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A wider approach to aid effectiveness : correlated impacts on health, wealth, fertility and education

TL;DR: The 2005 G8 summit in Scotland focused attention on the commitment of the industrialized world to promoting economic/social development in Africa and other parts of the developing world as discussed by the authors, and debates about aid delivery took place in an atmosphere of scepticism about the benefits that foreign aid might bring.
Abstract: The 2005 G8 summit in Scotland focused attention on the commitment of the industrialized world to promoting economic/social development in Africa and other parts of the developing world. The debates about aid delivery took place in an atmosphere of scepticism about the benefits that foreign aid might bring. For example, at the time of the summit, many newspapers reported recent IMF research casting doubt at the effectiveness of aid expenditure.1 This pessimistic news contrasts strongly with some of the recent academic literature. The balance of evidence in the academic literature — which has not received a great deal of attention outside the academic community — is that, on average, aid does have some beneficial impact on human development (Addison et al. 2005; Clemens et al. 2004). This is not to say that aid will ever close the income gap between the northern and southern hemispheres, but rather that aid recipients experience better development outcomes, on average, than they would in the absence of aid.

Summary (2 min read)

1 Introduction

  • The 2005 G8 summit in Scotland focussed attention on the commitment of the industrialized world to promoting economic/social development in Africa and other parts of the developing world.
  • At the time of the summit, many newspapers reported recent IMF research casting doubt at the effectiveness of aid expenditure.
  • This is not to say that aid will ever close the income gap between the northern and southern hemispheres, but rather that aid recipients experience better development outcomes, on average, than they would in the absence of aid.
  • They emphasize that ‘[a]id has to be spent really effectively so that the productivity improvements … offset any dampening effects from a fall in competitiveness’.
  • As usual, the academic research is less categorical and more hedged with doubt.

2.1 First problem: identification of the treatment effect

  • Poor countries receive more aid (on average) than rich ones.
  • A simple comparison of conditions in countries with aid to conditions in those without does not demonstrate the effect of aid.
  • (Hospitals are full of sick people, but it does not mean that the hospitals made them sick.).
  • Any results from the statistical analysis are predicated on the independence of the instrument and on the exclusion restriction.
  • The exclusion restriction here can be questioned: colonial ties could also promote trade between the developing country and its former occupier, in which case aid is not the only route through which colonial ties impact on economic development.

2.2 Second problem: how is ‘development’ to be measured?

  • Aid might affect a wide variety of social and economic indicators.
  • It is unfortunate then that most papers examining aid effectiveness measure development only in terms of material wellbeing, specifically, in terms of average personal income in a region.
  • The price data on which PPP adjustments are based are collected only in certain countries and certain years.
  • There already exist empirical studies relating to the connections between different dimensions of development, not just material wellbeing, but they typically focus on a single link in the chain.
  • Higher standards of education and health embody human capital investments that increase productivity and so per capita income.

3 A solution to these problems

  • Drawing on the methodology and results presented in Fielding et al. (2005).the authors.
  • Still, many of the poor in Paraguay lack sanitation and have higher fertility and infant mortality rates than the rich.
  • Of the exogenous country characteristics that the authors allow for in their model of development, some might impact on all of their indicators.
  • The authors need not speculate about whether the positive or negative effect dominates for any given pair of development indicators: appropriate statistical analysis will reveal which is greater on average, or whether the two more or less cancel each other out.
  • Second, the authors ought to distinguish between the direct effect of aid, on average, and the ‘equilibrium’ effect.

4 Conclusions

  • The results thus summarized show a straightforwardly positive effect of aid on development outcomes.
  • One reason for this contrast may be that the results above focus on the impact of aid on human development, and how aid might promote investment in human capital.
  • Moreover, any beneficial impact of aid on labour productivity could be offset by a Dutch Disease effect, as the inflow of foreign currency leads to a real exchange rate appreciation and a consequent reduction in export competitiveness.
  • Despite the fact that a relatively small fraction of aid budgets (about 5 per cent on average) is hypothecated to health expenditure.
  • One potential explanation for this, meriting further research, is that there are relatively low fungibility and/or relatively large flypaper effects with aid to health.

