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Does aid work?
Poverty in Focus, International Poverty Centre
October 2007

http://www.undp-povertycentre.org/pub/IPCPovertyInFocus12.pdf (Direct link to PDF)

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In 2005, the G8 leaders promised to double aid to Africa and the UN World Summit to increase total official development assistance (ODA) by around $ 50 bn. a year by 2010 to reach at least 0.5 per cent of donor countries'gross national product (GNP). The Summit recognised that such increases in ODA were required for achieving the Millennium Development Goals (MDGs).

Aid volume targeting is not new; even in 1970 the UN set the ODA target of 0.7 per cent of the GNP of each economically advanced country, so far met by only five donor countries. The announcements of sharp increases in aid to developing countries have not been received only with cheers all around. An intense debate is taking place on whether this is the right road to take, considering the perceived macroeconomic risks and the large amounts of aid that have already been provided during several decades, while massive poverty persists in developing countries. The aid critique and the signs of political 'aid fatigue' have intensified in recent years; many point to free trade and private investment as better options.

Yet, the decades of ODA have seen the largest poverty reduction in the history of mankind. The evidence indicates mostly that aid has contributed significantly to this, both via its impact on economic growth and through more direct interventions for human development (see page 10).

In this issue of Poverty in Focus, various features of the current international aid system are discussed critically and constructively, with references to recent research literature on aid effectiveness and sharing of important and policy-relevant results. Roger C. Riddell summarises his new book explaining why the current aid system is no longer fit for purpose and needs a radical overhaul. He provides a sketch of an alternative as a basis for discussion.

Stephen Browne aims his critique at the traditional volume targeting of aid and at its supply-driven mode, proposing a shift of focus to human development at country level. Nancy Birdsall focuses on the impact of aid on the middle class, including skilled workers. She advocates reforms of aid to reduce its risk of undermining weak institutions in aid-dependent Africa.

Finn Tarp reviews the evidence from aid effectiveness studies and finds the single most common result to be that aid has had a positive impact on per capita income growth. Edward Anderson discusses how different principles for allocating aid across countries affect global MDG achievement, involving a trade-off between equity and effective use of aid. Patrick Guillaumont argues that aid is most effective as volatility insurance in the poorest and most vulnerable countries, where it helps pro-poor growth by stabilising the economy.

Rainer Thiele et al. examine the large variations across donors in the sector targeting of aid, especially in the share of social sectors that are key to achieving most of the MDGs. David Goldsbrough and Ben Elberger find that IMF conditionality has unduly constrained aid spending in poor countries in favour of using aid for reducing debt rather than poverty. John Serieux stresses that such a response to the fear of Dutch disease is unjustified, since many countries have shown that aid surges can be managed and used for its intended purposes.

Terry McKinley shows that such fears have meant that only about a quarter of disbursed aid to Africa was actually spent as intended; the lion's share went into reserves and debt buy-backs.

Pierre Jacquet analyses the aid grants vs. loans issue in the light of the resolution of the debt crisis of poor countries, supporting the use of modernised models of ODA loans. Jan Cedergren reports on the response by development cooperation partners to the many challenges of aid effectiveness and on the intensive reform process and its monitoring. May these articles contribute to the ongoing analytical and policy debate on aid effectiveness and thus to the changes in aid modalities and procedures that are most likely to enhance advancement towards the MDGs.

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