Aid Can Work

• Author: François Bourguignon and Mark Sundberg
• Position: Senior Vice President of Development Economics/Lead Economist of Development Economics

Aid effectiveness is getting better, even though it's tough to prove

The international call for increased aid to fight HIV/AIDS, cut extreme poverty, and expand access to clean water presumes that aid promotes development. This presumption lies behind most of the $106 billion dollars that international agencies and bilateral donors spent in 2005 on official aid to developing countries. But the effectiveness of aid remains a highly controversial issue for economists and development practitioners, who have debated it ever since aid first appeared as an expenditure line in national budgets. The resurgence in interest coincides with the push to scale up transfers to poor countries to help them achieve the Millennium Development Goals.

From both sides of the political spectrum, attacks on aid effectiveness have become a growth industry. Some critics point to bad projects funded by aid, others to aid granted to bad governments, usually inferring this is the rule and not the exception. Several economists have used econometric models on cross-country data to test whether aid leads to economic growth, but the results have been largely ambiguous.

This approach is a bit like setting up a straw man only to knock it down. The aid industry unquestionably provides ample fodder for critics: many cases exist of aid funding poorly conceived, badly executed, unsustainable projects (for example, cement factories built far from sources of gypsum and sand). And some badly managed countries have, indeed, received millions, especially during the Cold War, when aid was extended for geopolitical objectives. At times, aid agencies followed fads that later proved misguided (recall the popular integrated rural development projects of the 1970s). This does not prove that all aid has been, or is, ineffective.

It is entirely unsurprising that many economists have found the relationship between aggregate aid and growth to be weak. Evidence suggests a high level of heterogeneity in the effects of aid, which comes on top of the typical statistical problems that arise in cross-country analysis. Multiple markers for development success-income growth, poverty reduction, literacy, access to sanitation, and inoculations-further complicate empirical analysis. Case studies do not solve this problem because of the difficulty of establishing a counterfactual: some argue that aid has not prevented...