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Copyright © UNU-WIDER 2006
1
Department of Economics, University of Otago;
2
UNU-WIDER;
3
University of Leicester
This study is a revised version of the paper presented at the 17-18 June 2005 UNU-WIDER anniversary
conference, ‘WIDER Thinking Ahead: The Future of Development Economics’, directed by George
Mavrotas and Anthony Shorrocks.
UNU-WIDER gratefully acknowledges the financial contributions to the research programme by the
governments of Denmark (Royal Ministry of Foreign Affairs), Finland (Ministry for Foreign Affairs),
Norway (Royal Ministry of Foreign Affairs), Sweden (Swedish International Development Cooperation
Agency—Sida) and the United Kingdom (Department for International Development).
ISSN 1810-2611 ISBN 92-9190-791-X (internet version)
Research Paper No. 2006/23
A Wider Approach to Aid
Effectiveness
Correlated Impacts on Health, Wealth,
Fertility and Education
David Fielding,
1
Mark McGillivray,
2
and Sebastian Torres
3
February 2006
Abstract
In this paper we discuss the results of research into the impact of foreign aid on human
development. Rather than focussing on per capita income, as is common in the existing
literature, we look at how aid impacts on a range of human development indicators,
including measures, of health, education and fertility, and allow for the fact that these
different dimensions of wellbeing are likely to interact with each other. Overall, aid is
found to have a substantial positive impact on many development outcomes.
Keywords: aid, health, wealth, fertility, education
JEL classification: O11, O15

The World Institute for Development Economics Research (WIDER) was
established by the United Nations University (UNU) as its first research and
training centre and started work in Helsinki, Finland in 1985. The Institute
undertakes applied research and policy analysis on structural changes
affecting the developing and transitional economies, provides a forum for the
advocacy of policies leading to robust, equitable and environmentally
sustainable growth, and promotes capacity strengthening and training in the
field of economic and social policy making. Work is carried out by staff
researchers and visiting scholars in Helsinki and through networks of
collaborating scholars and institutions around the world.
www.wider.unu.edu publications@wider.unu.edu
UNU World Institute for Development Economics Research (UNU-WIDER)
Katajanokanlaituri 6 B, 00160 Helsinki, Finland
Camera-ready typescript prepared by Lorraine Telfer-Taivainen at UNU-WIDER
The views expressed in this publication are those of the author(s). Publication does not imply
endorsement by the Institute or the United Nations University, nor by the programme/project sponsors, of
any of the views expressed.
Acknowledgements
We would like to express our thanks to Chris Haig for help in preparing this text.
However, all remaining errors are our own.

1
1 Introduction
The 2005 G8 summit in Scotland focussed attention on the commitment of the
industrialized world to promoting economic/social development in Africa and other
parts of the developing world. The debates about aid delivery took place in an
atmosphere of scepticism about the benefits that foreign aid might bring. For example,
at the time of the summit, many newspapers reported recent IMF research casting doubt
at the effectiveness of aid expenditure.
1
This pessimistic news contrasts strongly with
some of the recent academic literature. The balance of evidence in the academic
literature—which has not received a great deal of attention outside the academic
community—is that, on average, aid does have some beneficial impact on human
development (Addison et al. 2005; Clemens et al. 2004). This is not to say that aid will
ever close the income gap between the northern and southern hemispheres, but rather
that aid recipients experience better development outcomes, on average, than they
would in the absence of aid.
The research which the newspaper reports were publicizing illustrates some of the
difficulties involved in researching aid effectiveness. First of all in producing robust
estimates of the impact of aid on recipient countries, and secondly in communicating
these results to a wider audience. In fact, there is a marked difference in tone between
the newspaper reports above and the research paper they were quoting. This paper
(Rajan and Subramanian 2005) actually states that ‘[a]id inflows do have systematic
adverse effects on growth … in labour intensive and export sectors’, but that ‘[w]e have
not established whether these adverse competitiveness effects offset any beneficial
effects of aid’. They emphasize that ‘[a]id has to be spent really effectively so that the
productivity improvements … offset any dampening effects from a fall in
competitiveness’. As usual, the academic research is less categorical and more hedged
with doubt. But what are the reasons for uncertainty in this case? Why can economists
not work out how foreign aid affects the countries to which it is directed? There are two
key problems.
In the next section, we review the key difficulties in establishing empirical evidence on
the effects of aid. Section 3 then illustrates how we might chart a way though these
difficulties.
1
With headlines such as ‘Aid will not boost growth, warns IMF’ (The Age, 04.07.05); ‘Aid will not lift
growth in Africa, warns IMF’ (Financial Times, 29.06.05); and ‘IMF: Cash Alone Won’t Solve Africa’s
Ills’ (Iran Daily, 02.07.05).

