What works in aid
The literature differs on the long-term effect of aid, which may or may not, have a positive effect on economic growth, says Magnus Hatlebakk, senior researcher at the Chr. Michelsen Institute (CMI) who has done a review of the existing literature on aid interventions.
- Some studies argue that aid is a waste of time, effort and money. Others studies demonstrate how aid can be an effective, and perhaps even the only means that can contribute to growth and poverty reduction. How can researchers reach such different conclusions? What makes it so hard to tell whether aid works or not?
-Methodological pitfalls make it hard to determine whether aid is effective or not. Aid is often discussed in terms of a causal relationship: aid leads to economic growth. Many studies look at the aggregate relation between aid and economic growth. Aid, however, have a number of different effects. In order to find out whether aid has been effective or not, it is useful to separate different effects. Aid can directly contribute to growth in the shape of increased incomes as well as in the form of investments, and can also have a positive effect in terms of the introduction and development of new technology.
Trying to measure the aggregate relation between aid and economic growth is a methodological challenge. If you study the correlation between aid and economic growth you may find a negative relation as aid is targeted towards poor countries. But this does not mean that aid has a negative effect. To solve this methodological problem, you study change over time, and you try to explain the variation in aid levels at the same time as you estimate the impact of aid on growth. In principle researchers agree on the methodology, but slightly different methodological choices leads to opposing conclusions. Either aid leads to economic growth, or it does not. We can learn more about the effects of aid on economic growth by studying the different effects through which it can have an impact.
-So what happens when you do break the effect of aid into different components? Where does it have the largest impact?
-Aid can be perceived as a means of inducing economic growth, at a macro-economic level. It is also seen as a direct means of lifting people out of poverty, and can be targeted towards the poorest part of the population. It is here that interventions can have the largest potential. Aid comes in the form of foreign currency, and at some point it will flow out of the country. For example; a great deal of aid goes to salaries at the receiving end. To some extent, public officials and bureaucrats are also part of this economy. Many of these employees will be from the middle class and are likely to spend a share of their income on products that are imported, hence there is a smaller chance for the money to leave footprints locally. The poorer the recipient, the bigger are the chances that the money will be spent locally and circulate in the local economy before they eventually end up out of the country. Achieving a multiplier effect like this enables more people to benefit from the money.
Direct cash transfer programmes have proved successful as a way of providing aid directly to the poor. Several countries have implemented a direct cash transfer programme where poor and marginalized groups receive a grant for sending their kids to school. India has had great success with a workfare programme directly targeted towards the country’s large poor population. The programme guarantees every household in the countryside 100 days of minimum wage labour a year.
Programme and sector specific support is also targeted to have direct and discernible impact. Yet, the success of kind of interventions depends on highly capable staff.