Business, Legal & Accounting Glossary
Aid effectiveness is the effectiveness of development aid in achieving economic development (or development targets).
Aid agencies are always looking for new ways to improve aid effectiveness, including conditionality, capacity building and support for improved governance.
The major findings by Paul Moseley and others conclude that it is impossible to establish any significant correlation between aid and growth rate of GNP in developing countries. One reason for this is the fungibility and the leakage of the aid into unproductive expenditure in the public sector.
However, at a micro-level, all donor agencies regularly report the success of most of their projects and programs. This contrast is known as the micro-macro paradox.
Moseley’s result was further confirmed by Peter Boone who argued that aid is ineffective because it tends to finance consumption rather than investments. Boone also affirmed the micro-macro paradox.
Burnside and Dollar recently found that the impact of aid on growth is positive in countries with a good political environment for making policy. This is indicated by a significant and positive coefficient on the ‘aid’ policy interaction in the growth regression.
Burnside & Dollar advocated selectivity in aid allocation. This means that aid should be allocated in countries where it works best, then that would exclude countries that are less fortunate in terms of policies and require help most.
Burnside & Dollar’s findings have been placed under heavy scrutiny since their publication. Easterly and his colleagues re-estimated the Burnside & Dollar model with an updated and extended dataset but they could not find any significant aid-policy interaction term. New evidence seems to suggest that Burnside & Dollar’s results are not statistically robust.
One problem of the studies on aid is that there is a lack of differentiation between the different types of aid.
Some type of aids such as short term aid do not have an impact on economic growth while other aids used for infrastructure and investments will result in a positive economic growth.
The emerging stories from aid-growth literature are that aid is effective under a wide variety of circumstances and that nonlinearities in the impact of aid reduce the significance of the aid-growth relationship. However, returns to aid show diminishing returns due to absorption capacity and other constraints. Also, geographically challenged countries would display lower effectiveness with respect to aid and that should be taken into account in allocation.
Therefore, the challenge to aid allocation is to identify and eliminate the overriding institutional and policy constraints that will reduce the impact of aid on growth. The real challenge is thus to develop a framework of ‘growth and development’ diagnostics to help identify the constraints.
Some politicians in donor countries are expressing concern over the failure of aid to achieve economic growth, reduce poverty, or reduce inequality. In the United States, a very prominent donor of development aid, the Bush administration appears to be moving towards a position of reducing aid to corrupt countries and concentrating aid on less corrupt countries. This approach is under discussion in other donor countries, particularly European countries and Japan, but is not yet applied.
A similar, though, distinct hypothetical concern is that unless aid is either very project-specific or disaster-specific, economies may become counter-productively dependent on aid. The relative abundance of aid in comparison to the profits of work might lead to a confusion of fundamental economic signals (profit, supply, demand, etc.) and thus a weakened economic system.
As an example of aid programmes’ mixed results, one could outline the performance of the Phare programme. This European Union-designed programme to support the transition of post-socialist countries has been evaluated externally and these assessments broadly illustrate its successes and failures. For example, the Phare core activity – institution-building has received critical assessments due to the lack of project ownership.
Furthermore, the success of aid in support of EU integration seems to be determined by good policy environment where the recipient has determination for long-term structural policy reforms like in the Baltic states. It appears that the integration might create domestic interests to adopt new EU norms as policy objective for the Accession,i.e. Enlargement_of_the_European_Union. These incentives might be more significant stimulus factors than donor’s coercive conditionality as imbedded the need for recipient’s emulation of the new norms, legislation like adoption of acquis_communautaire.
The domestic institutions as a channel for aid inflow has a decisive role for sustainability of aid programmes as supports the external experts’ efforts financed by the donor agency. Thus, the aid programme like technical assistance could only be effective once tailor-made to support the demand-driven structural long-term reforms in sound institutional environment.
Over one hundred Ministers, Heads of Agencies and other Senior Officials representing donor and recipient governments and multilateral aid organisations have now signed the Paris Declaration on Aid Effectiveness, first endorsed on 2 March 2005. Signatories include all major donor and recipient governments. The Paris Declaration sets out an agenda to make aid more effective and efficient by reducing duplication, transaction costs, and misdirected aid. The essence of the Paris Declaration is a commitment by donors to help developing countries’ governments formulate and implement their own national development plans, using their own prioritisation, planning and implementation systems wherever possible.
The Paris Declaration commits signatories to five principles:
In some quarters, the Paris Declaration is almost synonymous with aid effectiveness; it is expected that aid will be effective and achieve development outcomes when the principles are observed for government sector aid. However, there continue to be criticisms and alternative views, particularly from aid non-government organisations. Implementation of the Paris Declaration is also questionable; concrete targets set for 2010 (such as an increased proportion of aid to be untied; establishment of “mutual accountability” mechanisms in aid recipient countries; and for two-thirds of aid to be delivered in the context of so-called programme approaches rather than projects) look unlikely to be met, according to data on the OECD website.
Some observers suggest that aid can only be effective if corruption is suppressed and a fair and credible justice system is in place. Without these preconditions, large amounts of development aid is lost to corruption. Investment projects can be debilitated and halted by corrupt bureaucracy. Furthermore, economic progress is held back because, for all but a wealthy minority of the population, the link between personal enterprise and profit is broken by the loss of increased earnings to crime and corruption.
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This glossary post was last updated: 18th April, 2020 | 141 Views.