University of Groningen - Minor Development Studies

Topical Themes in Development

Foreign Aid
Is it likely that it really works?
Anne Jet Niermeijer and Pieter Hogeveen

Dirk Bezemer (supervisor)

Final
Version
February 2009
TABLE OF CONTENT

INTRODUCTION 3

Literature Review 5

1. HISTORY OF AID, WHAT IS IT? 9

2. MOTIVES FOR AID, WHY IS AID GIVEN? 13

Morale Motives 13
Historical Reasons 13
Sense of Responsibility 13

Economic Motives 14
Financing Gap 14
Commercial interests 15

Political Motives 15

3. WHY WOULD AID WORK AND WHY WOULD IT NOT WORK? 17

Types of Aid 18

Main arguments pro aid 19

Why would aid work? 19

Main Arguments against aid 20

Why would aid not work? 20

Measuring the impact of Aid 23

Aid and Economic Growth vs. Socio-Political Factors 24

Conditions for Effective Aid 25

Policy Reform 25
Good governance and no corruption 27

Case Example 1 ‘Aid Works in Tanzania’ 28

Case Example 2 ‘Aid Does Not Work in Kenya’ 30

CONCLUSIONS 32

REFERENCES 34

2
Introduction

Almost since its inception more than 50 years ago official aid has been disputed. The mass media
gave great attention to the popular views on aid. Briefly stated and polarized in two camps. One
camp saying it does not work and therefore should be ended immediately, and the other camp
supporting aid , say it is necessary and should be increased. In these 50 years official aid has been
given to many countries, in many ways and based on many theories. Furthermore, numerous studies
and a large body of literature has focused on the everlasting question, does foreign aid work?

However, these studies and literature never really seem to answer this question in an objective way
upon which everyone could agree. Every theory and empirical evidence seemed to lack something
which created a basis for further debate and controversy.

It is interesting to ask ourselves, how is it possible that intelligent people, working for large influential
international institutes, with every possible necessary resource at their disposal, cannot agree on the
answer to this question? Does it show that the answer to this question is complex and therefore hard
to answer? Could it be that there is more behind this question, that aid is given for other goals than
economic growth and improvement of human welfare?

We think that given the fact that over 50 years of foreign aid giving and 50 years of foreign aid
research has not provided us with an absolute answer to this question, the question should be
slightly different. That is why we will try to answer the following question in this article

Is it likely that current foreign aid does help a developing country in its economic growth and
improvement of human welfare?

We will argue in this article that It is not likely that current foreign aid works, based upon the key-
literature we show that not only it won’t work when certain conditions aren’t met. Moreover, it is
seems that is does not work at all and can be even counterproductive.

Section one will first define what aid is, and how it has developed itself during the decades from the
1930’s till now. The different objectives for aid will be discussed as well as the underlying theories.
This will show us that there seems to be a reversal movement in aid giving. Furthermore, it will
consider the different thoughts on aid giving and it’s results.
Consequently, section two of this article will give an overview of the different motives for aid giving
and the linked theories to this motives. We will show that there are many other motives besides

3
helping our fellow human beings in desperate need. This raises some questions on the honest
motives in aid giving of some countries.

Section three will go into further detail on why aid would work and why it would not work. It
discusses the main arguments pro and contra foreign aid. Furthermore, it discusses the several types
of aid and how they differ. The next section, section four will assess the evidence on aid. We won’t
go into much detail on statistics, but elaborate on the different measurement methods. This will
provide insights in the difficulty of the measurement of aid effectiveness. We will illustrate the
effectiveness of foreign aid by discussing two cases. In either case it concerns an African country in a
comparable situation. However, in Tanzania foreign aid seems to work, while in Kenya it doesn’t.

Finally, in our conclusion we will sum up the arguments and literature on foreign aid and argue that
based upon this literature it is not likely that current foreign aid works.

4
Literature Review

Since foreign aid has been given to countries, it also became a hot debate which did vary in its
hotness but never seems to disappear. This explains the enormous amount of papers, books and
articles written on this particular topic. We have aimed to use the key pieces of literature written on
this issue and use additional literature for new insights. The literature is divided into the topics we
use for this article.

When discussing the definition and history of aid. There are two used sources which provide a good
overview on aid history. First of all, there is the book of Riddell(2007) which includes an extensive
description on foreign aid history. He claims that a few key stories can be told out of aid history.
Namely, that aid not only has continued to expand over the past 55 years, it also has become an
instrument for the construction of international relationships. Furthermore, there have been short
periods of stagnation in aid in almost every decade. Aid has always been subject to the GDP/Aid ratio
as its primarily measure standard. Lastly, we are in the midst of a period of revival and expansion of
high levels of aid giving. Secondly, the article of Thorbecke(2006) which guides us trough the
different decades of aid giving. In his article he describes the history of foreign aid by defining it as a
body of knowledge consisting of four interrelated components. The first component are the
development objectives and the definition of development. The second component, are the
development theories and hypotheses on development. The third component are the data systems
and the measurement of performance. These three influence each other but particularly influence
the development policies and strategies which is the fourth component described by Thorbecke.
These four components develop themselves and therefore change over het years. With respect to
development objectives he describes a change from an emphasis purely on GNP Growth in the 50’s
and 60’s to a more extended objective of Poverty Reduction and Equilibrium in payments and
budget in the 70’s and 80’s. This developed further in the 90’s into good governance and policies
through institution-building. The current objectives brought the additional objective of Human
Development in education and health. Just as the objectives developed over the years, as did the
theories and data they were based upon and consequently the implemented policies and strategies.
Remarkable is how there seems to be an cyclical effect in the used theories. For example, the
Millenium Development Goals seems to go back to the ‘big push theories’ of the 50’s and 60’s.

Alberto Alesina and David Dollar (2000) study the pattern of allocation of foreign aid from various
donors to receiving countries. They find considerable evidence that the direction of foreign aid is
dictated as much by political and strategic considerations, as by the economic needs and policy

5
performance of the recipients. Colonial past and political alliances are major determinants of foreign
aid. They say that donor countries fail to look at the political and economic situation in the recipient
country. Donors seem to have
ve more interest in giving aid to countries with which they have political
and financial relations.

At the margin, however, countries that democratize receive more aid, ceteris paribus. While foreign
aid flows respond to political variables, foreign dire
direct
ct investments are more sensitive to economic
incentives, particularly good policies and protection of property rights in the receiving countries.
We also uncover significant differences in the behavior of different donors.

Steven Radelet (2003) exploress trends in aid, motives for aid, its impacts and debates about
reforming aid. He discusses the multiple motivations and objectives of aid, some of which conflict
with each other. He gives empirical evidence on the relationship between aid and growth, which
whic is
divided between research that finds no relationship and research that finds a positive relationship.
Radelet is one of the academics who says aid can be effective, unless certain circumstances are met.

