I just stumbled across a piece by Helen Hughes on foreign aid, published in the AFR on July 9. As with her 2003 work on aid to the Pacific, assertion again takes the place of evidence. Dr Hughes argues that:
- We’ve given these countries a lot of money.
- They’re growing slowly.
- Our money must have made them grow slowly.
It’s possible that Dr Hughes has done some research proving the causation from (2) to (3). If so, I’d be glad to be pointed to it. But in the absence of any real analysis, it’s going to be deeply unconvincing. Frequently, we give aid because countries are growing slowly.
Reading Hughes’ writings, one might be forgiven for thinking that she’s the only researcher working on this issue. She ignores a substantial body of work which uses careful statistical techniques to try and unpack precisely this causality. For example, Craig Burnside and David Dollar have a paper on precisely this issue which finds that aid has either zero or small positive effects, but find no evidence of negative impacts. Abstract over the fold.
This paper uses a new database on foreign aid to examine the relationships among foreign aid, economic policies, and growth of per capita GDP. In panel growth regressions for 56 developing countries and six four-year periods (1970-93) the policies that have a large effect on growth are fiscal surplus, inflation, and trade openness. We construct an index of these three policies, interact it with foreign aid, and instrument for both aid and aid interacted with policies. We find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies. In the presence of poor policies, on the other hand, aid has no positive effect on growth. This result is robust in a variety of specifications that include or exclude middle-income countries, include or exclude outliers, and treat policies as exogenous or endogenous. We examine the determinants of policy and find no evidence that aid has systematically affected policies – either for good or for ill. We estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donorsâ€™ pursuit of their own strategic interests. In a counterfactual we reallocate aid, reducing the role of donor interests and increasing the importance of policy: such a reallocation would have a large, positive effect on developing countriesâ€™ growth rates.