Aid & Growth

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:

  1. We’ve given these countries a lot of money.
  2. They’re growing slowly.
  3. 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 donors’ 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 countries’ growth rates.

Other papers on aid and growth here and here.

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5 Responses to Aid & Growth

  1. Albatross2147 says:

    There seems to be little doubt that RWDB pin up girl, Emeritus Professor Helen Hughes AO, is one of the most perverse and vindictive creatures in Australia.

    Given that she herself was a refo arriving here before WW2, her lack of compassion towards the suffering of others is breathtaking. Her dog in the manger philosophy seems to derive from a form of grievance mentality: I’ve had to do it tough at times, therefore I will do my best to make it so for everyone else. Given that she sucked on the government teat for most of her career, this is particularly rich.

    Someone should really do a hatchet job on her and her works before the right deify her. For example she is credited with developing the policies which led to the marketing of Australian tertiary education to overseas students as a way of replacing government funding. Some years on we are now seeing the folly of this development and is disasterous effects on the education system – an outcome which some predicted but were vilified for doing so by Hughes and her ilk.

  2. Guy says:

    I get a little annoyed when liberal advocates of trade-driven development aid completely write off the benefits or positive impacts of direct assistance and charity.

    Yes, trade-based development is probably the long-term answer. But that doesn’t mean that aid is completely useless, even if the recipient governments are sometimes corrupt.

  3. mike says:

    One of the dangers of having a very broad spectrum of education is that you tend to know a lot about a little. Quite often you draw wrong conclusions because while you know some of the facts there are other you don’t. I fall into this category. Bearing this in mind:

    How the hell can Foreign Aid have a negative impact? I can see it being neutral I can see it being positive. In the simplest of terms what would seem to really count is how the aid is used. If ten billion in aid is used to service debt and to treat an aids ravaged population I do not see that that will have a great impact on GDP.

    Now to be really naïve. If the aid was spent on labour intensive activities would this not be right way to go. Reduce unemployment and create demand for goods and services. One would assume that little savings would occur and as such the multiplier effect would kick in quite strongly.

    It seems wrong (economically) in my humble opinion to utilise Aid on consumption of G&S. It should be used to create a demand for G&S and so the cycle should start. This would be a difficult discission to make when half the population are starving or dying of aids and your country is deeply in debt.

    Am I really that far off the track?

  4. Sacha Blumen says:

    I also know very little about this! Mike – do you mean that it’s bad to create a demand for G&S in the population because G&S may need to be imported into the country? It’s better for G&S to be produced in the country?

  5. mike says:

    Sasha,

    Creating a demand for G&S is a very good thing. Granted you really want domestic supply and not imports (the value of imports is negative when calculating GDP).

    What I was saying is that AID need to be spent on a way that best creates a demand for G&S and creates movement of money. If you give people jobs they have income to dispose of so they buy things. This then creates a demand for production of more G&S which generates more employment. With more people employed there demand for G&S rises again creating more jobs… I wont talk about inflations role in all of this as well.

    When no one saves money this sort of cycle is infinite in theory.

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