Dollar, Devarijan and Holmgren argue in their b

book,
ook, that development programmes must be country-
country
owned, not donor-owned.
owned. Country ownership is the way to make assistance effective. Their book
provides empirical evidence for development partnership. They discuss ten case studies from Africa,
that investigate
ate whether and how foreign aid affected economic policy in the different countries. All
ten received large amounts of aid. Yet the policy outcomes are very diverse among all countries.
Ghana and Uganda were the most successful reformers and achieved susta
sustained
ined good policy. The
other eight did not. These eight countries are divided into three groups; the post
post--socialist reformers,
the mixed reformers and the non
non-reformers.
reformers. The case studies look at the reform process during the
1980s and 1990s. Dollar, Decarijan
an and Holmgren say that what constitutes ‘good policy’ and how it
is measured is controversial.
Learning about development policies and good policy is an ongoing process and is one of the main
roles of effective aid. The ten countries from these case stu
studies
dies all received large amounts of aid, but
ended up with very different policies. This suggests that aid is not a primary determinant of policy.
They did not find an ongoing relationship between aid and reform. The average relationship is likely
to disguise
se the fact that aid supported policy reform in some cases and sustained poor policies in
others. The purpose of country studies is to delve more deeply into the relationship between aid and
reform. Improvements in economic policy are the key to more rapid growth and poverty reduction in
Africa. The question is; how can aid support these improvements?

6
These authors think that donors should look at the quality of policy in the receiving country, not only
at how poor the country really is. Also the composition of aid is important. In the pre-reform period
donors should provide technical assistance and policy dialogue. During the reform period policy
dialogue is also important as is finance. At a later stage in the reform period dialogue gets less
important while finance increases in importance. By altering the quantity and composition of aid,
donors could more systematically support genuine policy reform in the developing world.
Clearly the process of policy reform was more affected by domestic factors than by aid. The
resistance to, and the impetus for reforms are driven by ideology, not by economic analysis.
In the sample of this book there is no relationship between formal democratic institutions and
reform. Aid is so persistent because it was a foreign policy tool rather than a tool for economic
development.

Countries that have successfully reformed have had clear political movements leading to these
changes, what is often referred to as local ownership of reforms. Countries that have made less
progress typically have had powerful vested interests blocking change. Economic policies are
primarily domestically grown. While the recipient countries have different economies and go through
different phases of reform, donors tend to do the same things everywhere and at all times.
The general finding is that different instruments work in different phases of the reform process. If
donors use the wrong instrument at the wrong time, it will be a waste. Each country has a pre-reform
phase of very poor economic policy and no coherent political movement to change the situation.
There is a general agreement that TA and political dialogue are useful in this phase. It can lay the
foundation for policy learning. Conditionality does not work in this phase. The agreements were not
always implemented. Some case studies prove that aid financing can lead to worse economic policies
while is other cases the absence of aid finance encourages reform. In the case of aid absence the
impact of poor economies was clear and the political leaders felt that they had little choice but to
undertake serious reform.

The conclusion here is that large-scale finance in the pre-reform phase has a negative effect,
reducing the need to reform. Conditionality has typically failed in the absence of a serious domestic
movement for change. They don’t say that countries with bad policies should be withheld from all
aid. Rather they think that is an environment of poor policies, budget support has sustained those
bad policies and has not produced good outcomes. Then there is a period of rapid reform. In this
period aid finance plays an important supporting role. When countries actually reform, finance
increases the benefits of those reforms. Aid increases confidence in the reform program and call
forth greater private investment. In this phase TA and policy dialogue retain their usefulness.

7
Conditionality to be useful must reflect measures that the government wants to carry out. Not one
imposed by outside agencies.

Donors tend to discriminate against poor countries that have put good policy into place. Aid rises as
policy improved. However once good policy was achieved, aid declined. Donors continue to use
conditional assistance, when in fact it has outlived its usefulness by this point. Conditionality is useful
during a period of rapid reform in which the government is trying to establish its credibility as a
reformer and get macroeconomic policy measures well entrenched. Conditionality might disguise the
ownership of reforms. It tends to limit participation in policymaking.

George Mavrotas and Bazoumana Ouattara (2003) develop a new fiscal response model for aid,
which combines the ideas of both endogenous and disaggregated aid. They endogenized aid on the
grounds that the recipient government has some influence over aid disbursements. Regarding aid
disaggregation, they argue that each of the main four categories of aid, namely project aid,
programme aid, technical assistance and food aid may exert different effects on the recipient
economy. Furthermore, in case the preferences of the aid-recipient government are higher for some
of these types of aid, neglecting aid disaggregation would lead to aggregation bias in the results and
conclusions. The model adds an important new dimension to the vast aid effectiveness literature and
calls for further modelling as well as empirical work in this promising research area so that significant
policy implications can be derived.

Simeon Djankov, Jose Montalvo and Marta Reynal-Querol, Marta (2008) discuss the effect of foreign
aid and try to document its magnitude. They say foreign aid provides a windfall of resources to
recipient countries and may result in the same rent seeking behaviour as documented in the ‘curse of
natural resources’ literature. They used data from 108 recipient countries in the period of 1960-1999.
They find that foreign aid has a negative effect on institutions and say there is little chance that aid is
effective.

Paul Collier and David Dollar (2001) review the three recent attempts to nuance the analysis. Each
takes as its starting point the notion that a donor will be working with the recipient governments.
They also review the attempts that donor countries have done to influence the policy and conduct of
the receiving governments. The conclusion is that while much can be done to improve the potency of
aid in these respects, it is unlikely to be a very powerful instrument for inducing either type of change
and so these considerations should not become a dominant influence upon aid allocation.

8
1. History of Aid, What is it?

First of all, what is aid precisely? Riddell (2007) defines it as all resources, physical goods, skills,
technical knowhow, financial grants or loans transferred by donors to recipients. We will leave out
the loans as aid, since we don’t consider this as real aid. Furthermore, this definition is too broad to
work with. Therefore, we will define aid as all resources, physical goods, skills, technical knowhow,
financial grants provided by official agencies including state and local governments. With the main
objective of economic development and socio-economic welfare of developing countries. Lastly, in
our definition aid is Official Development Assistance (ODA) and excludes humanitarian aid.
The total amount of ODA over the past decades is shown in the graph1 below.

There were some forms of aid in the 1920’s and 1930’s by the British Government to their colonies
for example. Furthermore, there has always been aid giving by civil society through churches and
other private initiatives. Foreign Aid really started in the late 1940’s, and was formed by an economic
and political tense climate caused by the second world war. It started with the well-known Marshall
plans to help Europe recover from the war. US President Harry Truman emphasized renewed
foreign aid in his inaugural speech in 1949:

1
Source: www.oecd.org

9
“Fourth, we must embark on a bold new program for making the benefits of our scientific advances
and industrial progress available for the improvement and growth of underdeveloped areas. More
than half the people of the world are living in conditions approaching misery. Their food is
inadequate. They are victims of disease. Their economic life is primitive and stagnant. Their poverty is
a handicap and a threat both to them and to more prosperous areas. For the first time in history,
humanity possesses the knowledge and skill to relieve the suffering of these people.”

