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Aid, the incentive regime, and poverty reduction

  • Burnside, Craig
  • Dollar, David

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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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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  1. Pritchett, Lant & Summers, Lawrence H., 1993. "Wealthier is healthier," Policy Research Working Paper Series 1150, The World Bank.
  2. Ravallion, Martin & Chen, Shaohua, 1997. "What Can New Survey Data Tell Us about Recent Changes in Distribution and Poverty?," World Bank Economic Review, World Bank Group, vol. 11(2), pages 357-82, May.
  3. William Easterly & Sergio Rebelo, 1993. "Fiscal Policy and Economic Growth: An Empirical Investigation," NBER Working Papers 4499, National Bureau of Economic Research, Inc.
  4. Alesina, Alberto & Dollar, David, 2000. " Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
  5. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  6. 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.
  7. Charles C. Chang & Eduardo Fernández-Arias & Luis Servén, 1998. "Measuring Aid Flows: A New Approach," IDB Publications (Working Papers) 6447, Inter-American Development Bank.
  8. Killick, Tony, 1991. "The developmental effectiveness of aid to Africa," Policy Research Working Paper Series 646, The World Bank.
  9. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  10. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  11. repec:cup:cbooks:9780521420563 is not listed on IDEAS
  12. Filmer, Deon & Pritchett, Lant, 1997. "Child mortality and public spending on health : how much does money matter?," Policy Research Working Paper Series 1864, The World Bank.
  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 1563, The World Bank.
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