Foreign aid and its prospects

Transcription

1 1 / 17 Foreign aid and its prospects Sam Jones Asst. Professor Department of Economics University of Copenhagen 19th September 2012

2 2 / 17 Foreign aid... a quick introduction Foreign aid is substantial,. William Easterly, 2005 Spending $2.3 trillion... in aid over the past five decades has left the most aid-intensive regions, like Africa, wallowing in continued stagnation; it s fair to say this approach has not been a great success.

3 2 / 17 Foreign aid... a quick introduction Foreign aid is substantial, significant. William Easterly, 2005 Spending $2.3 trillion... in aid over the past five decades has left the most aid-intensive regions, like Africa, wallowing in continued stagnation; it s fair to say this approach has not been a great success. Jeffrey Sachs, 2009 Rwanda currently imports around $800 million of merchandise each year, but only earns $250 million or so in exports. So how does it do it? Aid, of course,... Without foreign aid, Rwanda s pathbreaking public health successes and strong current economic growth would collapse.

4 2 / 17 Foreign aid... a quick introduction Foreign aid is substantial, significant and controversial. William Easterly, 2005 Spending $2.3 trillion... in aid over the past five decades has left the most aid-intensive regions, like Africa, wallowing in continued stagnation; it s fair to say this approach has not been a great success. Jeffrey Sachs, 2009 Rwanda currently imports around $800 million of merchandise each year, but only earns $250 million or so in exports. So how does it do it? Aid, of course,... Without foreign aid, Rwanda s pathbreaking public health successes and strong current economic growth would collapse. Dambisa Moyo, 2009 The problem is that aid is not benign it s malignant. No longer part of the potential solution, it s part of the problem in fact aid is the problem.

5 3 / 17 Thinking about the future of foreign aid Three critical questions: 1 Are there political or ethical reasons to give aid? 2 If so, what do we know about aid effectiveness? 3 How is foreign aid evolving?

6 4 / 17 Contents 1 Introduction 2 Ideology 3 Effectiveness 4 Trends 5 Conclusion

7 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

8 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

9 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

10 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

11 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

12 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

13 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

14 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

15 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

16 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

17 5 / 17 (Q1) Philosophical positions on foreign aid Anti-welfarism... hand-outs don t work None-of-our-business(ism)... John Rawls Instrumentalism... we benefit Utilitarianism... we all benefit Cosmopolitanism... we are all equal Answers to these questions define the objectives of aid.

18 6 / 17 (Q2) What do we know about aid effectiveness? Even if we agree aid is important, does it work? Contentious! Why? Foreign aid is not a simple or homogeneous thing. It has been: provided by many different actors, at different times given for different reasons, e.g.: emergency relief social sectors (health, education etc.) economic growth purely political motives guided by changing views about what works volatile & unpredictable poorly measured & evaluated

19 6 / 17 (Q2) What do we know about aid effectiveness? Even if we agree aid is important, does it work? Contentious! Why? Foreign aid is not a simple or homogeneous thing. It has been: provided by many different actors, at different times given for different reasons, e.g.: emergency relief social sectors (health, education etc.) economic growth purely political motives guided by changing views about what works volatile & unpredictable poorly measured & evaluated

20 6 / 17 (Q2) What do we know about aid effectiveness? Even if we agree aid is important, does it work? Contentious! Why? Foreign aid is not a simple or homogeneous thing. It has been: provided by many different actors, at different times given for different reasons, e.g.: emergency relief social sectors (health, education etc.) economic growth purely political motives guided by changing views about what works volatile & unpredictable poorly measured & evaluated

21 7 / 17 Many different questions Numerous valid dimensions to the question: does aid work? 1 Micro-level studies project-level evaluation specific and focussed 2 Meso-level studies intermediate (sector-specific) outcomes such as education evaluate a wide-range of (similar) interventions 3 Macro-level studies aggregate outcomes such as economic growth evaluate the totality of aid, intended & unintended

