Aid and the growth of income in aid-favoured developing countries: policy issues

Abstract

This paper opens by expressing disappointment in the disparities between published estimations of the effectiveness of foreign aid to developing countries and effectiveness data which arise from the application of complex econometric methods. The new dilemmas for aid policy include the fact that aid increasingly devoted to human development at the expense of productive activity is unlikely to create the material development which will allow maintenance of human development targets. The second part of the paper presents comparative statistics on gross national product, official development assistance, and savings growth which paint a disturbing picture because the growth of domestic savings has been negative in the period 1967-87 in nine of the 11 less developed countries with data available. Section 3 covers the shortcomings of econometric experiments which neither confirm nor deny the findings of other studies on the effectiveness of aid. The fourth section describes constraints to the growth of income imposed by the foreign exchange, the rate of return on investment, and the growth of labor productivity and presents statistical evidence supporting aid policy which would 1) take advantage of opportunities to rehabilitate output growth in traditional industries without the addition of a great deal of capital, 2) direct attention to increasing the absolute gross national product (GNP) to raise the growth of per capital income, and 3) strategically reorient the structure of aid to increase the absolute GNP faster to accelerate reversal of the negative savings pattern and speed the reduction of fertility. Section 5 considers suggested shifts in aid policy orientation dealing with 1) population growth, income level, and food security; 2) reconstruction and structural adjustment; 3) rationalizing aid for social, institutional, and human development and technical assistance. The concluding section notes that the suggested strategic reorientation of the structure of aid should result in reduced population growth.