Transcript The Triple Crisis and the Global Aid Architecture

AID, GROWTH AND DEVELOPMENT
For or Against Official Development Assistance
Finn Tarp
UNU-WIDER and University of Copenhagen
UNU-ONY Event
:
Conference Room 6, Temporary North Lawn Building,
UN Headquarters, New York
19 April 2010
Part I
INTRODUCTION AND
MOTIVATION
Introduction (1)
• The effectiveness of aid contentious: Not really surprising
• First, aid is given and received for many reasons: Two
basic approaches:
– unselfish (promote ”a better world”) (includes needs vs merit/potential
issues) and selfish (strategic political, commercial and other interests)
• Second, “Does aid work” has many interpretations, for
example:




Does aid improve human development (ex. HDI, save human lives,
improve nutrition, promote food security)?
Does aid reduce poverty and inequality (ex. Headcounts, Gini,
regional imbalances)?
Does aid promote ‘good policies’ (ex. CPIA)?
Does aid promote democracy, freedom of speech and political
rights?
Introduction (2)
• Third, assume agreement on purpose: ”The how”
remains open
• Many reasons for disagreement (Kanbur):
– Different perceptions of market structure and power (causal
relationships)
– Different levels of aggregation
– Different time horizons
Principal Question of Interest in What
Follows
Does foreign aid boost economic growth on average in
developing countries?
 Debated both in the academic and popular literature.
“The notion that aid can alleviate systemic poverty, and has done so,
is a myth. Millions in Africa are poorer today because of aid; misery
and poverty have not ended but have increased.”
(Dambisa Moyo, 2009)
“A reasonable estimate is that over the last thirty years [aid] has
added around one percentage point to the annual growth rate of
the bottom billion.”
(Paul Collier, 2007)
Objections to Pursuing the Issue
This isn’t a relevant question
– Economic growth is not the objective
– Foreign aid is too heterogeneous
– Averages are not interesting
 And recognize upfront methodological challenges:
– Poor quality data across the board
– Growth is a highly complex, non-linear process
– Long delays between receipt of aid and onset of
economic growth (e.g., health, education)
– Endogenous allocation of aid (good performers graduate,
poor performers remain or receive even more)
BUT …..
– My view: Profound dangers involved if the
economics profession and more broadly social
sciences fenced off the question (leave the
field open to unhelpful rhetoric)
= Humility is required, BUT….lessons from
4 generations spanning >40 years merit
attention
Part II
HISTORICAL BACKGROUND
8
General Trends in Foreign Aid
•
•
•
•
•
The early years (>1945) – the Marshall plan: its
success fuelled optimistic expectations
The golden age (from early 1960s)
Stabilization and structural adjustment (early 1980s)
(-> conditionality)
Aid fatigue (from the late 1980s –> selectivity)
Monterey/Gleneagles G-8, the Paris declaration and the
Accra agenda for action (country ownership is key): A
new beginning?
9
.08
Figure 2.2: Density of average annual (1996-2005)
ODA shares
.06
Aid in % of GNI
Mode: 1.8%
Median: 3.2%
Iqr: 11.6%point
Min: -0.3%
Max: 73.3%
Aid per capita, US$
Mode: 17.9$
Median: 31.5$
Iqr: 65.9$
Min: -20.6$
Max: 1781.3$
.04
Vietnam (4.3%)
Bolivia (8.7%)
Tanzania (13.2%)
.02
Vietnam (18.2$)
Tanzania (34.7$)
Mozambique (61.9$)
Bolivia (82.2$)
Mozambique (28.6%)
0
Density
How Much Aid is Actually out There?
0
20
40
60
80
Note: Kernel density using Gaussian kernel. The hight of the graph reflects
the (weighted) average number of observations in an interval around the midpoint.
Source: World Bank (2007)
10
Changing Global Context
100
Figure 2.3: Macroeconomic indicators in aid
receiving countries
0
20
40
60
80
Remittances
FDI
Trade
GNI
Aid
1970
1975
1980
1985
1990
1995
2000
2005
Year
Note: All variables are expressed as an index equal to one in 1970 and constructed from series
of constant 2000 prices in US$.
FDI is constructed from net FDI inflows and trade is based on the sum of exports and imports.
Source: World Bank (2007)
11
Part III
EMPIRICAL LITERATURE:
Four Generations
12
What Does “does aid work?” Mean?: An
Economist Perspective
• High income per capita associated with good standards
of living – a lot of variation around means, but ….
• How to get high income? One avenue is:
– Savings -> Investment -> Growth
• “Does aid work” often means:
– Does aid increase savings?
