Does Foreign Aid Reduce Poverty? Evidence from Niger

This paper analyses empirically whether foreign aid is associated with poverty reduction at household level in Niger. Evidence suggests that aid is correlated with poverty, to be expected when the poor are targeted. However, the study finds increases in poverty in communities that received aid projects. Further exploration reveals that poverty changes among aid-recipient households are not different to those among households receiving no projects at all. However, households benefiting from aid underperformed those who benefited from development projects by other donor types. Knowledge of local conditions seems to be the reason: when projects are funded by foreign aid only, poverty does not change, but when aid co-funds projects with other types of donor, poverty decreases. The implications are important: first, foreign aid requires coordination with other providers of public goods, which is always difficult, especially in a context of poor institutional capacity such as Niger’s. Second, the models estimated allow the prediction of the benefits a specific project would bring to a given household, which would allow Niger’s policymakers to coordinate donors’ initiatives to maximize their effectiveness – although such coordination may involve having to reduce the least efficient donors to mere providers of finance, a role they might not be willing to accept. And finally, poverty can be reduced, but for that, there is a minimum number of home-grown interventions which households should benefit from.