Aid and Economic Development

by

Alice N. Sindzingre

• LAST REVIEWED: 31 August 2015
• LAST MODIFIED: 31 August 2015
• DOI: 10.1093/obo/9780199846733-0014

Introduction

The analysis of the relationships between foreign aid—also called “official development assistance” (ODA)—and economic development is a core issue in the disciplines of development economics and development studies. These relationships are addressed in the literature mostly in line with understanding the impact of foreign aid either on economic growth or on development. An understanding of the concept of aid as well as those of development and growth, respectively, is required. The concept of development is viewed as more comprehensive than that of economic growth. A consensus exists that, beyond an increase in countries’ wealth and individual incomes, “development” encompasses human development—health and education—and it includes consideration of the quality of economic and political institutions. Foreign aid includes a great variety of heterogeneous elements, for example, not only financial flows (grants and long-term loans), but also technical cooperation or debt relief, which give rise to debates on its measurement. In addition, aid can be given by different types of donors. It can be provided by multilateral institutions, that is, allocated to a given government or any sub- or nongovernmental entity by multilateral organizations, for example, the international financial institutions (the World Bank or the International Monetary Fund [IMF]) or regional institutions (such as the European Union, the Asian Development Bank, the Inter-American Development Bank, and many others). Aid can also be bilateral, that is, allocated by bilateral sources, such as governments of donor countries or various donor national entities, such as public agencies, private firms, or nongovernmental organizations. The various short- and medium-term forms of lending made by the IMF, strictly speaking, are not considered as ODA; however, concessional lending made by the World Bank is viewed as aid. Likewise, the impacts of aid are numerous: they can be macroeconomic and microeconomic and can involve all levels of human activity—economic, political, and social. This variety of definitions and channels explains why the relationships between foreign aid and development are complex, which is reflected in the literature.

General Overviews

Development theory started as a full discipline after the middle of the 20th century, spurred by outstanding thinkers such as Arthur Lewis (who received the Nobel memorial prize in economics in 1979 for his work), Paul Rosenstein-Rodan, Ragnar Nurske, and Gunnar Myrdal. During the 1950s and 1960s, the deepening of the discipline was marked by accompanying reflections on decolonization, the development needs of newly independent countries, and the appropriate policies these countries should adopt. The early theories of the mid-20th century strongly defended foreign aid as a key engine of development. Theorists relied, in particular, on the Harrod 1939–Domar 1946 model and the subsequent “two gaps” model elaborated in 1966 by Hollis Chenery and Alan Strout: this model assumed that developing countries were saddled with a “savings gap” and a “trade gap” (or “foreign exchange gap”), and it was affirmed that foreign aid was needed to fill these gaps (Temple 2010). These theoretical justifications have come to be challenged over time in view of the disappointing results of foreign aid, in particular in sub-Saharan Africa. A great deal of the literature on aid, its effectiveness, and its impact concentrates on sub-Saharan Africa, which is compounded by the fact that East Asian developing countries started their rapid growth as early as the 1960s and ceased to receive foreign aid in that period. The trends in the literature on aid reflect these evolutions. This literature includes general reviews of the various dimensions of aid: some studies are written by experts who have direct experience in aid work due to their activities within donor agencies or consultancy firms (Riddell 1987), while other general reviews are based largely on the work of academic researchers (Tarp and Hjertholm 2000). Most general studies on aid are situated within the framework of development economics; a noticeable exception is Martens, et al. 2002, which explores the relevance of institutional economics (a subfield of economics that grew greatly beginning in the 1990s) for analysis of foreign aid. The steadily mounting disappointment with aid outcomes is reflected in the fact that, at the beginning of the 21st century, the debates on aid tend to highlight its negative effects more than did those that took place in the 20th century, as explained in Sindzingre 2012. Many discussions on the negative effects of aid have been driven by William Easterly (Easterly 2006, Easterly 2009), an academic scholar based in the United States who acquired an extensive practical experience during his previous career at the World Bank and who has published a great number of critical studies on aid. Arguing that aid does more harm than good, this perspective underscoring the negative effects of aid is continued by Angus Deaton, a reputable economist based at Princeton University (Deaton 2013).

• Deaton, Angus. “Aid and Politics,” In The Great Escape: Health, Wealth and the Origins of Inequality. Princeton, NJ: Princeton University Press, 2013.

  Written by one of the world’s most renowned economists and experts on poverty and inequality, chapter 7 of this book argues that aid rarely reaches the poor and that there is no evidence that it promotes growth. Deaton also claims that aid is also distorted by politics.

• Easterly, William. The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good. Oxford: Oxford University Press, 2006.

  An influential book and a concise summary of the critical reflections of William Easterly, who articulates for the general public the many criticisms of aid that he developed in academic articles.

• Easterly, William. “Can the West Save Africa?” Journal of Economic Literature 47.2 (2009): 373–447.

  DOI: 10.1257/jel.47.2.373

  A critical breakthrough by one of the most prominent scholars on aid, which puts forward an original distinction between donors’ predominant “transformational” (“savior”) and a “marginal” approach (based on learning by doing).

• Martens, Bertin, Uwe Mummert, Peter Murrell, and Paul Seabright. The Institutional Economics of Foreign Aid. Cambridge, UK: Cambridge University Press, 2002.

  DOI: 10.1017/CBO9780511492563

  A collection of theoretical papers written by the authors, who analyze aid through the lens of institutional economics, in particular, the concepts of incentives driving the behavior of persons involved in the entire chain of aid programs.

• Riddell, Roger C. Foreign Aid Reconsidered. Baltimore: Johns Hopkins University Press, 1987.

  One of the first books that evaluated foreign aid—very few studies had been done before the 1980s—in its various dimensions, including its historical evolutions, the validity of its motives (e.g., ethical), its theoretical justifications, and its empirical applications.

• Sindzingre, Alice N. Theoretical Criticisms and Policy Optimism: Assessing the Debates on Foreign Aid. Working Paper 1-2012. Vienna: University of Vienna, Department of Development Studies, 2012.

  The author highlights the tensions regarding aid in the 2000s, namely, the emphasis in the academic literature on the detrimental effects of aid coexisting with a paradigm in the policymaking sphere based on the necessity of increasing aid.

• Tarp, Finn, and Peter Hjertholm, eds. Foreign Aid and Development: Lessons Learnt and Directions for the Future. London: Routledge, 2000.

  A useful collection of articles on foreign aid and one of the few books that includes material written by the best economists and specialists on the subject. It provides a comprehensive presentation of all the questions regarding aid.

• Temple, Jonathan R. W. “Aid and Conditionality.” In Handbook of Development Economics. Vol. 5. Edited by Dani Rodrik and Mark Rosenzweig, 4415–4523. Amsterdam: Elsevier, 2010.

  A complete review of the academic literature on aid that includes both accessible and deep analyses of the main concepts and issues, for example, impacts on growth, poverty, human development; limits of conditionality; and fiscal responses to aid. It addresses technical concepts with clarity and is a useful complement to Tarp and Hjertholm 2000.