– Does aid increase investment?
– Does aid increase growth?
13
What is the Problem?
•
•
•
•
How to measure the true impact of aid?
Targets versus actual outcomes
Before-and-after
The need for a counterfactual
– With-and-without
– It is difficult and controversial! Economists use
different (often statistical) methods to try to deal with
this
14
Micro-evidence
• Cost-benefit analysis (old)
• Many projects showed respectable rates of
private, economic and social return
• Different projects had different returns (and
variation across countries and time), but overall it
seemed aid works …
15
Turning to Early Macro: The Harrod-Domar Macro
Model of Saving, Investment and Growth
Growth  Constant * Investment / GDP
I
g 
Y
Investment  Gross Domestic Saving + Foreign Saving
I S A F 
   
Y Y Y Y 
• This simple model leads to the “financing gap”
model: Aid fills a gap to reach desired growth
• Aid => S one-to-one, so Aid => I one-to-one, and
Aid => Growth is predictable and sizeable (Aid =
10% of GDP might give an additional 5% growth)
Aid and Growth: 1970s and 1980s
• Early optimism – Papanek’s articles using simple crosscountry regressions
• But increasing disappointment with traditional HarrodDomar (and Solow) model
• Aid may work at micro – but its impact not only is
smaller than predicted (for many reasons) – it also
somehow ‘evaporates’ on its way to the macro level (the
micro-macro paradox)
• Eventually widespread perception of failure – reported in
influential “so-called” summary studies…by Mosley, Anne
Krueger, Howard White etc
• But what did cross-country research (first and second
generation) actually show? No impact?
17
First and Second Generation: Hansen and Tarp
(2000)
• 131 ”early” (simple) cross-country regression studies…..
– Several studies showed aid associated with decreased
savings BUT only one study (and one regression) (Gupta
& Islam, 1983) shows impact is greater than the aid – so
net savings effect positive
– Aid increases investment! Not a single study contradicts
– Only one study (and one regression) (Mosley, 1987)
shows negative impact on growth (and the insignificant
studies overwhelmingly dominated by one study with
misspecified model…)
• Aid seems to work – on average – in simple first and
second generation studies
18
Aid and Growth: Third Generation – the 1990s
• New data: panel data
• New theory (introducing economic policy and
institutions directly)
• Taking account of the endogeneity of aid
• Taking non-linearity serious
• New econometric methods (GMM)
19
Third Generation – Panel Data Cross-country
Regressions
• Aid is down the rathole (Boone, 1994)
– [t]he lack of robustness of the aid variable in the
regression . . . shows that aid does not create, nor
correlate with, those underlying factors which cause
growth
– This empirical evidence supports Friedman’s (1958)
forecast that the ‘new’ aid programs would not lead
to economic development
• But Boone soon started fading….
20
Aid and Growth: Third Generation –
Burnside-Dollar
• Burnside-Dollar: aid works
– But only in good policy countries
• Burnside-Dollar cutting the Gordian knot introducing an
aid x policy interaction term in the statistical analysis
• Note underlying development paradigm and key policy
implication
• Hansen and Tarp (2001) showed there is a more
convincing story: aid works but with diminishing returns
– The interaction term – aid x policy – looses out to aid
squared!
• New data, new doubts!
21
3rd Generation: Summing-up (Tarp, SEPR)
• A substantial number of 3rd generation studies
• General consensus: aid does seem to work
• But: disagreement about the particular circumstances +
aid less decisive than originally thought
– Inherent problems or too small?
• Robustness an issue, methodological choices matter +
remember ‘iron law of econometrics’:
– With ‘noisy’ data, a ‘dirty’ dependent variable, and weak proxies
results biased towards zero
– Weak instruments will give weak conclusions!!
• My take: Don’t allocate aid selectively according to
simple macro rules
22
An Emerging Pessimistic 4th Generation
• Leading example is Rajan and Subramanian 2008
– Supply side instruments for aid motivated by skepticism
of GMM statistical methods
– Long horizon cross-section
– No systematic effect of aid
– This conclusion seems to hold for:
• Different types of aid
• Alternative time periods
Micro-macro Paradox Revived?
• Insights of non-macro empirical research
– Largely positive results from rigorous field
experiments
– World Bank project evaluations broadly encouraging
http://www.worldbank.org/ieg/arde09/index.html
– Evidence of improvements in meso-level outcomes ,
particularly social indicators (e.g., Easterly, 2009)
• Some authors link these to aid
What Should We Expect?
