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Aid allocation and poverty reduction

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Author Info

  • Collier, Paul
  • Dollar, David

Abstract

The authors derive a poverty-efficient allocation of aid and compare it with actual aid allocations. They build the poverty-efficient allocation in two stages. First they use new World Bank ratings of 20 different aspects of national policy to establish the current relationship between aid, policies, and growth. Onto that, they add a mapping from growth to poverty reduction, which reflects the level and distribution of income. They compare the effects of using headcount and poverty-gap measures of poverty. They find the actual allocation of aid to be radically different from the poverty-efficient allocation. In the efficient allocation, for a given of poverty, aid tapers in with policy reform. In the actual allocation, aid tapers out with reform. In the efficient allocation, aid is targeted disproportionately to countries with severe poverty and adequate polices-the type of country where 74 percent of the world's poor live. In the actual allocation, such countries receive a much smaller share of aid (56 percent) than their share of the world's poor. With the present allocation, aid is effective in sustainably lifting about 30 million people a year out of absolute poverty. With a poverty-efficient allocation, this would increase to about 80 million people. Even with political constraints introducedto keep allocations for India and China constant, poverty reduction would increase to about 60 million. Reallocating aid is politically difficult, but it may be considerably less difficult than quadrupling aid budgets, which is what the authors estimate would be necessary to achieve the same impact on poverty reduction with existing aid allocations.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2041.

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Date of creation: 31 Jan 1999
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Handle: RePEc:wbk:wbrwps:2041

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Keywords: Services&Transfers to Poor; Environmental Economics&Policies; Development Economics&Aid Effectiveness; Poverty Reduction Strategies; Health Economics&Finance; Poverty Assessment; Achieving Shared Growth; Environmental Economics&Policies; Safety Nets and Transfers; Services&Transfers to Poor;

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  1. Dani Rodrik, 1996. "Understanding Economic Policy Reform," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 9-41, March.
  2. Li, Hongyi & Squire, Lyn & Zou, Heng-fu, 1998. "Explaining International and Intertemporal Variations in Income Inequality," Economic Journal, Royal Economic Society, vol. 108(446), pages 26-43, January.
  3. Dollar, David & Kraay, Aart, 2002. " Growth Is Good for the Poor," Journal of Economic Growth, Springer, vol. 7(3), pages 195-225, September.
  4. Dollar, David & Easterly, William, 1999. "The search for the key : aid, investment, and policies in Africa," Policy Research Working Paper Series 2070, The World Bank.
  5. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, World Bank Group, vol. 12(1), pages 29-58, January.
  6. Devarajan, Shantayanan & Hossain, Shaikh I., 1998. "The combined incidence of taxes and public expenditures in the Philippines," World Development, Elsevier, vol. 26(6), pages 963-977, June.
  7. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  8. Levy, Victor, 1987. "Does Concessionary Aid Lead to Higher Investment Rates in Low-Income Countries?," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 152-56, February.
  9. Killick, Tony, 1991. "The developmental effectiveness of aid to Africa," Policy Research Working Paper Series 646, The World Bank.
  10. François BOURGUIGNON & Gary S. FIELDS, 1990. "Poverty Measures and Anti-Poverty Policy," Discussion Papers (REL - Recherches Economiques de Louvain) 1990038, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  11. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  12. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  13. Dollar, David & Alesina, Alberto, 2000. "Who Gives Foreign Aid to Whom and Why?," Scholarly Articles 4553020, Harvard University Department of Economics.
  14. Ravallion, Martin & Shaohua Chen, 1996. "What can new survey data tell us about recent changes in distribution and poverty?," Policy Research Working Paper Series 1694, The World Bank.
  15. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-65, May.
  16. Datt, Gaurav & Ravallion, Martin, 1990. "Regional disparities, targeting, and poverty in India," Policy Research Working Paper Series 375, The World Bank.
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