2
2 Why is it so difficult to determine the effects of aid?
2.1 First problem: identification of the treatment effect
Poor countries receive more aid (on average) than rich ones. A simple comparison of
conditions in countries with aid to conditions in those without does not demonstrate the
effect of aid. (Hospitals are full of sick people, but it does not mean that the hospitals
made them sick.) To identify the effect of aid on an indicator of social or economic
development, we need to find an instrument, a third variable that is independent of both,
and that has a direct effect on aid only (not on the development indicator; this is an
exclusion restriction). If our indicator varies systematically with this third variable, then
we have demonstrated an aid effect, because, by assumption, the only way our indicator
could have been affected is through aid.
But this approach relies on assumptions about how the three variables are connected; no
study can ever be 100 per cent watertight. Any results from the statistical analysis are
predicated on the independence of the instrument and on the exclusion restriction.
Therefore, all results about the effectiveness of aid are necessarily provisional. In many
cases, it is possible to question the validity of the exclusion restriction. For example,
Rajan and Subramanian use information about developing countries’ colonial ties as an
instrument. The argument is the that former colonial powers are more inclined to give
aid to their former colonies, so a developing country with a colonial tie to one of the
relatively prosperous industrialized countries is likely to receive more aid, ceteris
paribus. However, the exclusion restriction here can be questioned: colonial ties could
also promote trade between the developing country and its former occupier, in which
case aid is not the only route through which colonial ties impact on economic
development.
2.2 Second problem: how is ‘development’ to be measured?
Aid might affect a wide variety of social and economic indicators. In order to identify
the degree of aid effectiveness, we need to establish which indicators are important, and
how the different indicators interact. A multivariate approach to the problem is a key to
its solution, because there may be many virtuous spirals between different dimensions
of development. It is unfortunate then that most papers examining aid effectiveness
measure development only in terms of material wellbeing, specifically, in terms of
average personal income in a region. In cross-country growth studies, the norm is to use
PPP-adjusted per capita GDP or GNP.
2
There are a number of reasons why PPP-
adjusted per capita income may be an unsatisfactory measure of material wellbeing. The
price data on which PPP adjustments are based are collected only in certain countries
and certain years. PPP adjustments for other countries and years, especially in the
developing world, are based on extrapolations that may embody large measurement
2
See Summers and Heston (1991) for a description of PPP adjustment to national accounts data.