• Aim of empirics is to falsify a prior
• Theoretical prior from growth theory =
modest
– Rajan and Subramanian (2008): 10% Aid/GDP → 1%
increase in per capita growth rate
• Time dimension is important due to long run
aspects of growth process
– Education & health (Ashraf et al. 2008; Acemoglu
& Johnson 2007)
Arndt-Jones-Tarp (2009)
http://www.wider.unu.edu/publications/working-papers/discussionpapers/2009/en_GB/dp2009-05/
• Start from Rajan-Subramanian (same data and
instrument)
– Retain focus on long-run cross-section
• Employ insights from programme evaluation:
(1) Develop a new treatment/control estimator
(2) Strengthen the growth equation specification
(3) Improve the instrumentation strategy
• Quick review of results:
– Cannot reject the theoretical prior (β = 0.1) (10% aid gives 1%
additional growth)
– Generally do reject a “no impact” hypothesis (β = 0)
– No micro-macro paradox!
Part IV
CONCLUDING DISCUSSION
27
The Impact on Aid of Economic Crisis
• The average banking crisis reduces output per
capita by 10% – and the loss is not restored
within 7 years of the crisis onset
• The target for aid expressed as a percentage of
economic size (0.7% of GNI)
• To maintain the past VOLUME of aid, aid will
have to rise faster as a % of total spending
• Is this likely under business as usual scenarios?
No
28
1
Net ODA as Percentage of Donor GNI in 2008
.98
.92
.88
.8
.82
.8
.6
UN Target (0.7)
.58
Average Country Effort (0.47)
.34
.32
.3
.3
.27
.2
.18 .18
Japan
United States
Portugal
New Zealand
TOTAL DAC
Canada
Australia
Germany
France
Switzerland
Austria
Finland
Spain
United Kingdom
Belgium
Ireland
Netherlands
Denmark
Norway
Luxembourg
Sweden
0
.2
Greece
.42 .41
.39 .38
Italy
.43 .43 .43
.2
.4
.47
ODA/GNI
Source: OECD-DAC Online Data Base
Many donors remain far from achieving the UN goal
29
100 150
Net ODA Disbursement and ODA/GNI (% Change Between 2005 and 2008 )
122
88
80
63
38
36
60
29
16
11
41
38
6
0
18
26
37
33
4
42
26
26
21
14
1
-6
-6
-7
-7
-9
-11
7
-7
-17
-19
-22
Net ODA Disbursement (% Change)
US
Austria
France
Belgium
UK
Finland
Switzerland
Canada
Norway
Netherlands
Denmark
Sweden
Germany
New Zealand
Luxembourg
Greece
Portugal
Australia
Ireland
Spain
-50
-2
9
6
-13
-31-29-36
Japan
50
59
Italy
84
ODA/GNI (% Change)
Note: ODA Disbursement is expressed in current prices(Millions of USD). Data for 2008 is preliminary.
Source: OECD-DAC Online Data Base
The ODA/GNI ratio fell for 12 out of 22 DAC donors
before the crisis
30
35000
Net ODA Disbursement to Africa Constant Prices(1981-2007)
34,224
30000
Gleneagles G8 Summit
20000
25000
27,712
17,643
10000
15000
17,282
1980
1985
1990
Net Disbursement,Total
1995
Year
2000
2005
2010
Net Disbursement Excluding Debt Relief
Source: OECD-DAC Online Data Base
Netting out debt relief ODA to Africa has not risen
in real terms since the late 1980s
31
Should We Worry?
• Aid’s critics would say NO (some even say growth will
rise if aid is eliminated, others say aid has no effect)
• Weight of empirical evidence: Aid’s aggegate impact
conforms to priors from modern growth theory (i.e.
10% aid/GNI gives 1% additional growth)
• So would appear present financial climate (where private
flows have fallen dramatically) not a good time to
experiment with Dambisa Moyo’s proposal to kill aid
32
Conclusion
•
•
•
•
•
•
•
•
There is a problem out there!
It is morally right to do something about it
Aid an established tool – and limited other options – at
least for the time being
Plenty of micro evidence aid works
On many macro issues we lack definitive answers
But, empirical macro evidence mounting – and generally
favorable to aid: 4 generations during more than 40
years!
To get more impact make aid work better
Should we scale up as well?
33
Conclusion
• Scaling up: Moyo says NO!! – Sachs says YES!!
• Four generations suggest aid does work: while little to
suggest a highly potent driver – on average – very little
to suggest aid has done macro-economic harm and
many indications of some impact (alongside what one
would expect)
• This does not per se prove significant scaling up would
work – so balanced implication is: scale up where-ever
possible
• From economics to politics: the need is there but is
scaling up politically feasible? If so, how, under which
circumstances?