Supplementary memorandum submitted by
Professor Paul Mosley, University of Sheffield
IS OVERSEAS
AID EFFECTIVE?
Overseas aid has had a bad press, and many blame
it for the frequent failures of development policy in poorer countries.
A large literature over the last twenty years has found it difficult
to demonstrate the positive impacts of aid statistically, and
casual empiricism does little better—witness the lack of
correlation between aid flows into Africa and economic development
in that continent during the years of economic reform in the 1980s
and 1990s.
More recently the World Bank—in its book
Assessing Aid (1998) has claimed that overseas aid is effective
in the sense of increasing the growth rates of recipient countries
if and only if economic policies are "good". Economic
policies, on this approach, are conceived as a blend of measures
to ensure budgetary and macro-economic stability, and measures
to keep the economy open. The prescription arising from this approach,
which has become a conventional wisdom, is to confine aid to countries
which practice "good policy" in the sense above defined.
This prescription can easily be combined with poverty focus by
limiting aid to poor countries with good policies as advocated
for example by the World Bank in their recent (2000/01) World
Development Report.
Unfortunately the entire approach of the World
Bank appears to rest on a statistical misinterpretation. For as
demonstrated by the Danish economists Henrik Hansen and Finn Tarp
(Journal of Development Economics, September 2001), aid
flows now appear to be a significant influence on growth across
the average of all developing countries, with or without "good
policies" in the Bank's sense. The Bank's error appears to
have arisen from failing to acknowledge that, within any individual
recipient country, the effectiveness of aid tails off as the aid
flow is increased. Once this factor is included in the analysis,
the influence of "good policies" disappears. The message,
so far as the growth objective is concerned, would appear to be
that aid is now able in a majority of developing countries to
improve performance by working on long-period factors—investment,
infrastructure and the skill base—and that in the short
term there is relatively little which policy can do to make or
mar the effectiveness of aid. Given the still defective quality
of policy and institutions in a number of aid-recipient countries,
this is encouraging news for donors.
Of course, donors are additionally concerned
to reduce poverty by means of aid. They can do this, of course,
simply through its impact on growth earlier mentioned, since in
fast-growing recipient countries such as China, poverty reduces
growth automatically so long as that growth provides employment
and livelihoods to low-income people. Additional leverage on poverty
can be, and is being, exerted by donors through a new style of
conditionality in which ultimatum is avoided, and the pattern
of public expenditure is used as the focus of policy dialogue.
Two illustrations of this process, as mentioned in my verbal evidence
to the Committee, are Uganda and Ethiopia. In both countries in
the early to middle 1990s:
— advice was given by donors to liberalise
policy and at the same time to move public expenditure in a more
poverty-focussed direction, favouring primary health and education,
agricultural research and extension, and rural water and sanitation;
— the response by the recipients was
not immediate and in some ways was perverse, with both countries
persisting with fixed exchange-rate policies and export taxation
well into the 1990s;
— nonetheless, dialogue, trust and
an aid flow were sustained;
— and eventually, the trust of the
donors was rewarded, with the needed changes in expenditure policy
eventually materialising and poverty falling—dramatically
so in Uganda, from 50 per cent to 32 per cent in the decade to
2000.
The message coming out of all this is that aid
donors do have influence, but that it is not influence of a conventional
kind. They have contributed to growth in developing countries
by building up their stocks of physical and human capital, and
they have helped to reduce poverty both by this route and through
policy dialogue aimed at a pro-poor pattern of public expenditures.
But the influence of more conventional policy dialogue, aimed
purely at macro-stability and economic liberalisation, would appear
to have been much less significant.
Professor Paul Mosley
University of Sheffield
May 2002
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