31 October 2013

What Do We Know About Foreign Aid – at the Aggregate Level?Finn TarpUNU-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 answersQ. 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

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

0 20 40 60 80

Developing Regions

Northern Africa

Sub-Saharan Africa

Latin America and theCaribbean

Eastern Asia (China only)

Southern Asia

Southern Asia excludingIndia

South-Eastern Asia

Western Asia

Oceania

Caucasus and Central Asia

2008

1990

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)

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

0

10

20

30

40

50

60

70

80

90

100

1990 2008

% o

f glo

bal p

over

ty Low-incomeCountries

Middle-incomeCountries

0 20 40 60

South Asia

Sub-SaharanAfrica

East Asia

Latin America

MENA

% of global poverty

20081990

Inequality remains a major challenge

Inequality measured by mean-log deviations of income

0.05.0

10.015.020.025.030.035.0

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 00.10.20.30.40.50.60.70.80.9

1

1981 1990 1999 2008

Latin Americasub-Saharan AfricaEast Asia

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

A Bird’s-eye View of Current UNU-WIDER Research on Fragility

Rachel M. GisselquistUNU-WIDER

ReCom: Governance & Fragility

• ReCom works with an interdisciplinary, global network of experts– to address identified knowledge gaps, and– to communicate and discuss findings with a wider audience.

• The Governance and Fragility theme draws on some 80 UNU-WIDER studies, including 7 collaborative projects.

• For more, see wider.unu.edu/recom

Theme 1The challenge of chronic state weakness

In Conflict(peacemaking, peacebuilding)

Post-conflict(DDR, reconstruction)

Chronically Weak

(state-building, conflict

prevention)

Theme 2Context matters a lot. And, so what?

• Ignoring contextual factors has exacerbated the challenges of institutional development.

• But, accepting that context matters is not enough. We need greater precision on how – and how not –and what precisely to do about it.

Theme 3 The dilemmas of local ownership• A “lack of political will”

to provide basic public goods suggests the lack of a genuine national development agenda

Incentivize political will?Deal with other actors

(local governments, civil society, traditional authorities)?

• A “lack of capacity” suggests the inability to lead and implement a national development agenda

Provide technical assistance?

Act in place of the state?

Theme 4Speaking to Peacebuilding & Statebuilding GoalsLegitimate

Politics

Democratic Trajectories in Africa:

Unraveling the Impact of Foreign Aid

(Resnick & van de Walle, OUP 2013)

”Consociational Settlements and Reconstruction:

Bosnia in Comparative Perspective” (Stroschein)

Security

”Policing Reforms and Economic

Development in African States:

Understanding the Linkages,

Empowering Change” (Marenin)

”Liberia’s Gender-Sensitive Police Reform: Starting

from Scratch? Improving

Representation and Responsiveness”

(Bacon)

Justice

“Impact Assessment of the Facilitadores

JudicialesProgramme in

Nicaragua” (Barendrecht et al.)

”Transitional Justice and Aid” (Hellsten)

Economic Foundations

“Aid and EmploymentGeneration in

Conflict-Affected Countries:

Recommendations for Liberia” (del

Castillo)

“Economic Governance:

Improving the Economic and

Regulatory Environment for

Supporting Private Sector Activity”

(Kirkpatrick)

Revenues & Services

”Taxation and Development: A Review of Donor

Support to Strengthen Tax

Systems in Developing

Countries” (Fjelstad)

”How to Spend It: The Organization of Public Spending and Aid Effectiveness”

(Collier)

www.wider.unu.eduHelsinki, Finland