Growth, Poverty and Development Assistance: When Does Foreign Aid Work?
| Published date | 01 September 2015 |
| Date | 01 September 2015 |
| Author | Andy Sumner,Jonathan Glennie |
| DOI | http://doi.org/10.1111/1758-5899.12251 |
Growth, Poverty and Development
Assistance: When Does Foreign Aid Work?
Andy Sumner
Reader in International Development, King’s College, London
Jonathan Glennie
Visiting Fellow, King’s College, London
Abstract
This is a survey paper on aid effectiveness in terms of the contribution of development assistance to economic growth
and poverty reduction. The article focuses primarily on the most recent generation of cross-country studies. It concludes
that there is a set of broad areas where the evidence reviewed shows signs of convergence that have direct relevance
for policy decisions on aid and for aid-effectiveness discussions. These areas are: aid levels (meaning if the level of aid is
too low or too high); domestic political institutions (including political stability and the extent of decentralisation); the
composition of aid (including sectors, modalities, objectives and time horizons); and the volatility and fragmentation of
aid. We also identify two areas where there is little sign of convergence in the evidence: the importance or otherwise of
‘good’, meaning orthodox macroeconomic policies and whether grants are more effective than loans.
Policy Implications
•Aid is more likely to work in the correct ‘dosage’but is ineffective if the level is too high or too low. One needs to
consider existing levels of aid. Aid is likely to have diminishing returns as aid grows relative to the size of the econ-
omy, and those returns can even turn negative. In addition, at low levels aid may have little impact on growth.
•Aid effectiveness depends on domestic political institutions; for example, political stability and the level of
decentralisation.
•The effectiveness of aid depends on the objectives, sectors, modalities and time horizons (essentially what the aid
is intended for).
•Aid is likely to be more effective if it is not volatile or fragmented.
•There are two areas where there is little convergence in the evidence, despite oft-cited claims to the contrary: there
is no consensus on if orthodox macroeconomic policies make aid more effective; and there is no consensus that
grants are better than loans (or vice versa) in terms of aid effectiveness.
Foreign aid has always been controversial. Peter Bauer’s
critique of aid (1972) was seminal and there have
been many since, not least from William Easterly
(2006) and Dambisa Moyo (2009) and most recently
Angus Deaton (2013).
1
Indeed, the question ‘does aid
work?’has been dominant in aid debates since at least
the mid-1970s.
Total annual spending on aid (meaning official devel-
opment assistance (ODA) or concessional development
finance) has today reached $138.5 billion per year and
yet the answer to the question posed by Robert Cassen
and associates (1986) and Roger Riddell (1987), ‘does for-
eign aid really work?’, is still disputed.
2
Or is it?
In this article we review the cross-country, peer-
reviewed, econometric studies of the last decade. In the
following section we discuss why the assessment of aid
impact is so difficult, before reviewing the evidence. We
then seek to construct signposts regarding when and
where aid works. We arrive at a set of factors that are
likely to play a role in determining when aid is most
likely to be effective.
Why is it such a difficult question to answer?
A point of departure is: what do we mean by aid ‘work-
ing’or not? In the context of growth, for example, is it
higher growth than would have been the case without
aid that constitutes aid ‘working’? Or it is establishing the
preconditions for self-sustained growth without aid in
the future? Or is it a contribution to growth that
Global Policy (2015) 6:3 doi: 10.1111/1758-5899.12251 ©2015 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 6 . Issue 3 . September 2015 201
Research Article
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