The UN Charter (1945) and the Declaration of Human Rights (1948) provided further basis for foreign
aid. In the 1950’s and 1960’s it became it institutionalized in Official Development Assistance (ODA).
According to Thorbecke(2005) the selection and adoption of a development strategy depends on a
set of three building blocks. First, the prevailing development objectives. Secondly, the conceptual
state of art regarding the existing body of development theories and hypotheses. Thirdly, the
underlying data system available to diagnose the situation, measure the performance and test the
hypotheses. In these 50 years of foreign aid, policy makers have searched for a match between those
three building blocks. This match resulted in a policy which would enhance development. However,
the change in all three building blocks forced a change in policy, so policy changed as well.

In the beginning of aid programs the focus was on technical assistance and cooperation, since these
skills where seen as a catalyst for the economic development. However, financial aid also emerged
and led to the establishment of the World Bank’s International Development Association (IDA) in the
end of the 1950’s.

The 1950’s and 1960’s were the glory years of foreign aid. The motives for aid were clear and the
figures show socio-economic growth in developing countries. Therefore, the amount of aid
increased. Economic growth in GNP became the main policy objective, and other economic and
social objectives were thought to be resulting from GNP growth. This objective was to be reached by
huge amounts of investment based upon the idea that the developing countries needed a ‘big push’
and a ‘take-off’ in order to get their development going. Furthermore, the industrial sector was
believed to be the engine of growth and consequently the agricultural sector was neglected.
However, at the end of the 1960’s, the optimism turned into doubts and uncertainties about foreign
aid. The effectiveness of aid was disputed. A new question came up, did foreign aid reduce poverty?
The Pearson Commission evaluated the concept of foreign aid in a report called ‘Partners in
Development’ Pearson (1969) The new focus on reducing poverty instead of solely increasing
economic growth added a new dimension to foreign aid. This led to further expansion of foreign aid
in the 1970’s as is shown by the graph. Furthermore, increased employment became one of the

10
objectives in the ‘70’s multi-objective approach.

A combination of heavy foreign debt burdens of the developing countries and a debt crisis in the late
1970’s caused a decline in foreign aid. Before donors were willing to move on, the third world had to
be stabilized and structurally adjusted. The 1980’s was the decade of the so called ‘Structural
Adjustment Plans’. Economies of developing countries had to be transformed, enabling growth and
poverty reduction in an effective way. During the 1980’s the world economy was growing again after
the crisis of the 1970’s and this caused aid levels to rise again. The 1980’s decade was characterized
by a significant growth in NGO’s which focused their attention to poverty reduction and other socio-
economic development issues. The cold war ended in 1989, and signaled a new era for foreign aid
and development. In the early 1990’s political incentives seemed to have disappeared, new
skepticism on foreign aid aroused, and according to the graph on ODA, aid levels decreased. While
the adjustments continued, there was a resurgence of poverty alleviation as a primary goal.
Furthermore, the fast economic growth of east Asia was taken as an example for development. The
results of extraordinary economic growth of Asian countries like China, India and Indonesia without
large flows of foreign aid where astonishing. As a result, there was deregulation, liberalization and an
increased reliance on market mechanisms.

The new millennium provided new political incentives for aid after the 9-11 terrorist attack. The
graph on ODA clearly points this out by taking the example of Iraq. It received nearly 20% of ODA in
2005. Besides political incentives, aid regained attention through institutions as the World Bank with
their World Development Report ‘Attacking Poverty ‘(Worldbank, 2000). Furthermore, the
resurgence of the Human Development Index (HDI). The most well known development in
development arose from the Millennium Development Summit of Heads of State in 2000 held by the
UN. An agreement was reached, called the Millennium Declaration which led to the famous
Millenium Development Goals. With the primary goal to cut poverty in halve by 2015 and the
primary instrument is increasing the amount of aid. In 2005 another report by key-author Jeffrey
Sachs was published under the name ‘Investing in Development: A Practical Plan to achieve the
Millennium Development Goals’(2005). As it says in the title, a concrete plan. As a follow up for the
Structural Adjustment Plans, a new concept was introduced. The Poverty Reduction Strategy Papers
(PRSP’s). They will function as an instrument for poverty reduction. However, they seem to be a SAP
make-over. At this point in time, UN and other agencies are trying to increase foreign aid for the
MDG’s and use the MDG to increase foreign aid. These latest developments have increased the levels
of foreign aid significantly in the past decade to over more than 100 billion US dollars.

11
In conclusion, it seems that the development community has run out of ‘big ideas’ for making
development work. What we see is an amazing reversal of ideas over the 50 years of development
evolution with respect to the roles of the market, government and underlying theories. Although,
each time differently packed and based on different figures there is some resemblance. For instance,
the Millenium Development Goals are big plans which needs a lot of money and government
coordination. It resembles to the big plans of earlier decades which required also a lot of money and
governmental effort. Easterly(2006) calls it a ‘big push déjà vu’ and claims that today, just as then it
overlooks the unsolvable information and incentive problems facing any large scale planning
exercise.

12
2. Motives for Aid, Why is aid given?

Upon what basis do donors allocate their aid? In first instance, one would say that aid is being given
solely altruistically to save lives in emergencies and to contribute to development, growth and
poverty eradication in poor countries. However, this provides a incomplete picture of reality.
Although, donors claim the noble reasons for giving aid. Their allocation of foreign aid is influenced
by other factors and reveals other motives. The ways that aid is allocated and the tying of aid have
profound effects on the overall contribution of aid to development and welfare goals. In this section
we will briefly discuss three types of motives for country’s providing foreign aid; morale, economic,
and political motives for aid.

Morale Motives

Historical Reasons
Several developing countries have historical ties with a developed country, as a consequence of the
colonial era. This provides a developed country with a motive to give aid to its former colony. This
statement is also made by the paper of Alesina&Dollar(2000). In their regression analysis the ‘own
colony’ variable is highly significant with respect to aid giving pattern of the donor country.
Moreover, this can be interpreted as elasticity’s. For instance, doubling the length of time as a colony
of France would result in a 100% increase in aid. Moreover, even against variables as ‘democracy’
and ‘openness’, colonial past is more significant in determining the allocation of aid. For example, a
non-democratic closed developing country with a colonial past receives twice as much aid as an
developing open democratic country with no colonial past.