22 7 / 17 Many different questions Numerous valid dimensions to the question: does aid work? 1 Micro-level studies project-level evaluation specific and focussed 2 Meso-level studies intermediate (sector-specific) outcomes such as education evaluate a wide-range of (similar) interventions 3 Macro-level studies aggregate outcomes such as economic growth evaluate the totality of aid, intended & unintended

23 7 / 17 Many different questions Numerous valid dimensions to the question: does aid work? 1 Micro-level studies project-level evaluation specific and focussed 2 Meso-level studies intermediate (sector-specific) outcomes such as education evaluate a wide-range of (similar) interventions 3 Macro-level studies aggregate outcomes such as economic growth evaluate the totality of aid, intended & unintended

24 7 / 17 Many different questions Numerous valid dimensions to the question: does aid work? 1 Micro-level studies project-level evaluation specific and focussed 2 Meso-level studies intermediate (sector-specific) outcomes such as education evaluate a wide-range of (similar) interventions 3 Macro-level studies aggregate outcomes such as economic growth evaluate the totality of aid, intended & unintended

25 8 / 17 Measurement problems... even if we agree on the question To measure the casual impact of aid we need a counterfactual BUT this is never observed, and must be constructed

26 8 / 17 Measurement problems... even if we agree on the question To measure the casual impact of aid we need a counterfactual BUT this is never observed, and must be constructed Challenge is exacerbated by the endogeneity of aid: Income Foreign aid

27 8 / 17 Measurement problems... even if we agree on the question To measure the casual impact of aid we need a counterfactual BUT this is never observed, and must be constructed Challenge is exacerbated by the endogeneity of aid: Income Foreign aid Foreign aid Income

28 8 / 17 Measurement problems... even if we agree on the question To measure the casual impact of aid we need a counterfactual BUT this is never observed, and must be constructed Challenge is exacerbated by the endogeneity of aid: Income Foreign aid Foreign aid Income Economists use different methods to deal with these problems: Ideally, randomized controlled trials Treatment vs. control groups (over time) Instrumental variables techniques

29 9 / 17 What do we know? Micro-studies: Broadly favourable picture that aid can work >65% World Bank projects moderately satisfactory BUT lots of gaps, many evaluations not rigorous Meso-studies: Limited number of studies, reasonably favourable Macro-studies: Methodologically contentious Results most controversial BUT very important Recurrent theme: micro-macro paradox Absence of evidence vs evidence of absence

30 9 / 17 What do we know? Micro-studies: Broadly favourable picture that aid can work >65% World Bank projects moderately satisfactory BUT lots of gaps, many evaluations not rigorous Meso-studies: Limited number of studies, reasonably favourable Macro-studies: Methodologically contentious Results most controversial BUT very important Recurrent theme: micro-macro paradox Absence of evidence vs evidence of absence

31 9 / 17 What do we know? Micro-studies: Broadly favourable picture that aid can work >65% World Bank projects moderately satisfactory BUT lots of gaps, many evaluations not rigorous Meso-studies: Limited number of studies, reasonably favourable Macro-studies: Methodologically contentious Results most controversial BUT very important Recurrent theme: micro-macro paradox Absence of evidence vs evidence of absence

32 10 / 17 Result 1: cross-country evidence What has been the impact of aid over the long-run ( ) for a cross-section of developing countries? Debate revived by Rajan & Subramanian 2008 Aggregate aid contributes positively to growth at levels predicted by growth theory Aid has been associated with a growth bonus 5% of aid in GDP 0.5 pp increase in GDP growth Conclusion: No micro-macro paradox.

33 10 / 17 Result 1: cross-country evidence What has been the impact of aid over the long-run ( ) for a cross-section of developing countries? Debate revived by Rajan & Subramanian 2008 Aggregate aid contributes positively to growth at levels predicted by growth theory Aid has been associated with a growth bonus 5% of aid in GDP 0.5 pp increase in GDP growth Conclusion: No micro-macro paradox.

34 10 / 17 Result 1: cross-country evidence What has been the impact of aid over the long-run ( ) for a cross-section of developing countries? Debate revived by Rajan & Subramanian 2008 Aggregate aid contributes positively to growth at levels predicted by growth theory Aid has been associated with a growth bonus 5% of aid in GDP 0.5 pp increase in GDP growth Conclusion: No micro-macro paradox.

