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The countrywide effects of aid

Author

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  • White, Howard
  • Luttik, Joke
  • DEC

Abstract

There are three main approaches to analyzing the effects of aid money and aid-supported reform: before-and-after comparison; control group (simple and modified) studies; and modeling. All three approaches have been used to carry out macroeconomic analysis of policy reform. But before-and-after and simple control group approaches are not valid explanatory techniques, say the authors; the results may be used to describe what happened, but not why it happened. Theoretically, the modified control group is the strongest approach. In practice, it has many shortcomings - in particular, its failure to allow for the effects of aid and other capital flows as an explanatory variable. The macroeconomic impact of aid inflows is best understood within the context of an accounting framework, say the authors. The literature on the macroeconomic effects of aid funds has relied almost entirely on modeling. But much work has used only single equations, so that many potentially important relationships - notably aid's effects on output and income - are excluded from the analysis. Even the simultaneous models used are mostly partial, not general, equilibrium models - which makes the findings doubtful. And much of the empirical work suffers from methodological shortcomings. Much research is needed on how aid affects the private sector macroeconomically; more is known about how to analyze the public sector's response to aid inflows. The analysis of aidmoney and aid-supported policy reform can be incorporated into a single framework - but with the effects of each clearly separable. The authors favor a country-specific modeling approach because it allows the separate analysis of policies and money as well as the separate analysis of different policies. Country-specific analysis can capture local factors that may be omitted from cross-country analyses. They argue that counterfactual analysis using econometric or general equilibrium models may be the most legitimate approach to analyzing the relationship between poverty and economic reform. Modeling has yielded results quite different from the common view about the social impact of reform policies, they say, but existing models fail to incorporate aid as an important macroeconomic variable. Project aid, program aid, commodity (mainly food) aid, and technical assistance are the four main types of aid. One problem in much of the literature is that an aggregate aid figure is used, even though the macroeconomic repercussions of these different types of aid will differ. Much analysis is also flawed by considering the effects of a program (despite different intensities and compliance rates) rather than the policies implemented.

Suggested Citation

  • White, Howard & Luttik, Joke & DEC, 1994. "The countrywide effects of aid," Policy Research Working Paper Series 1337, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1337
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    References listed on IDEAS

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    Cited by:

    1. Feyzioglu, Tarhan & Swaroop, Vinaya & Min Zhu, 1996. "Foreign aid's impact on public spending," Policy Research Working Paper Series 1610, The World Bank.
    2. Liutang Gong & Heng-fu Zou, 2000. "Foreign Aid Reduces Domestic Capital Accumulation and Increases Foreign Borrowing: A Theoretical Analysis," Annals of Economics and Finance, Society for AEF, vol. 1(1), pages 147-163, May.
    3. Liutang Gong & Yuzhe Zhang & Heng-fu Zou, 2008. "Foreign Aid, Public Spending, Optimal Fiscal and Monetary Policies, and Long-Run Growth," CEMA Working Papers 309, China Economics and Management Academy, Central University of Finance and Economics.

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