Sense of Responsibility
Based on our ethics, norms and values, we find it hard and morally unacceptable to see countries and
its citizens suffer from poverty. Practically all individuals, companies and foundations who give
voluntarily to support the work of humanitarian and development charities do so because of some
sense of responsibility or duty to help people suffering and in need. Based upon this public opinion
governments state that they provide foreign aid for these moral reasons This provides grounds for
foreign aid, to share our wealth and reduce their poverty out of solidarity. This obviously implies that
rich countries are the donors while poor countries are recipients, as is shown by Alesina&Dollar
(2000). One particular ethical theory closely associated with this argument is described by
Riddell(2007) ‘Utilitarianism’. The basic notion that moral life should be guided by the objective of
trying to achieve the maximum happiness and satisfaction for the greatest number of people.

13
Consequently, if greater overall satisfaction can be achieved by providing assistance to those in need,
then we should do so. As long as the reduction in our happiness is less as the raise in their happiness.
Furthermore, after the declaration of Human Rights in 1949, the developed countries also had a
responsibility in taking care of these human rights. Hence, human rights perspectives and approaches
form another important framework which provides profound grounds for foreign aid. Extreme
poverty has repeatedly been described in UN documents as a violation of human economic, social
and cultural rights. Therefore, attention should be given to their fulfillment. Encompassing human
rights is the equality in gender and race, which should be ensured through foreign aid giving.
Although, the human rights perspective provides solid grounds for foreign aid it is a very broad
perspective and therefore difficult to use for pointing out responsibilities and tasks.

Economic Motives

Financing Gap
One of the first economically derived motives for foreign aid was the financing gap and the ‘2 Gap
Model’ as described by Chenery and Strout (1966). Firstly the ‘investment-savings gap’, It assumes
that developing countries have no money left to save and consequently to invest. They need every
penny to survive and there consume it. When they receive money through foreign aid to bridge the
gap so they can invest an become self sustainable. The second gap explained by Chenery and Stout is
the ‘foreign exchange gap’ or the ‘balance of payments’ gap. The developing countries are structural
importing more goods in terms of value than they are exporting. As a result they face a structural
deficit on their balance of payment. These gaps can be solved by a flow of foreign capital as the
following economic model will show.

Under the assumption that goods and services in an economy come from two sources, domestic
output and imports we can derive an economic equation: Y = C + I + ( X – M )
Government and individuals can choose to either consume or save, and therefore we can derive the
following equation: I = S + (X-M)

Y national income C consumption

I investment S saving
X exports M imports

14
In this equation we can calculate that for a certain investment to be made there is the requirement
of a certain amount of savings and/or a certain trade balance (X-M). When investment is greater than
the savings, a savings gap exist. Moreover, when imports are greater than exports a trade gap exists.
These gaps don’t have to equal each other, and usually they differ. As a result of this economic
model the gaps must be met by a net capital inflow. According to Chenery and Strout(1966) foreign
aid stimulates development in this way by filling in the gap of domestic savings as well as closing the
trade gap. However, this theory was criticized by other economists. For instance Easterly(2003)
shows that this foreign capital flow leads to consumption instead of investment and Griffin(1970)
performed a data analysis and found that there was a negative correlation between aid and savings.

Commercial interests
Since aid was provided, it has been linked with the commercial interests of donor countries.
Commercial interests were expressed in a lobby under politicians by businesses to gain access to aid
funds, by using the main argument of win-win situation. Where domestic jobs and export will get a
boost while simultaneously development will be stimulated abroad. Hence, commercial interests of
donors remain a significant determinant of current donor relationships. This phenomenon of the
commercialization of aid is particularly visible in ‘the tying of aid’. Data reports published in 2006 by
the OECD/DAC2 showed that only 42 percent of Official Development Aid was reported by donors as
untied. This tied aid is very costly, because it undermines the benefits of free trade within a free
competitive market. The obligation for developing countries to trade with their donor countries is
detrimental for their overall development and the world trade system.

Political Motives
After the Cold War the political incentives for giving aid seemed to disappear. See also the graph on
ODA in section 1. However, foreign aid remains a strong instrument in forming the political landscape
and international relations. For example, we still see that Russia gives aid to different countries than
the USA with respect to the middle east problems with the Palestine and Israel. Alesina and
Dollar(2000) describe this relations as ‘UN friend variable’ and find this variable particular significant
for all the major players in international relations in their regression analysis. Money is a strong mean
to influence people’s behavior. As is the case for countries. Therefore, if you want to form a coalition,
this can be done through decisions on the distribution of foreign aid. Japan is a good example with
respect to receiving countries of Japanese Aid and voting behavior within the UN. Furthermore, this
voting behavior shows the existing political alliances between countries, which provide incentives for

2
Source: www.oecd.org

15
the allocation of foreign aid. For the future, the US is building an alliance in their war on terror. For
example the case of ODA in Iraq mentioned in section 1. Therefore, the link between national
interests and aid giving will continue to exist. This resembles to the cold-war era.

In conclusion, it seems that the allocation pattern of donors is not so much dictated by the numbers
of poverty or good governance. Instead, historical, political and commercial criteria matter greatly in
the allocation of foreign aid. Foreign aid has become an instrument in the self interest of donor
countries. This is detrimental to aid’s potential development and human welfare effects.

16
3. Why would Aid work and why would it not work?

Since the 1990s many research has been done on aid effectiveness. In mid-1990’s talks about the
future contribution of foreign aid were mainly pessimistic. Many developing countries faced
deepening poverty, even though they received large amounts of aid. Many academics say this is not
only the recipients fault, but it’s often the donor who had too little control over how the finance was
used by the government for a particular project (Collier & Dollar, 2001).

Since the 1980s almost every country in Africa received large amounts of aid, mainly aimed at
stimulating political reform. The results have varied enormously among the recipient countries.
Different academics formed different opinions about the topic of foreign aid. Hansen and Tarp said
that aid is effective, without qualification, in enhancing the growth process. Collier and Dollar (2001)
put it in a different way. They say that aid is effective in some circumstances and in other not, or less
effective.

In the 1980s the typical African country had government intervention in almost every sector of the
economy. Donor countries agreed on the fact that improving economic policy was the highest
priority. They started aiming their aid at inducing governments to reform their policies. Twenty years
later there is no relationship visible between the amounts of aid given and the extent to which the
receiving countries reformed their policy. Clearly the process of policy reform was more affected by
domestic factors than by aid. (Dollar et al, 2001)

Donors tend to discriminate against poor countries that have put good policy into place. Aid rises as
policy improved. However in many cases, once good policy was achieved, aid declined. Donors
started to turn aid into conditional assistance, and then in fact, it has outlived its usefulness by this
point. Conditionality is useful during a period of rapid reform in which the government is trying to
establish its credibility as a reformer and get macroeconomic policy measures well entrenched.
Conditionality might disguise the ownership of reforms. It tends to limit participation in policy
making (Dollar et al, 2001).

