Abstract
Much of the academic debate on the effectiveness of foreign aid is centered on the relationship between aid and growth. Different aid-growth studies find conflicting results: aid promotes growth everywhere; aid has a zero or negative impact on growth everywhere; or the effect of aid on growth depends on recipient-specific characteristics, such as the quality of institutions and policies. Although these studies fuel an interesting debate, cross-sectional macroeconomic studies cannot be the last word on the topic of aid effectiveness. In this paper, Dollar and Levin introduce microeconomic evidence on factors conducive to the success of aid-funded projects in developing countries. The authors use the success rate of World Bank-financed projects in the 1990s, as determined by the Operations Evaluation Department, as their dependent variable. Using instrumental variables estimation, the authors find that existence of high-quality institutions in a recipient country raises the probability that aid will be used effectively. There is also some evidence that geography matters, but location in Sub-Saharan Africa is a more robust indicator of lower project success rate than tropical climate. The authors proceed to disaggregate the success rate of World Bank projects by lending instrument type and by investment sector, finding that different institutions are more important for different types of projects. The finding of a strong relationship between institutional quality and project success serves to provide further support to the hypothesis that aid effectiveness is conditional on institutions and policies of the recipient country.
Highlights
In recent years, the international donor community as well as academic researchers have turned their attention to the effectiveness of development assistance
Overall Project Success Rate and Institutional Quality We argued in the previous section that cross-country growth regressions alone are unlikely to settle the debate about aid effectiveness and institutional quality because different data-sets, specifications, and methodologies yield different results
We start with OLS regressions and with a simple specification in which the project success rate for each country in the 1990s is a function of log per capita GDP, the Rule of Law measure, the Freedom House Index, and the overall quantity of aid relative to GDP
Summary
Much of the academic debate on the effectiveness of foreign aid is centered on the relationship between aid and growth. Different aid-growth studies find conflicting results: aid promotes growth everywhere; aid has a zero or negative impact on growth everywhere; or the effect of aid on growth depends on recipient-specific characteristics, such as the quality of institutions and policies. The finding of a strong relationship between institutional quality and project success serves to provide further support to the hypothesis that aid effectiveness is conditional on institutions and policies of the recipient country. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Sowing and Reaping: Institutional Quality and Project Outcomes in Developing Countries
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