid increases growth by 0.5 percent.


11

IV. Aid impacts: Poverty

Empirical study shows that every country with increasing per capita income has a decline in poverty.

In the expanding economies, per capita income grew 4 percent, and poverty declined 5 percent.

In countries with good economic management the expected effect of aid on poverty reduction can be high.

IV. Aid impacts: Poverty

12

IV. Aid impacts: Private Investment

One percent of GDP in assistance increases private investment an extra 1.9 percent of GDP in good economic management countries.

The combination of good economic management and foreign aid can promote private investment.

IV. Aid impacts: Private Investment

13

V. Bilateral and Multilateral Ai

Bilateral aid has a weak, negative relationship. A doubling of per capita income leads to a 33 percent reduction in aid.

Multilateral aid or World Bank’s International Develop-ment Association (IDA) facility has stronger relation-ship than bilateral aid. For IDA, a doubling of per capita income leads to a 90 percent reduction in aid.


14

2. Aid allocation often depends on the political or strategic interest of donor (Bilateral aid).- U.S. aid in the Middle East or European aid to former colonies.

1. Aid discrimination against large countries.- Large countries receive less aid per capita (China and India).

Two factors which undermine this relationship:


15


Good and poor manag-ement countries have received roughly the same average assistance.

Strong influenced by political interests. Being a former colony of a major donor is more valuable in attracting bilateral assistance than having good management.


16.

The allocation of multilateral aid has depended on good management.

Political and strategic considerations were not significant.

Lower-middle income countries with good management received 30 percent more aid than the poor management country.


17

VI. Focused AidVI. Focused Aid

There is more focused approach to make aid more effective.

Aid is most effective in reducing poverty in those countries that have both mass poverty and a good policy.

113 developing countries are classified based on their incidence of poverty and the quality of their policies.

18

High impact quadrant

There are millions of poor people in need of help, but the policy environments are not good enough for aid to have much effect.

In the remaining two bottom quadrants aid is less effective. There are fewer poor people to help.

An extra $10 million increase in aid would lift 7 million people out of poverty, while a targeted increase in aid to the high impact quadrant could lift 25 million out of poverty.

19

VII. Conclusions

• Aid can increase growth, reduce poverty and promote private investment.

• Its effectiveness depends largely on recipient country’s economic management and institutional quality.

• Countries with good economic management can benefit more from aid than others.

• Since most official development assistance is bilateral, the allocation of all aid together (multilateral and bilateral) shows little relationship with the quality of country economic management.

• Being more focused on High Impact countries–good policy and high poverty-can increase the aid effectiveness.

• To improve the economic management and institutional quality in poor countries, the priority of development assistance is to contribute to policy reform.

VII. Conclusions

20

THANK YOU

Foreign aid under good policy environment

Education

Transcript of Foreign aid under good policy environment