17
Types of Aid
Other empirical studies suggest that the composition of aid matter for deriving conclusions on aid
effectiveness. A problem here is that the vast literature neglects the heterogeneous character of
foreign aid. So it can be argued that the conclusions on aid effectiveness may be misleading, because
according to the OECD rapport of 2003 we can distinguish at least three different types of aid:

1. Project aid
2. Program aid
3. (Conditional) Budget support

Mavrotas and Ouattara (2003) add three other types to this list, namely technical support, food aid
and emergency aid. In this paper we will not go into further detail regarding these types, we will
focus on the types distinguished by the OECD rapport.

Project aid is mostly finance for specific projects in poor countries by donor countries. This kind of aid
has a rather lengthy gestation period. It involves direct participation in their design and
implementation by the recipient country. A donor may opt for project aid because this way they have
more direct control over the funds given.
Program aid is mostly a program which is set up in a poor country by a donor country, it often
disburses rapidly as free foreign exchange.
Budget support is mostly given in the way of funds.

Both budget support and project aid have shortcomings, especially when the objectives of the
recipient and donor aren’t alike. The effectiveness is limited by the ability of the donor to monitor
the final destination of the given money. On the other hand carries project aid the risk of crowding
out developmental expenditures which recipient governments would have undertaken if there were
no donors (Cordella and Dell’Ariccia, 2007).

In some cases project aid and budget support are combined. This means that support for, for
example, education includes both financing of education projects, like building schools, and budget
support, like funds to the ministry of education.

Project aid can be preferable to budget support when the preferences of the donor and those of the
recipient government are relatively far apart. The other way around budget support is more
preferable when total aid is small relative to the recipients own resources. Project aid results in these

18
situations are superior for large programs. But in the end it all depends on what the government
does with the resources that are given by the aid projects. The way the government implements the
given resources is important in their evaluation of the impact of their aid.
The question of what aid ultimately finances is interesting when the preferences of the recipient and
donor differ. If the preferences are identical it would not matter if aid is given as budget support of
to a specific project.

These different types of aid operate in different ways in the receiving countries and every type has its
own conditions relating to the different countries. This results in different effects in every specific
country. (Mavrotas and Ouattara, 2003)

Main arguments pro aid

Why would aid work?

Many academics have argued that, even though aid has failed in some cases, it has been successful in
some countries, where it supported growth and poverty reduction, and prevented worse
performance in others. People like Jeffrey Sachs and Joseph Stieglitz believe that a lot of the
weaknesses of aid have more to do with the donor countries than with the recipients. They point to a
number of successful countries that have received large amounts of aid such as Botswana, Indonesia
and Tanzania.

The optimists argue that aid augments saving, adds to the capital stock and finances investments. For
example; aid is likely to increase investments in health and education, which increases worker
productivity. Aid could also provide a conduit for the transfer of knowledge and technology from
developed countries to poor countries by paying for imports, technical assistance of through direct
transfer of technologies. One good example of this is the introduction of fertilizers and new seeds in
the Green Revolution. This all contributes to a better economic environment (Radelet, 2006).
In their book, Dollar, Devarijan and Holmgren (2001), argue that development programs must be
country-owned, not donor-owned and that this is the way to make assistance effective. They use
data from ten case studies done in Africa. All ten received large amounts of aid, but ended up with
different policies. This suggests that aid is not a primary determinant of policy.

19
The overall view is that ‘aid works in a good policy environment’ (Mavrotas and Ouattara, 2003). So
this states that if donor countries want aid to be effective, they should focus on countries with good
economic policy. We will go further into this in paragraph four about conditions for effective aid.

Main Arguments against aid

Why would aid not work?

Aid has always had its critics who say it does more harm than good. Within the discussion about aid
effectiveness there are a lot of pessimists. Several observers argue that large amounts of aid from
developed to poor countries is wasted. They say that aid is increasing unproductive public
consumption. They point out different reasons for these results such as corruption, bureaucratic
failures, poor institutional development and inefficiencies in the developing countries.

As mentioned in section one, aid started as an institution in 1947 with the Marshall Plan. Almost
immediately there arose concerns over the behavior and attitudes of recipient governments. The US
was worried that the European countries were relying too much on foreign funding and not able to
mobilize resources themselves for their recovery. At this point it was already argued that “too little
attention is being paid by the participants to the elements of self-help.” (Knack, 2001)
As aid started to expand across more poor countries, practitioners began to emphasize that foreign
aid must not involve dependence but should be based on partnership. Riddell calls aid dependence;
“a state of mind, where aid recipients lose their capacity to think for themselves and thereby
relinquish control.” There have been concerns about the effects of aid giving from the moment it
started.

As was discussed in section 2, Allesina and Dollar (1998) found evidence that the aid giving pattern is
dictated by strategic and political considerations. A mismanaged non-democratic, inefficient,
economically closed former colony, politically friendly to its former colonizers, receives often more
aid that another country which has the same level of poverty and a better political situation, but
without a colonial past. They did not only find significant differences between receiving countries but
also between donors. Some donors respond more to correct incentives, namely good institutions,
income levels and openness. Other donors give former colonies aid tied by political alliances, without
regard to other factors such as poverty levels of choice of political regimes. Donors also tend to give
more aid to countries that have democratized. Most of these countries received aid immediately
afterwards.

20
Boone (1996) finds that aid has no effect on investment or growth. Burnside and Dollar (2000) put
this in a different way. They say that aid has a positive effect on growth when a country has ‘good’
policies and has no effect when it has ‘poor’ policies.

Another reason why aid is likely not to work is the lack of coordination. In many of the aid giving
cases aid coordination lacked in the period before 1990. In the 1990s it improved considerably, with
governments playing a more active role. Since then there is more partnership between donors and
recipients. Because of the lack of coordination, the receiving country doesn’t know what to do with
the aid, and so it doesn’t go to the right places, which makes it ineffective (Dollar et al. 2001).

Another big problem with aid effectiveness is the case of poor governance. Governance reforms can
happen, and they did in some countries. And aid can even contribute to these processes. Yet we
believe that foreign aid poses more problems than good for governance in aid-dependent states.
Knack (2004) says that “underlying the litany of Africa’s development problems is a crisis of
governance” (pp. 255). Here he refers to the poor quality of institution, high levels of corruption and
weak rule of law which still characterizes many governments in Africa today.
There are many reasons for the poor status of governments in developing countries. A few of them
are colonialism, economic crisis, civil wars and political instability. It is hard to separate the impact of
these factors from the impact of foreign aid, which is most of the times high in the countries that
have to deal with these kinds of problems.
State capacity and governments have never been really strong in many developing countries. The
new independent nations were not prepared for self-government and many faced ethnic tensions,
which had been established during colonial rule. Many countries also suffered from economic crisis,
which is a big contributor to poor governance. Another major problem in Africa has been the
experience of political instability and the presence of war. Political instability, often a result of civil
wars and violent coups, disrupts the whole society and makes the countries more dependent on aid.
Despite some benefits aid can have, it is also possible that the way aid is delivered makes it more
difficult to develop good governance. This means improving the law system, building a better
bureaucracy and reducing corruption (Knack, 2004).