35 10 / 17 Result 1: cross-country evidence What has been the impact of aid over the long-run ( ) for a cross-section of developing countries? Debate revived by Rajan & Subramanian 2008 Aggregate aid contributes positively to growth at levels predicted by growth theory Aid has been associated with a growth bonus 5% of aid in GDP 0.5 pp increase in GDP growth Conclusion: No micro-macro paradox.

36 10 / 17 Result 1: cross-country evidence What has been the impact of aid over the long-run ( ) for a cross-section of developing countries? Debate revived by Rajan & Subramanian 2008 Aggregate aid contributes positively to growth at levels predicted by growth theory Aid has been associated with a growth bonus 5% of aid in GDP 0.5 pp increase in GDP growth Conclusion: No micro-macro paradox.

37 11 / 17 Result 2: unpacking aggregate aid effectiveness Are these results for economic growth consistent with the effect of aid on other outcomes (e.g., proximate growth drivers)? We unpack aid effectiveness, and find: A consistent and coherent pattern of results across mesoand macro-outcomes Aid supports key building-blocks for growth: esp. human capital (health), physical investment Cumulative (long-run) impact of aid, NO quick wins Internal rate of return from aid (to growth) = 16% Ambiguous link from education to growth (as elsewhere)

38 11 / 17 Result 2: unpacking aggregate aid effectiveness Are these results for economic growth consistent with the effect of aid on other outcomes (e.g., proximate growth drivers)? We unpack aid effectiveness, and find: A consistent and coherent pattern of results across mesoand macro-outcomes Aid supports key building-blocks for growth: esp. human capital (health), physical investment Cumulative (long-run) impact of aid, NO quick wins Internal rate of return from aid (to growth) = 16% Ambiguous link from education to growth (as elsewhere)

39 12 / 17 Result 2: unpacking aggregate aid effectiveness Change in the period average for outcomes due to 5% Aid/GDP ratio ( ): Variable Lower Point Upper GDP per capita growth / year Agriculture, value added (% GDP) Poverty headcount at $1.25 a day Investment (% GDP) Revenue, excluding grants (% GDP) Av. years total schooling, Life expectancy at birth, total (years) Infant mortality rate Notes: lower and upper refer to 95% confidence limits; results from IPWLS estimator employed.

40 12 / 17 Result 2: unpacking aggregate aid effectiveness Change in the period average for outcomes due to 5% Aid/GDP ratio ( ): Variable Lower Point Upper GDP per capita growth / year Agriculture, value added (% GDP) Poverty headcount at $1.25 a day Investment (% GDP) Revenue, excluding grants (% GDP) Av. years total schooling, Life expectancy at birth, total (years) Infant mortality rate Notes: lower and upper refer to 95% confidence limits; results from IPWLS estimator employed.

41 13 / 17 Result 3: time series evidence What can we say about the relation between aid and macroeconomic performance within sub-saharan African countries over time? Aid has a positive long-run effect on key macro-variables (GDP, investment, consumption) for the vast majority of countries In only 3 of 36 countries is there a negative effect of aid on GDP or investment The transmission of aid on the macro-economy is heterogeneous Country-specific approaches (insights) are vital to understand the role of aid in individual cases

42 13 / 17 Result 3: time series evidence What can we say about the relation between aid and macroeconomic performance within sub-saharan African countries over time? Aid has a positive long-run effect on key macro-variables (GDP, investment, consumption) for the vast majority of countries In only 3 of 36 countries is there a negative effect of aid on GDP or investment The transmission of aid on the macro-economy is heterogeneous Country-specific approaches (insights) are vital to understand the role of aid in individual cases

43 Result 4: meta-analysis Different studies come to different conclusions. What do they say overall? Paldam et al. find no evidence of any effect of aid on growth (using 68 studies) Mekasha and Tarp (forthcoming, JDS) review the same studies and find the weighted average effect of aid on growth is positive & statistically significant Why such different result? Paldam et al. assume a single fixed effect of aid on growth Mekasha et al. allow for heterogeneity (different samples, periods etc.) Paldam et al. mis-measure the partial effect of aid for papers which include an aid interaction term Mekasha et al. correct this error 14 / 17

