Steven Radelet

Counting Chickens when they Hatch: The Short-Term Effect of Aid on Growth

Past research on aid and growth is flawed because it typically examines the impact of aggregate aid on growth over a short period, usually four years, while significant portions of aid are unlikely to affect growth in such a brief time. We divide aid into three categories: (1) emergency and humanitarian aid (likely to be negatively correlated with growth); (2) aid that affects growth only over a long period of time, if at all, such as aid to support democracy, the environment, health, or education (likely to have no relationship to growth over four years); and (3) aid that plausibly could stimulate growth in four years, including budget and balance of payments support, investments in infrastructure, and aid for productive sectors such as agriculture and industry. Our focus is on the third group, which accounts for about 53% of all aid flows. We find a positive, causal relationship between this “short-impact” aid and economic growth (with diminishing returns) over a four-year period. The impact is large: at least two-to-three times larger than in studies using aggregate aid. Even at a conservatively high discount rate, at the mean a

A Primer on Foreign Aid

1 increase in short-impact aid raises output (and income) by

The Millennium Challenge Account: How Much is Too Much, How Long is Long Enough?

1.64 in present value in the typical country. From a different perspective, we find that higher-than-average short-impact aid to sub- Saharan Africa raised per capita growth rates there by about half a percentage point over the growth that would have been achieved by average aid flows. The results are highly statistically significant and stand up to a demanding array of tests, including various specifications, endogeneity structures, and treatment of influential observations. The basic result does not depend crucially on a recipient’s level of income or quality of institutions and policies; we find that short-impact aid causes growth, on average, regardless of these characteristics. However, we find some evidence that the impact on growth is somewhat larger in countries with stronger institutions or longer life expectancies (better health). We also find a significant negative relationship between debt repayments and growth. We make no statement on, and do not attempt to measure, any additional effect on growth from other categories of aid (e.g., emergency assistance or aid that might affect growth over a longer time period); four-year panel regressions are not an appropriate tool to examine those relationships.

Global Fund grant programmes: an analysis of evaluation scores

Controversies about aid effectiveness go back decades. Some experts charge that aid has enlarged government bureaucracies, perpetuated bad governments, enriched the elite in poor countries, or just been wasted. Others argue that although aid has sometimes failed, it has supported poverty reduction and growth in some countries and prevented worse performance in others. This new working paper by CGD senior fellow Steve Radelet explores trends in aid, the motivations for aid, its impacts, and debates about reforming aid. It begins by examining aid magnitudes and who gives and receives aid. It discusses the multiple motivations and objectives of aid, some of which conflict with each other. It then explores the empirical evidence on the relationship between aid and growth, which is divided between research that finds no relationship and research that finds a positive relationship (at least under certain circumstances). It also examines some of the key challenges in making aid more effective, including the principal-agent problem and the related issue of conditionality, and concludes by examining some of the main proposals for improving aid effectiveness.

Will the Millennium Challenge Account Be Different

The US government’s proposed

Aid Effectiveness and the Millennium Development Goals

5 billion Millennium Challenge Account (MCA) could provide upwards of

From Pushing Reforms to Pulling Reforms: The Role of Challenge Programs in Foreign Aid Policy

250-

Making aid smarter

300m or more per year per country in new development assistance to a small number of poor countries judged to have relatively “good” policies and institutions. Could this assistance be too much of a good thing and strain the absorptive capacity of recipient countries to use the funds effectively? Empirical evidence from the past 40 years of development assistance suggests that in most potential MCA countries, the sheer quantity of MCA money is unlikely to overwhelm the ability of recipients to use it well, if the funds are delivered effectively. There may be a small number of potential recipients—mostly very small economies already receiving substantial amounts of aid—in which MCA money might be so bountiful as to surpass recipient governments’ absorptive capacity. Strong monitoring and evaluation is the key to detecting and correcting possible absorptive capacity problems, rather than ad-hoc rules limiting the amount of assistance. Where problems do arise, funds should be re-allocated to other activities within the country or to other MCA countries, or the list of countries qualifying for the MCA could be expanded slightly to include a small number of additional countries that may be able to use the funds effectively. We also explore the length of time that the USG should be prepared to continue to fund MCA countries, and how recipients might exit from MCA funding over time. We look back at two dozen ‘good policy’ countries that previously were very poor but have grown and developed after receiving large amounts of aid—one might call them the ideal MCA candidates of the 1970s. Their experience suggests that (1) unlike some other countries, they used aid well, and (2) these “best case scenarios” required stable and moderately sizeable aid commitments lasting decades. This experience suggests that even the best performing of the MCA countries are likely to require significant assistance for many years. The idea of a brief, big-bang “Marshall Plan” for developing countries in which the MCA provides a large amount of funding for a short period of time in hopes of igniting rapid development is probably wishful thinking.

Reviving Economic Growth in Liberia

BACKGROUND The Global Fund to Fight AIDS, Tuberculosis and Malaria evaluates programme performance after 2 years to help decide whether to continue funding. We aimed to identify the correlation between programme evaluation scores and characteristics of the programme, the health sector, and the recipient country. METHODS We obtained data on the first 140 Global Fund grants evaluated in 2006, and analysed 134 of these. We used an ordered probit multivariate analysis to link evaluation scores to different characteristics, allowing us to record the association between changes in those characteristics and the probability of a programme receiving a particular evaluation score. FINDINGS Programmes that had government agencies as principal recipients, had a large amount of funding, were focused on malaria, had weak initial proposals, or were evaluated by the accounting firm KPMG, scored lowest. Countries with a high number of doctors per head, high measles immunisation rates, few health-sector donors, and high disease-prevalence rates had higher evaluation scores. Poor countries, those with small government budget deficits, and those that have or have had socialist governments also received higher scores. INTERPRETATION Our results show associations, not causality, and they focus on evaluation scores rather than actual performance of the programmes. Yet they provide some early indications of characteristics that can help the Global Fund identify and monitor programmes that might be at risk. The results should not be used to influence the distribution of funding, but rather to allocate resources for oversight and risk management.

The Role of the IMF in Well-Performing Low-Income Countries

The Millennium Challenge Account initiative is a good start to significantly improve the allocation and delivery of U.S. foreign assistance. But the initiative itself, and a broader foreign assistance strategy, still need to be developed. Heres how.