Foreign Aid and Growth

Aid Scores 2006. Source: Center for Global Development.
aid_scores-2006.jpg
Norway and Denmark have the highest scores and give most aid as a share of GDP. Is that good?

In Kenya recently the opposition protested against the resumption of aid to the government, because it would make the government less dependent on parliament and weaken the fight against corruption.

This fits nicely with the model by Bueno de Mesquita et al. described in this post. Aid can do harm by enabling an autocrat to pay off a small winning coalition.

Aid can sometimes do some good, but we don’t really know how much harm aid does. It is probably substantial. I haven’t seen any studies of the iatrogenic effects of foreign aid. There is certainly no solid evidence for a positive effect of aid on economic growth, the opposite seems to be the case.

aid-and-growth.jpg

Source: William Easterly

Of course, it could be argued that there is selection bias so that the poorest and worst managed countries with the lowest growth get the most aid. Note, however, that the graph covers 42 years. If aid worked there should have been more growth in the countries with the highest aid.

Denmark and Norway may be the countries that do relatively most harm with aid. We just don’t know. No industry shows any great inclination towards external evaluations of its harmful effects. The aid industry is no different.

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3 thoughts on “Foreign Aid and Growth

  1. I also found the CGD work a bit misleading to be honest – both in terms of aid and the environment. This work on foreign aid is quite simlar to the work on debt forgiveness, in which Easterly has published on extensively. Indeed, those countries which have recieved debt forgiveness have not, on average, done better than those which are currently indebted. On the other hand, they sometimes do even worse, since it does not give states the incentive to improve their institutional capacities.

    On the debt issue, I’ve posted an article on the debt-resource hypothesis and the resource curse with regards to Russia: http://envecon.wordpress.com/2006/08/25/russia-external-debt-and-its-natural-resources/
    You might be interested.

  2. In the absense of institutional reform, you would expect countries which received debt forgiveness to borrow up to whatever they could get away with, again.

    I think you are right about Russia. Russian is becoming more like Singapore and China, following a path of “democratic centralism”.

  3. i think aid don’t support the economic growth. it only makes the country handicape. if u see the developng and the least developed countrie’s economy, they are highly dependent on foreign aid and their econmic policy are donner driven. their dependency level is increasing day by day and they have loosed their confident level that they can do something theirselvs for their betterment.

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