3
errors. Moreover, the prices used make little or no adjustment for variations in the
quality of goods and services. Perhaps more importantly, many of the key goods and
services that make a large difference to the utility of low-income households are
consumed jointly by all the members of a single household. Examples include access to
piped water and a flush lavatory, and the use of a refrigerator or radio. In this case per
capita measures of prosperity may be less informative than measures based on assets per
household.
There already exist empirical studies relating to the connections between different
dimensions of development, not just material wellbeing, but they typically focus on a
single link in the chain. There are studies of the impact of a region’s education on its
income (for example, Teulings and van Rens 2003), of income on education (for
example, Fernandez and Rogerson 1997), of income on health (for example, Pritchett
and Summers 1996), of health on income (for example, Bloom et al. 2004), of fertility
on income (for example, Ahlburg 1996) and of income on fertility (for example, Strulik
and Siddiqui 2002).
3
Many of these studies present careful and compelling evidence on
their chosen area of research, but taken as a whole they embody certain limitations. The
heterogeneity of statistical methodologies and datasets across these papers means that
they do not shed any collective light on the relative importance of the different causal
links in the overall development process. It would be useful to know, for example, if
any one link is particularly strong, and hence a potential focus for development policy
and expenditure.
Moreover, most existing cross-country studies use data on the average value of the
development indicators in each country. The main aim of most empirical economic
research has been to explain correlations in these indicators at the national level.
Researchers in education and health sciences have often been more sensitive to the
drawbacks of such an approach.
4
They point out that using mean income places a large
weight on the income of the rich, because income distributions are left-skewed, so the
mean figure reported for a country is higher than the median. Looking at the link
between variations in mean income and, say, variations in infant mortality might be
misleading, because high infant mortality is a consequence of the poverty of middle-
and low-income groups in a developing country. One way of addressing this problem
might be to include a measure of income distribution in the empirical model; however, a
more direct approach would be to measure separately the income and health status of
the rich and poor within a country.
3
Briefly, the theoretical rationale for the effects is as follows. Higher standards of education and health
embody human capital investments that increase productivity and so per capita income. Higher fertility
entails a higher rate of population growth, and so a lower capital-labour ratio and (with decreasing returns
to labour) lower productivity. Education and health are also normal consumption goods, so expenditure
on them increases with per capita income. High fertility is a consequence of a low opportunity cost of
labour (especially female labour), and is therefore decreasing in per capita income.
4
See for example Dean Jamison’s comments at the IMF Economic Forum Health, Wealth and Welfare,
15 April 2004 (www.imf.org/external/np/tr/2004/tr040415.htm).

Citations
More filters
Journal ArticleDOI
TL;DR: The authors assesses the aid-development nexus in 52 African countries using updated data (1996-2010) and a new indicator of human development (adjusted for inequality) and find that development assistance is detrimental to GDP growth, GDP per capita growth and inequality adjusted human development.
Abstract: This paper assesses the aid-development nexus in 52 African countries using updated data (1996-2010) and a new indicator of human development (adjusted for inequality). The effects of Total Net Official Development Assistance (NODA), NODA from the Development Assistance Committee (DAC) and NODA from Multilateral donors on economic prosperity (at national and per capita levels) are also examined. The findings broadly indicate that development assistance is detrimental to GDP growth, GDP per capita growth and inequality adjusted human development. The magnitude of negativity (which is consistent across specifications and development dynamics) is highest for NODA from Multilateral donors, followed by NODA from DAC countries. Given concerns on the achievement of the MDGs, the relevance of these results point to the deficiency of foreign aid as a sustainable cure to poverty in Africa. Though the stated intents or purposes of aid are socio-economic, the actual impact from the findings negates this. It is a momentous epoque to solve the second tragedy of foreign aid; it is high time economists and policy makers start rethinking the models and theories on which foreign aid is based. In the meantime, it is up to people who care about the poor to hold aid agencies accountable for piecemeal results. Policy implications and caveats are discussed.

74 citations

Journal ArticleDOI
TL;DR: In this paper, the authors examined the effect of different categories of foreign aid on poverty reduction and found that only aid in the form of grants do have a pro-poor effect, while the increasing donor interest in technical assistance aid in recent years should be reconsidered as there is no strong evidence that it reduces poverty.
Abstract: This paper examines the effect of different categories of foreign aid on poverty reduction. It uses a country case study for Sierra Leone to explore the impact of different aid types on pro-poor growth as a dimension of poverty reduction. Using annual time series data spanning from 1970 to 2007 and employing the bounds test approach to cointegration by Pesaran and Shin (1999), the study finds strong evidence to suggest that only aid in the form of grants do have a pro-poor effect. This result is more obvious in the long run than in the short run. Aid in the forms of loans and technical assistance could not prove signficant for fostering pro-poor growth in the country. Thus, even though total aid reveals a highly significant long-run impact in improving pro-poor growth in Sierra Leone, when disaggregated, only aid in the form of grants shows strong evidence of reducing poverty in the country. The implication of these findings is that for reducing poverty in typically poor and fagile states, aid in the form of grants should be encouraged. The increasing donor interest in technical assistance aid in recent years should be reconsidered as there is no strong evidence that it reduces poverty.