Academic literature also finds that in the period 1982-1995 aid has been associated with an increase
in corruption and deterioration in bureaucratic quality and the rule of law. Since 1995 donor
community has given much more attention to corruption. Many projects now were explicitly
designed to reduce corruption and all projects show greater awareness of the potential dangers.

21
Despite these new projects to reduce corruption, aid is proven to be a weak instrument for reducing
corruption (Collier and Dollar, 2001).
Aid might help spur growth in countries with reasonably good policies, but might fail to do so where
corruption is rife and the economy is badly mismanaged (Radelet 2006).

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4. Evidence on Aid Effectiveness

Measuring the impact of Aid

In academic literature several methods are being used to measure the impact of aid. Many
researchers developed different models to explain the impact of aid (Hansen & Tarp).
We will not go into detail on these different models, but we will discuss the different ways in which
aid and its effectiveness is measured.

Aid is typically measured in one of three ways: (1) total US dollars, (2) as a share of GDP or (3) per
capita. Each measure reveals different things.
Total dollar amounts clearly are important, but they do not tell the entire story. Aid measured as a
share of GDP indicates its size relative to the entire economy and is perhaps the most common
measure. But it can be misleading since a high ratio can be indicative of low GDP or a large amount of
aid (Radelet, 2006). The second problem with measuring aid as a share of GDP is the measurement of
GDP itself. GDP does not take into account the income disparities between the rich and the poor
within a country, it excludes non-market activities and it tends to neglect the underground
economies, such as tax-avoiding activities and illegal trade, which often exist in corrupted developing
countries.
Dollar et al, (2001) in their book also talk about the controversial measurement of aid and ‘good
policy’. They say that learning about development policies is an ongoing process and is one of the
main roles of effective aid.

Bigsten, Mutalemwa, Tsikata and Wangwe note in their paper that standard measure of aid tends to
overestimate the aid flow. Because of this problem the World Bank produced a new aid measure. It is
called Effective Development Assistance (EDA), which provides a more accurate measure for true aid
flows that the traditional Official Development Assistance (ODA). The EDA is the sum of grants and
aims to measure the pure transfer of resources. It is defined as grant equivalents of all development
flows in a given period. Grants tied to technical assistance are excluded from this measure.

Traditionally the literature that analyzes the effect of foreign aid on development has used ODA data.
ODA measures aid flows that arrive to the recipient country in a given year, irrespective of what part
has to be repaid. Data are always in US dollars. This variable has advantages and disadvantages. The
advantage is that it provides a consistent measure of whether reform programs succeeded or failed.
The disadvantage is that the measure of success is subjective. Despite the subjective element of the
OED evaluation, DS stress that there are two reasons why this is still an acceptable measure of

23
success. OED independence within the World Bank means that there is no necessary bias in the
results. Historically half of the reform programs in Africa supported by lending have been judged to
be a failure by OED. This is in line with the literature that has highlighted the poor policy
performance of many African countries. (Svensson, 2002)
The biggest problem with measuring aid effectiveness is that data is incomplete; the reason for this is
often data is not obtained properly at periods of civil conflict and periods of domestic unrest, which
tend to be common problems in the developing countries.

It is difficult to measure aid dependence, because it cannot be directly measured. This is why a proxy
which reflects “aid intensity” is used often (Knack, 2001).
Some countries with low incomes per capita are less dependent on aid that others, this indicates that
aid dependence is not simply a function of poverty.

Aid and Economic Growth vs. Socio-Political Factors

Most foreign aid is designed to meet one or more of four broad economic and development
objectives (Radelet, 2006):

- Stimulate economic growth through building infrastructure, supporting productive sectors

such as agriculture, or bringing new ideas and technologies
- Strengthen education, health, environment, or political system
- To support subsistence consumption of food and other commodities, especially during relief
operations or humanitarian crises
- To help stabilize an economy following economic shocks.

Economic aid has always been the main yardstick used to judge aid effectiveness, with more aid
expected to lead to faster growth. At a very broad level, there is no apparent simple relationship
between aid and growth. Some countries have received large amounts of aid and have recorded
rapid growth, while others, who also received large amounts of aid, recorded slow or even negative
growth. At the same time, some countries that have received very little aid have done very well,
while others have not.
Several early studies found a positive relationship between aid and growth. The tendency is that the
greater the capital inflows from abroad, the lower the rate of growth of the receiving country.

24
(Hansen & Tarp). Aid also can have a positive impact on development outcomes other than growth,
such as health, education or the environment.

Conditions for Effective Aid

Policy Reform
Governance is added to the list of conditionality’s imposed as requirements for funding from the
World Bank, IMF and bilateral donors. Poor governance is not the result of one cause, it has multiple
causes. Once it starts to decline, it gets into a vicious cycle and poor performance is easily created
(Knack, 2004). Many other academics agree that good policy is significant to raise growth. A receiving
country with a new government is more likely to have success than a country with a government who
are in power for a long time.

Collier and Dollar (2001) say there is also a difference between different types of governments. A
democratically elected government has a 95% probability of success. An authoritarian government,
although in power for 12 years, only has 67% chance at success. These governments are less likely to
change and by a large extent the low success rate of reform programs can be explained by
characteristics that can change. Dollar et al. (2001) state in their book, with case studies on aid and
reform, that there is no relationship between formal democratic institutions and reform. The two
strongest positive policy reformers from these case studies – Ghana and Uganda – had both leaders
who came to power through military coups. Other, democratically elected governments, never
seriously embraced economic reform and were not as successful as Ghana and Uganda. These two
successful countries were convinced that market friendly policies were not desirable. The failures
that followed helped trigger the introduction of market-based reform programs. These programs
received good support from the donors. Aid flows increased when the reform programs took off. Aid
started to decrease in the 1990s when policies were still improving. Conditional financial aid was
later most helpful in pushing the reform agenda and implementing the reforms (Dollar et al. 2001).
This shows that sometimes failure is needed for a country to see they are acting the wrong way.
The situation was different for the post-socialist reformers from the case study of Dollar et al. Aid
volumes they received were quite steady over time. These countries received large amounts of aid
irrespective of policy performance. When policies got worse, aid in relation to GDP increased. The
worse the policies got the more aid they received. Technical assistance had played a large role in this
group of reformers.

25
Mixed reformers received more aid when their policy was bad than they did when policies were
good. In the 1990’s policies and aid levels moved in a synchronized way for the mixed reformers.

