Development Policy Programme for Finnish

Journalists 2015

Aid and Development – at the Aggregate Level

By Finn Tarp

Overview

• Introduction

• Aid, growth and development: what do we know?

• Poverty: what do we know about developments since 1990?

• Looking post-2015

Recent WIDER research on foreign aid

• : A comprehensive research, documentation and communications initiative (initiated in early 2011)

– Motivated by our desire to understand better four key questions about aid:

• What works?

• What could work?

• What is scalable?

• What is transferrable?

Point of departure

• Aid is diverse and complex

– no single individual can encompass it all => rely on

global network of researchers and policy

practitioners

• A sizeable research output now available

under 5 core themes (incl. 250 WIDER WPs

and five position papers)

– see http://recom.wider.unu.edu/

– this presentation meant to provide a ”big picture”

perspective

Aid, growth and

development:

what do we know?

Where to begin?

• The macro aid and growth literature

• Probably the most controversial theme

– Many critical voices: Peter Bauer, Bill Easterly, Dambisa Moyo, and others

• They often frame and strongly influence the development debate and there is frequently talk of a micro-macro paradox?

– What do we mean by that?

– Aid and macroeconomics

– Aid, political economy and institutions

• But is it true that the impact of aid “evaporates” as we move from the project (micro) level up to the macro economy? What can we say on balance about aid’s aggregate impact?

It is difficult!

• Aside from ideological debates…..

• A thorny econometric challenge: attribution somewhat elusive

– Progress typically associated with less aid

– Causality not so easy to establish, so debate ripe with rhetoric:

• Africa, aid, Africa still not developed…..

• Anecdotes….

– We need a credible counterfactual (what would have happened without) -> we use statistical methods

Back to basics

• What does lack of statistical significance mean?

• “Absence of evidence” vs “evidence of absence”

• Just because economists have had a hard time at the macro level does not in and by itself prove aid impact is not there

• Time has been passing: the macro-evidence now piling up – and, yes we can say quite a lot – based on WIDER research

• A brief summary:

– Cross country (vs. Rajan & Subramanian): Journal of Globalization and Growth + update and unpacking: World Development

– Time series – 36 individual African countries : Oxford Bulletin of Economics and Statistics

– Time series: World Development

– Meta: Journal of Development Studies

– Simulations –> heterogeneity….but overall a respectable rate of return

Poverty:

what do we know?

Poor nations: some questions and answers

Q. Why are some countries poor?

A. Poor countries produce very little.

Q. Why do poor countries produce so little?

A. Poor countries employ rudimentary technology, possess limited stocks of human and physical capital, and weak institutional structures.

Q. Why do poor countries lack the wherewithal to produce?

A. Poor countries have not managed to accumulate over time.

Growth is a long run and fragile process of accumulation.

What does this mean for the analysis of aid and development?

Poverty is falling – but remains a huge challenge

Since 1990: people living on less than $1.25 has fallen in every region, including sub-Saharan Africa:

• In 1990 46% (or 2 billion people) were extremely poor

• Estimates predict that that the MDG target of cutting extreme poverty by half will be achieved

• Still: 1 billion people (14%) remain in extreme poverty

• Fragile states not on track to reach MDGs

0 10 20 30 40 50 60 70

Developing Regions

Northern Africa

Sub-Saharan Africa

Latin America and the Caribbean

Eastern Asia (China only)

Southern Asia

Southern Asia excluding India

South-Eastern Asia

Western Asia

Oceania

Caucasus and Central Asia

2008

1990

% of people living on less than $1.25 USD (2005 PPP)

Under-five mortality rate: 1990-2010

0

20

40

60

80

100

120

140

160

180

200

1990 2010

Sub-Saharan

Africa

Southern Asia

South-Eastern Asia

LAC

Eastern Asia

Developed

countries

Primary school enrolment, 1990-2010 (%)

1990 2010

Boys Girls Boys Girls

Developing world 84 75 91 89

Sub-Saharan Africa 57 50 78 74

Latin America and the Caribbean

88 84 96 95

Eastern Asia 99 96 97 97

Southern Asia 83 66 94 91

South-Eastern Asia 94 91 95 96

Western Asia 87 79 94 89

Developed Regions 95 95 97 97

Growth has been poverty reducing

Poverty increasingly associated with middle-income

countries (often with high levels of inequality)

0

10

20

30

40

50

60

70

80

90

100

1990 2008

% o

f gl

ob

al p

ove

rty

Low-incomeCountries

Middle-incomeCountries

0 20 40 60

South Asia

Sub-SaharanAfrica

East Asia

Latin America

MENA

% of global poverty

2008

1990

People living on less than $1.25 USD a day (2005 PPP)

Looking post-2015

The new faces of the development

challenge

• To the extent the existing aid system was designed at all, it was designed to improve the livelihoods of poor people in poor countries.

• Much has been achieved. Many countries (including former fragile states) have “graduated” and new donors have emerged (Republic of Korea).

• And looking beyond 2015: in 10 years 36 of 68 current IDA recipients will graduate out of IDA – Especially the large countries are graduating: India,

Vietnam, Pakistan, Nigeria, Ghana and Kenya – Population in IDA eligible countries will fall from 3 to 1

billion)

So: should we worry about aid post-2015?

• Aid’s critics would say no– Some even say growth will rise if aid is eliminated, others

say aid has no effect

• The weight of the existing up-to-date analytical and big-picture evidence clearly suggests this is unfounded: – Aid has (on average) helped countries grow and reduce

poverty over the past decades

• But while progress has been realized major challenges remain which future aid efforts must address

Key challenges moving forward

• Aid must post-2015 adapt to emerging national and global contexts, including how to deal with:– Increased complexity (on supply side)

– The new geography of poverty

– Global public goods (climate, health)

– And a “hard core” of fragile states (including building state capability)

• Much of this is unknown territory -> the need for high quality policy research

• With ReCom WIDER hopes to have helped move this agenda forward in a constructive manner

www.wider.unu.eduHelsinki, Finland