The Kinky Effects of Aid

I came across a new and interesting NBER working paper called “The Effect of Aid on Growth: Evidence from a Quasi-Experiment” by  Sebastian Galiani, Stephen Knack, Ben Zou, and Lixin Colin Xu.

Here’s the abstract:
The literature on aid and growth has not found a convincing instrumental variable to identify the causal effects of aid. This paper exploits an instrumental variable based on the fact that since 1987, eligibility for aid from the International Development Association (IDA) has been based partly on whether or not a country is below a certain threshold of per capita income. The paper finds evidence that other donors tend to reinforce rather than compensate for reductions in IDA aid following threshold crossings. Overall, aid as a share of gross national income (GNI) drops about 59 percent on average after countries cross the threshold. Focusing on the 35 countries that have crossed the income threshold from below between 1987 and 2010, a positive, statistically significant, and economically sizable effect of aid on growth is found. A one percentage point increase in the aid to GNI ratio from the sample mean raises annual real per capita growth in gross domestic product by approximately 0.35 percentage points.

I like the approach and have often wondered whether donor country thresholds make a difference. I have to say that I like my title better than theirs though!

(Not) Making Progress on Foreign Aid

Nancy Qian has an excellent review paper on foreign aid called Making Progress on Foreign Aid.*  There are a lot of interesting findings in this paper, and it’s definitely worth reading in its entirety, although I disagree a bit with the optimism of the title.

Here are some of the most interesting results in my opinion:

“The literature shows that the primary purpose of aid is often not to alleviate poverty and that out of all of the foreign aid flows, only 1.69% to 5.25% are given to the poorest twenty percent of countries in any given year.”  I knew the percentage was low but I didn’t expect it to be this low.  Important to keep in mind if you’re trying to make any sweeping generalizations about extreme poverty and aid.

Speaking of which, it is almost impossible to draw meaningful conclusions about the effectiveness of aid because it varies so much across donors, recipients, and across time.  As Qian writes, “The aggregation also makes it very difficult to develop credible identification strategies for establishing causality. It is then not surprising that many studies of the aggregate effect of aid on aggregate outcomes have been shown to be highly sensitive to sampling, measurement and empirical strategies.”  So Bill Easterly and Jeff Sachs could probably use the same data and find totally different results about aid effectiveness.  It’s hard to see any resolution in the near future.  I predict even more cycling in the literature on this topic.

*Qian N. 2014. Making Progress on Foreign Aid. Annu. Rev. Econ. 3: Submitted. Doi:10.1146/annurev-economics-080614-115553)

If at first you don’t succeed, try slander?

Jeff Sachs had a bad year. There was the retraction of the Lancet paper about how the MV project had produced extra-ordinary results and there was Nina Munk’s devastating book
Sadly, to start the new year off, Jeff has taken to twitter to slander his long-time nemisis, Bill Easterly:

Jeffrey D. SachsVerified account@JeffDSachs

@samloewenberg And the process should include Easterly acknowledging the success of many aid programs he opposed, e.g. malaria control.

  1. To @JeffDSachs please allow me to clarify that I have always been opposed to malaria

  2. @bill_easterly You opposed the aid & policies that cut malaria deaths of African children <5 by half, then claimed that MY approach failed.

  3. @GrantBrooke It would be funny if he hadn’t fought so hard against the aid and policies that have controlled malaria.

  5. @JeffDSachs @bill_easterly This claim is false. 1) Easterly has staunchly supported health aid. 2) You have no evidence that aid halved U5R.

Grading Aid

I just learned about the Aid Transparency Index and it is a very cool undertaking.  The group grades all major aid organizations across 22 indicators.  In 2013 they started taking into account not only how accessible the data is, but also how accessible the format is in which it is provided.  Click here for more on the indicators, here for their methodology, and here for the 2013 results. 


Speaking of accessibility, I wish I could reproduce the graphics they have showing the results.  It is one of the flashiest, yet totally clear, illustrations I’ve seen.  So what’s the lowdown on the 2013 results.  They find that:

“The top ranking agency is U.S. MCC, scoring 88.9%, while China takes the last place scoring only 2.2%. At the top end, MCC (88.9%), GAVI (87.3%), UK DFID (83.5%) and UNDP (83.4%) are all nearly 10 or more percentage points ahead of the next highest donor. The average score for all organisations is comparatively low at 32.6%, with 25 organisations scoring less than 20%. As in previous years, larger organisations generally perform better overall. Multilaterals as a group tend to score higher than bilaterals, although the performance of individual organisations within each group varies significantly.”

The group recognizes though that this is just the beginning of the challenge.  They note that understanding how and why people use this data will continue to be a goal for all development actors – and will mean working closely with diverse partners to make a real difference.”