Only a small amount of cases shows that policy significantly improves in the following five years, and
in a same amount of cases it significantly worsens. This shows that large changes in policies are the
exception, not the rule. Aid can be expected to have two opposing effects on the incentive for a
government to reform. If aid is linked to reform there is one favorable substitution effect; if the
government agrees to reforms it will receive more aid. Offsetting this effect is the income effect; the
more aid the government expects to receive, the less necessary it is to implement those reforms
which are politically costly. (Collier & Dollar, 2001)

Dollar et al. (2001) say that donors should look at the quality of policy in the receiving country, not
only at how poor the country really is. Also the composition of aid is important. In the pre-reform
period donors should provide technical assistance and policy dialogue. During the reform period
policy dialogue is also important as is finance. At a later stage in the reform period, dialogue gets less
important while finance increases in importance. By altering the quantity and composition of aid,
donors could more systematically support genuine policy reform in the developing world. (Dollar et
al, 2001)

The general finding is that different instruments work in different phases of the reform process. If
donors use the wrong instrument at the wrong time, it will be a waste.
Each country has a pre-reform phase of very poor economic policy and no coherent political
movement to change the situation. There is a general agreement that technical assistance and
political dialogue are useful in this phase. It can lay the foundation for policy learning. Conditionality
does not work in this phase. The receiving countries are mostly not able to implement the
agreements at that time.

Some case studies prove that aid financing can lead to worse economic policies while in other cases
the absence of aid finance encourages reform. In the case of aid absence the impact of poor
economies was clear and the political leaders felt that they had little choice but to undertake serious
reform. So it seems that large-scale finance in the pre-reform period has a negative effect and
reduces the need to reform.

After this period there is a phase of rapid reform. In this phase aid finance plays an important
supporting role. When countries actually reform, finance increases the benefits of those reforms. Aid

26
increases confidence in the reform program and call forth greater private investment. In this phase
technical assistance and policy dialogue retain their usefulness. Conditionality to be useful must
reflect measures that the government wants to carry out, not one imposed by outsiders. (Dollar et al
2001)

Collier and Dollar (1998) estimate that if aid is redirected towards poor countries with good policies,
more than twice the number of people could be lifted out of poverty for the same aggregate level of
foreign aid.

Countries that have successfully reformed have had clear political movements leading to these
changes, what is often referred to as local ownership of reforms. Countries that have made less
progress typically have had powerful vested interests blocking change. Economic policies are
primarily domestically grown. While the recipient countries have different economies and go through
different phases of reform, donors tend to do the same things everywhere and at all times.

The overall thought is that in order to be effective, aid should be given to a country with good
economic policies. So for a development country to attract more foreign aid, they should consider
policy reform.

Recent literature indicates that policies depend primarily on domestic political-economic factors.
There is no ongoing relationship between aid and reform. The average relationship is likely to
disguise the fact that aid supported policy reform in some cases and sustained poor policies in
others. Improvement in economic policy is the key to more rapid growth and poverty reduction. The
question is; how can aid support these improvements? Collier and Dollar (2001) estimate the
poverty-efficient allocation of aid. They assume that aid has no effect on policy. But the effect of aid
on growth and poverty reduction increases with quality of good policy. Therefore aid should rise with
the quality of policy

Good governance and no corruption

Donors should not be too concerned about providing program aid in low probability environments.
As shown in the section above donors are often concerned about governance. There is a need for aid
policy to take government corruption into account. Good governance is desirable for aid to be
effective.
Donors can choose between two approaches when factoring this into their programs. The maximal
approach is to allocate aid so as to induce improvements in governance, whereas the minimal

27
approach is to allocate aid so as to reduce its exposure to the poor governance environments. As
with policy, the appropriate choice as between the maximal and the minimal depends on whether
aid affects governance and whether governance affects aid (Collier & Dollar, 2001).

High levels of aid have the potential to improve governance but they can also work the other way
around. Looking at it from the positive point of view, aid channeled to government with
development agenda’s can be used to strengthen policy, planning capacity and establish strong
central institutions.
Looking at it from the negative point of view, aid might block governance improvements in different
ways. For example the way huge amounts of aid are delivered can weaken institutions rather than
building them, due to the high transaction costs or the fragmentation that multiple projects and
agenda’s promote. High levels of aid can also create incentives that make it more difficult to
overcome the collective action problems involved in building a more capable and responsive state
and a more effective foreign system.
The quality of governance may also be influenced by other factors such as religion and traditions.
Political violence is associated with deteriorating governance.
Alesina and Weder found in their study that aid and corruption tended to be positively related. Knack
finds a negative relationship between the two among all recipient nations between 1982 and 1995.

Case Example 1 ‘Aid Works in Tanzania’

Tanzania has been at the center of development debate since the 1960s. It’s had a development
strategy aimed at self-reliance and African socialism. Their president Nyerere became a spokesman
not only for Tanzania, but for the whole Third World. This brought great positive interest in Tanzania,
especially from the democratic European governments. They provided large amounts of aid to the
country.
Since 1961, when Tanzania became independent, it has been one of the largest recipients of aid in
Sub-Saharan Africa in absolute terms. In the 1970s the share of total aid from the DAC3 countries was
8.3 percent. And in that period they were the largest recipients of aid in Sub-Saharan Africa. This
started to decline in the 1980s and by 1985 it decreased to 5.8 percent. Still they were the second
largest recipients of aid. Even when their policy was very poor they received more aid than countries
that were already reforming their policy.

3
Development Assistance Committee (of the OECD)

28
Between 1970 and 1996 Tanzania received a total of 16,632 million US dollars in foreign aid. This
accounted for 80 percent of total net inflows. In per capita terms aid peaked in the 1980s and early
1990s with more than US$40. As a share of GDP it peaked in 1990 at 30 percent. Tanzania was highly
dependent on aid, but the dependence declined significantly in the 1990s.

They received aid from more than 50 donors. The Nordic European countries have been the major
donors, accounting for more than 30 percent of the total aid between 1970 and 1996. At first it was
mostly bilateral aid they were receiving, since the 1980s the share of multilateral aid was rising.

The composition of aid also changed over time. In the beginning, the 1960s, investment projects
assistance made up almost two-third of total aid. In the 1980s aid shifted from project aid to program
aid. Reason for this was the growing balance of payment problems in Tanzania. This was seen as
evidence that project aid was unsuccessful and import support was needed to raise the level of
output.

Over the period 1970-1996 there can be three different phases of aid identified. The expansion
phase is the first one, which took place from 1970 to 1982. In this period the willingness of donors to
extend aid to Tanzania can be explained by the development policies the country pursued at this
time. It motivated many donors to provide aid to the country, this because the policies were in line
with the thinking of social democrats in Europe. The second phase was the contraction phase, from
1983 till 1985. In this period the donors attitude towards Tanzania changed. Donors became critical
of the country’s development strategy. There was evidence that effectiveness of aid had been low.
The general view among donors from Europe was that aid to Tanzania could not be effective unless
the country agreed to redress inappropriate domestic policies. Despite this general view the Nordic
countries continued to provide aid to Tanzania, although at a reduced rate. Aid flows scaled down.
The last phase was the adjustment phase from 1986 to 1996. The country made an agreement with
the IMF in 1986 helped to restore the donor confidence. Bilateral aid resumed leading to a second
boom in 1992. Tanzania is an example of a developing country in which foreign aid was attracted by a
good political situation.

