Introduction: Aid and Development

Abstract

The debate on the impact of aid on the economies of developing countries is a rapidly evolving one. Early studies by, e.g., Papanek (1972) reported a positive impact of aid on growth within a multiple regression context. This conclusion allowed policy makers to entertain the possibility that poverty across the world could be largely eradicated, that countries could be moved out of poverty through the allocation of aid and that the following of successful policies would allow them to generate increased prosperity from their own resources. Unfortunately after some thirty years the poor are still with us, poverty shows relatively little signs of disappearing and until recently enthusiasm for aid amongst donors had declined. The papers in this symposium examine the effectiveness of aid in the past and its potential in the future. A number of economic studies help explain this apparent failure. Mosley et al. (1987) found it impossible to establish any significant relationship between aid and the growth rate of developing countries. They suggested that this might be because of the possibility of leakages into non-productive expenditure in the public sector and the transmission of negative price effects to the private sector. They also argued for the targeting of aid, i.e. its allocation to countries where it would be used most effectively. Boone (1996) concluded that aid does not significantly increase growth nor benefit the poor. It did however increase the size of the government. But again the message was not entirely negative in terms of what aid could achieve and argued for the targeting of aid, this time at liberal democratic regimes, as they appeared more effective in, for example, reducing infant mortality. Hence, until recently, the dominant view within economics had become pessimistic with respect to the past effectiveness of aid but, somewhat optimistically perhaps, held out the hope for improvement on the basis of aid targeting. More recently, however, work by Burnside and Dollar (2000) was to put forward a more optimistic view of the former. They concluded that aid had a positive impact on growth for developing countries with good fiscal, monetary and trade policies in place but had little impact for those countries who were following poor policies. This therefore, partially at least, provided an explanation of why aid had been found to have little positive impact on growth in previous empirical work. It also provided specific criteria for targeting aid. This was then built upon by Collier and Dollar (2001, 2002) who calculated a 'poverty efficient allocation of aid' which focused on those countries with a combination of most poverty and best policies. They suggested that targeting of aid in this manner would almost double its effectiveness in reducing poverty. This work has had an extraordinary impact upon policy and Easterly (2003), as well as Dalgaard, Hansen and Tarp (DHT) in this symposium, document how it