41 citations

Posted Content
TL;DR: The authors assesses the aid-development nexus in 52 African countries using updated data (1996-2010) and a new indicator of human development (adjusted for inequality) and find that development assistance is detrimental to GDP growth, GDP per capita growth and inequality adjusted human development.
Abstract: This paper assesses the aid-development nexus in 52 African countries using updated data (1996-2010) and a new indicator of human development (adjusted for inequality). The effects of Total Net Official Development Assistance (NODA), NODA from the Development Assistance Committee (DAC) and NODA from Multilateral donors on economic prosperity (at national and per capita levels) are also examined. The findings broadly indicate that development assistance is detrimental to GDP growth, GDP per capita growth and inequality adjusted human development. The magnitude of negativity (which is consistent across specifications and development dynamics) is highest for NODA from Multilateral donors, followed by NODA from DAC countries. Given concerns on the achievement of the MDGs, the relevance of these results point to the deficiency of foreign aid as a sustainable cure to poverty in Africa. Though the stated intents or purposes of aid are socio-economic, the actual impact from the findings negates this. It is a momentous epoque to solve the second tragedy of foreign aid; it is high time economists and policy makers start rethinking the models and theories on which foreign aid is based. In the meantime, it is up to people who care about the poor to hold aid agencies accountable for piecemeal results. Policy implications and caveats are discussed.

27 citations


Cites background from "A wider approach to aid effectivene..."

  • ...Of all examined proponents of a positive aid-development nexus, Fielding et al. (2006) have been the most optimistic in their conclusion on a straight forward positive impact of aid on development outcomes....

    [...]

  • ...Fielding et al. (2006) There is a straight forward positive impact of aid on development outcomes....

    [...]

  • ...While development assistance has a bearing on the development of the recipient country (Addison et al., 2005; Fielding et al., 2006), the reverse effect cannot be ruled-out as aid from donor agencies (countries) is conditional on development (institutional) characteristics of recipient countries....

    [...]

  • ...Source (Author) While the effectiveness of aid is more straightforward for some (Ishfaq, 2004; Addison et al., 2005; Fielding et al., 2006), the Okada & Samreth (2012) findings ‘on the effect of foreign aid on corruption’ have recently been object of intense debate from an African perspective…...

    [...]

  • ...(Addison et al., 2005; Fielding et al., 2006), the reverse effect cannot be ruled-out as aid from donor agencies (countries) is conditional on development (institutional) characteristics of recipient countries....

    [...]

Journal ArticleDOI
TL;DR: In this paper, the authors integrated two main strands of the aid-development nexus in assessing whether institutional thresholds matter in the effectiveness of foreign-aid on institutional development in 53 African countries over the period 1996-2010.
Abstract: Purpose – The purpose of this paper is to integrate two main strands of the aid-development nexus in assessing whether institutional thresholds matter in the effectiveness of foreign-aid on institutional development in 53 African countries over the period 1996-2010. Design/methodology/approach – The panel quantile regression technique enables us to investigate if the relationship between institutional dynamics and development assistance differs throughout the distributions of institutional dynamics. Eight government quality indicators are employed: rule of law, regulation quality, government effectiveness, corruption, voice and accountability, control of corruption, political stability and democracy. Findings – Three hypotheses are tested and the following findings are established: first, institutional benefits of foreign-aid are contingent on existing institutional levels in Africa; second, but for a thin exception (democracy), foreign-aid is more negatively correlated with countries of higher institutio...

24 citations

Journal ArticleDOI
TL;DR: In this article, the authors use a cross-country dataset to estimate the strength of the links between different dimensions of social and economic development, including indicators of health, fertility, and education, as well as material wellbeing.
Abstract: The authors use a new cross-country dataset to estimate the strength of the links between different dimensions of social and economic development, including indicators of health, fertility, and education, as well as material wellbeing. This differs from previous studies in employing data for different income groups in each country in order to provide direct evidence on factors driving inequality, and in using a unique measure of material wellbeing that does not rely on PPP comparisons.