44 Result 4: meta-analysis Different studies come to different conclusions. What do they say overall? Paldam et al. find no evidence of any effect of aid on growth (using 68 studies) Mekasha and Tarp (forthcoming, JDS) review the same studies and find the weighted average effect of aid on growth is positive & statistically significant Why such different result? Paldam et al. assume a single fixed effect of aid on growth Mekasha et al. allow for heterogeneity (different samples, periods etc.) Paldam et al. mis-measure the partial effect of aid for papers which include an aid interaction term Mekasha et al. correct this error 14 / 17

45 Result 4: meta-analysis Different studies come to different conclusions. What do they say overall? Paldam et al. find no evidence of any effect of aid on growth (using 68 studies) Mekasha and Tarp (forthcoming, JDS) review the same studies and find the weighted average effect of aid on growth is positive & statistically significant Why such different result? Paldam et al. assume a single fixed effect of aid on growth Mekasha et al. allow for heterogeneity (different samples, periods etc.) Paldam et al. mis-measure the partial effect of aid for papers which include an aid interaction term Mekasha et al. correct this error 14 / 17

46 Result 4: meta-analysis Different studies come to different conclusions. What do they say overall? Paldam et al. find no evidence of any effect of aid on growth (using 68 studies) Mekasha and Tarp (forthcoming, JDS) review the same studies and find the weighted average effect of aid on growth is positive & statistically significant Why such different result? Paldam et al. assume a single fixed effect of aid on growth Mekasha et al. allow for heterogeneity (different samples, periods etc.) Paldam et al. mis-measure the partial effect of aid for papers which include an aid interaction term Mekasha et al. correct this error 14 / 17

47 15 / 17 Summary Growing body of evidence using different methods that aid can work (at all levels), but is heterogeneous Perspective also supported by: Recent research from Center for Global Development Case studies (e.g., Mozambique) Large health gains in low income countries Challenge therefore is to enhance aid effectiveness: Transparency Accountability Experimentation & evaluation Focus

48 15 / 17 Summary Growing body of evidence using different methods that aid can work (at all levels), but is heterogeneous Perspective also supported by: Recent research from Center for Global Development Case studies (e.g., Mozambique) Large health gains in low income countries Challenge therefore is to enhance aid effectiveness: Transparency Accountability Experimentation & evaluation Focus

49 15 / 17 Summary Growing body of evidence using different methods that aid can work (at all levels), but is heterogeneous Perspective also supported by: Recent research from Center for Global Development Case studies (e.g., Mozambique) Large health gains in low income countries Challenge therefore is to enhance aid effectiveness: Transparency Accountability Experimentation & evaluation Focus

50 16 / 17 Current trends Changing focus of aid: 1 Challenge of global public goods (climate, health) 2 Turn to productive aid (industry, agriculture) Widening financing options: 1 Shift to specialised (challenge) funds 2 Re-emergence of non-dac donors 3 Other capital flows (e.g., FDI) Evolving challenges: 1 Exit strategies (IDA) 2 Fragile states

51 16 / 17 Current trends Changing focus of aid: 1 Challenge of global public goods (climate, health) 2 Turn to productive aid (industry, agriculture) Widening financing options: 1 Shift to specialised (challenge) funds 2 Re-emergence of non-dac donors 3 Other capital flows (e.g., FDI) Evolving challenges: 1 Exit strategies (IDA) 2 Fragile states

52 16 / 17 Current trends Changing focus of aid: 1 Challenge of global public goods (climate, health) 2 Turn to productive aid (industry, agriculture) Widening financing options: 1 Shift to specialised (challenge) funds 2 Re-emergence of non-dac donors 3 Other capital flows (e.g., FDI) Evolving challenges: 1 Exit strategies (IDA) 2 Fragile states

53 17 / 17 Conclusions 1 Ideological vs. empirical views about aid 2 No evidence that aid is damaging 3 Aid can work BUT is heterogeneous 4 Aid environment is evolving: More competition Greater complexity