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Aid, the incentive regime, and poverty reduction

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  • Burnside, Craig
  • Dollar, David

Abstract

Spurring growth in the developing world is one stated objective of foreign aid. Another, more commonly cited, objective is reducing poverty. Generally poverty reduction and growth go hand in hand, but could aid mitigate poverty without measurably affecting growth? The authors examine how foreign aid affects infant mortality -- an important social indicator that provides indirect evidence that the benefits of development are reaching people everywhere. They conclude that in developing countries with weak economic management -- evidenced by poor property rights, high levels of corruption, closed trade regimes, and macroeconomic instability -- there is no relationship between aid and the change in infant mortality. In distorted environments, development projects promoted by donors tend to fail. And aid resources are typically fungible, so the aid does not in fact finance these projects. Aid finances the whole public sector at the margin, which is why the quality of management is the key to effective assistance. A government that cannot put effective development policies in place is unlikely to oversee the effective use of foreign aid. On the other hand, there is a relationship between aid and a change in infant mortality when the recipient country has relatively good management. When management is good, additional aid worth 1 percent of Gross Domestic Product (GDP) has a powerful effect, reducing infant mortality by 0.9 percent. In other words, aid spurs growth and improvements in social indicators only in a good policy environment. These findings strengthen the case for targeting foreign aid to countries that have improved their economic policy. But after controlling for per capita income and population, there has been almost no relationship between countries'economic policies and the amount of aid they get. The relatively indiscriminate allocation of assistance is one factor undermining the potential impact of aid.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1937.

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Date of creation: 30 Jun 1998
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Handle: RePEc:wbk:wbrwps:1937

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Keywords: Labor Policies; Public Health Promotion; Health Economics&Finance; Environmental Economics&Policies; Health Monitoring&Evaluation; Achieving Shared Growth; Health Economics&Finance; Health Monitoring&Evaluation; Governance Indicators; Inequality;

References

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  1. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series, The World Bank 1777, The World Bank.
  2. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(3), pages 485-512, December.
  3. Lant Pritchett & Lawrence H. Summers, 1996. "Wealthier is Healthier," Journal of Human Resources, University of Wisconsin Press, vol. 31(4), pages 841-868.
  4. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
  5. Goldin,Ian & Winters,L. Alan (ed.), 1992. "Open Economies," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521420563.
  6. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(3), pages 417-458, December.
  7. Chang, Charles C. & Fernandez-Arias, Eduardo & Serven, Luis, 1999. "Measuring aid flows : a new approach," Policy Research Working Paper Series, The World Bank 2050, The World Bank.
  8. Killick, Tony, 1991. "The developmental effectiveness of aid to Africa," Policy Research Working Paper Series, The World Bank 646, The World Bank.
  9. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
  10. Filmer, Deon & Pritchett, Lant, 1997. "Child mortality and public spending on health : how much does money matter?," Policy Research Working Paper Series, The World Bank 1864, The World Bank.
  11. Ravallion, Martin & Shaohua Chen, 1996. "What can new survey data tell us about recent changes in distribution and poverty?," Policy Research Working Paper Series, The World Bank 1694, The World Bank.
  12. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  13. Bruno, Michael & Ravallion, Martin & Squire, Lyn, 1996. "Equity and growth in developing countries : old and new perspectives on the policy issues," Policy Research Working Paper Series, The World Bank 1563, The World Bank.
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Cited by:
  1. Patrick Guillaumont, 2011. "Aid effectiveness for poverty reduction:macroeconomic overview and emerging issues," Working Papers, HAL halshs-00554285, HAL.
  2. Boriana Yontcheva & Nadia Masud, 2005. "Does Foreign Aid Reduce Poverty? Empirical Evidence From Nongovernmental and Bilateral Aid," IMF Working Papers, International Monetary Fund 05/100, International Monetary Fund.
  3. Hicks, Robert L. & Parks, Bradley C. & Tierney, Michael J., 2005. "Explaining the Allocation of Bilateral and Multilateral Environmental Aid to Developing Countries," 2005 Annual meeting, July 24-27, Providence, RI, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 19346, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. Burnside, Craig & Dollar, David, 2004. "Aid, policies, and growth : revisiting the evidence," Policy Research Working Paper Series, The World Bank 3251, The World Bank.
  5. Afridi, Muhammad Asim & Ventelou, Bruno, 2013. "Impact of health aid in developing countries: The public vs. the private channels," Economic Modelling, Elsevier, Elsevier, vol. 31(C), pages 759-765.
  6. Luigi Maria Solivetti & Alessandra Mirone, 2014. "Learning for Life: A Cross-National Analysis Comparing Education with Other Determinants of Infant Mortality," Working Papers, Sapienza University of Rome, DISS 3/14, Sapienza University of Rome, DISS.

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