To improve effective utilization of foreign aid and domestic resources efficiently national leadership
needs to articulate a development vision that inspirers its own population and gives hope for the
future. One of the most important visions for Tanzania is that of the commitment to primary
education, access to basis health care and clean water for everyone.

29
Case Example 2 ‘Aid Does Not Work in Kenya’

In the years from 1980 to 1998 Kenya was engaged in a program of structural adjustment reform
with support from the World Bank. In the years before, from the 1970s, Kenya buildup nominal flows
of ODA. In the 1970s they received an average of US$205 million per year, this increased during the
1980s to more than US$630. In the 1990s it even went up to US$1 billion. This growth in nominal aid
flows in Kenya has followed the pattern for Sub-Saharan Africa as a whole. While there was great
buildup in nominal aid, there has been a decrease in donor support in the 1990s. Aid flows decreased
and the level dropped well below that of the mid-1980s.

Kenya has performed a curious mating ritual with its aid donors. Kenya won its yearly pledges of
foreign aid and then the government began to misbehave. The donors retreated, but Kenya knew to
get them to review the case and then aid was pledged again. This is the vicious cycle aid in Kenya is in
right now. So when is foreign aid policy credible?

One of the ongoing challenges in Kenya was donor coordination, this mainly because of the
multiplicity of donors. Almost every Western donor country has been active, putting large demands
on the time of the senior government officials. While at the same time the government of Kenya
showed no effort to better coordinate donor activities.

In Kenya donors supported the Institute of Policy Analysis and Research to help set op local capacity
for policy formulation and analysis. This didn’t have a large pay-off as long as vested interests
blocked any form of political reform. But it was an essential foundation for any political movement
which established for change and reform.

The large amounts of aid received, were given in return for policy undertakings. In the early 1980s
and in 1993 the land was in severe economic crises. In these periods the governments need for
foreign support was huge, especially financial support. This desperation did induce the government
to make agreements on reform programs. However, these agreements were most of the times not
implemented. Foreign aid can have an influence on the form of agreement reached and on the
agreed timetable for implementation, but whether implementation is carried out depends in the end
much more on domestic political and economic factors than on the donor presence.

30
In the times large-scale aid was absent, the impact of poor economic policies was clear. The political
leaders felt that they had little choice but to undertake serious reform. So in the early 1990s they
introduced reforms such as liberalization of foreign exchange and foreign because relations between
government and donors strained and financing was in decline. Despite these intended reforms Kenya
failed to make foreign aid effective. In Kenya, study shows that policy failed to improve and in some
points even got worse, despite large amounts of aid given and series of adjustment loans and that
foreign aid was ineffective.

31
Conclusions

Most observers conclude that foreign aid has at best been sometimes partially effective at promoting
economic growth and improving human welfare. In this article we have shown that current foreign
aid will remain at best partially effective at promoting economic growth and improving human
welfare.

First of all, history was always the one to learn from, and 50 years of foreign aid has taught us many
lessons for which we came up with new ideas for more effective foreign aid. However, it seems that
we have run out of ideas and fall back on old ideas. Jeffrey Sachs is the leader of the UN Millennium
Development Goals Project and author of The End of Poverty (2005). He is a profound planner who is
convinced that the end of poverty can be planned when there is enough money made available by
the rich countries for a big push. William Easterly(2006) however, describes it in his article as the ‘ big
push déjà vu’ and claims that it is proven by the last 50 years of development aid that planning and
huge sums of money won’t work. He argues that piecemeal efforts through trial and error with
accountability and feedback will provide success in development. The so called ‘searchers approach’.
There is no big universal solution to solve the problem of underdevelopment and poverty. It depends
on domestic sociological, economic and political factors.

Secondly, Burnside Dollar(2000) have shown in their paper that aid’s impact on growth is very limited
and can be counterproductive. However, they claim that when foreign aid is given to countries with
solid governments which conduct good policies aid is effective. This statement has been criticized by
numerous authors. For example Easterly(2003). He uses the same statistical methods with additional
data and shows that this claim can’t be made for the entire period of foreign aid. Moreover, when
aid effectiveness is subject to good policies. How are these good policies to be defined? Moreover,
once these good policies are defined, how are these to be implemented in a developing country?

The problem with aid under the ‘right’ conditions is that it is very unlikely for developing countries to
meet all of the required conditions for aid to be effective. Many developing countries suffer from
poor policies and do not have good governance. We argue that even in the case of policy reform aid
is not likely to contribute to economic growth. The literature showed us there is no ongoing
relationship between aid and reform. In most cases policy reform even sustained poor policies. This
is shown in the case example of Kenya. They were in a big economic crisis and try to reform policy in
order to receive aid from donor countries. This shows that donor pressure is a big problem and not

32
the right way to handle the problem. Recipient and donor governments should work together and
there should be more coordination. This way both the donor and recipient know what to expect from
each other.

The case studies also show that in the end aid effectiveness depends on domestic political and
economic factors. The biggest problem here seems to be corruption and civil conflicts, which both
makes aid ineffective and can have an adverse income effect which reduces economic pressure for
accountability. We argue that donor countries should be more concerned with the political and
economic environment in the receiving country. Aid should not be given to countries with poor
polices, because they are not able to implement aid in the right way. When aid is given, donors
should coordinate and work together with the receiving government. Furthermore, donors should
not be too concerned with policy reform. In most cases policy reform doesn’t mean the country is
ready to receive aid and use it the right way. Besides that, there is the dilemma whether foreign aid
stimulates good governance or whether good governance stimulates aid.

Thirdly, do these good policies actually matter if the aid allocation pattern is determined by other
factors? Alesina Dollar (2000). We argue that aid giving is not so much determined by altruistic
reasons for contributing to the development, growth and poverty eradication in poor countries.
Instead, historical, political and commercial motives seem to prevail. This is detrimental to the
effectiveness of foreign aid. Moreover, the economic motive of the 2-gap model Chenery
Strout(1966) lacks evidence and can be even counterproductive.

Lastly, despite the lack of likeliness one could say that if it sometimes works, aid should continue.
Amongst several authors Boone (1996) has criticized on that by showing the counterproductive
effects of foreign aid.

We are convinced, that it is clear that it’s not likely that current foreign aid giving is actually working.
Therefore, due to the enormous costs and the possible counterproductive effects other ways should
be found to actually help the developing countries. This is a subject outside the scope of this article,
but the answer can be found in small piecemeal efforts through accountability and feedback.
Furthermore, through NGO’s who work with the local citizens.

33
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Growth, Vol. 5, Iss. 1.

Boone, P. (1996). Politics and the Effectiveness of Foreign Aid in European Economic Review, Vol. 40,
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Burnside C. and Dollar D. (2000). Aid, Policies and Growth in American Economic Review, Vol. 90, Iss.
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