20 citations

References
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Posted Content
TL;DR: The Penn World Table as discussed by the authors is a set of national accounts economic time series covering many countries and its expenditure entries are denominated in common set of prices in a common currency so that real quantity comparisons can be made, both between countries and over time.
Abstract: The Penn World Table displays a set of national accounts economic time series covering many countries. Its expenditure entries are denominated in a common set of prices in a common currency so that real quantity comparisons can be made, both between countries and over time. It also provides information about relative prices within and between countries, as well as demographic data and capital stock estimates. This updated, revised, and expanded Mark 5 version of the table includes more countries, years, and variables of interest to economic researchers. The Table is available on personal computer diskettes and through BITNET.

3,160 citations


"A wider approach to aid effectivene..." refers background in this paper

  • ...4 See for example Dean Jamison’s comments at the IMF Economic Forum Health, Wealth and Welfare, 15 April 2004 (www.imf.org/external/np/tr/2004/tr040415.htm)....

    [...]

  • ...PPP adjustments for other countries and years, especially in the developing world, are based on extrapolations that may embody large measurement 2 See Summers and Heston (1991) for a description of PPP adjustment to national accounts data. errors....

    [...]

Journal ArticleDOI
TL;DR: The Penn World Table as discussed by the authors is a set of national accounts economic time series covering many countries and its expenditure entries are denominated in common set of prices in a common currency so that real quantity comparisons can be made, both between countries and over time.
Abstract: The Penn World Table displays a set of national accounts economic time series covering many countries. Its expenditure entries are denominated in a common set of prices in a common currency so that real quantity comparisons can be made, both between countries and over time. It also provides information about relative prices within and between countries, as well as demographic data and capital stock estimates. This updated, revised, and expanded Mark 5 version of the table includes more countries, years, and variables of interest to economic researchers. The Table is available on personal computer diskettes and through BITNET.

2,790 citations

Journal ArticleDOI
TL;DR: This article showed that good health has a positive, sizable, and statistically significant effect on aggregate output, even when controlling for experience of the workforce, and argued that the life expectancy effect in growth regressions appears to be a real labor productivity effect, and is not the result of life expectancy acting as a proxy for worker experience.

1,204 citations


"A wider approach to aid effectivene..." refers background in this paper

  • ...…(for example, Fernandez and Rogerson 1997), of income on health (for example, Pritchett and Summers 1996), of health on income (for example, Bloom et al. 2004), of fertility on income (for example, Ahlburg 1996) and of income on fertility (for example, Strulik and Siddiqui 2002).3 Many of…...

    [...]

  • ...Why can economists not work out how foreign aid affects the countries to which it is directed?...

    [...]

Journal ArticleDOI
TL;DR: In this article, the authors estimate the effect of income on health with cross-country, time series data on health (infant and child mortality, and life expectancy) and per capita income.
Abstract: With cross-country, time series data on health (infant and child mortality, and life expectancy) and per capita income, the authors estimate the effect of income on health. They use instrumental variables estimation to identify the effect of income on health that is structural and causal, isolated from reverse causation (healthier workers are more productive and hence wealthier) or incidental association (some other factor may cause both better health and greater wealth). The long-run income elasticity of infant and child mortality in developing countries lies between 0.2 and 0.4. Using those estimates, they calculate that in 1990 alone, more than half a million child deaths in the developing world could be attributed to poor economic performance in the 1980s.

1,112 citations

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TL;DR: This article examined the effects of aid on growth in cross-sectional and panel data, after correcting for the possible bias that poorer (or stronger) growth may draw aid contributions to recipient co
Abstract: We examine the effects of aid on growth in cross-sectional and panel data—after correcting for the possible bias that poorer (or stronger) growth may draw aid contributions to recipient co

833 citations

Frequently Asked Questions (2)
Q1. What have the authors contributed in "Correlated impacts on health, wealth, fertility and education" ?

In this paper the authors discuss the results of research into the impact of foreign aid on human development. 

One potential explanation for this, meriting further research, is that there are relatively low fungibility and/or relatively large flypaper effects with aid to health. Governments need to manage the potential downsides of aid, such as Dutch Disease. Nevertheless, there is a substantial body of evidence to suggest that institutions do matter for aid directed at industry. The Dutch Disease effect can be offset by good macroeconomic policy to promote competitiveness.