Title: The Composition of Foreign Aid: Consequences for Economic Growth and Welfare
Abstract: The Millennium Development Goals (MDGs) mandated by the United Nations set out an ambitious set of objectives to be achieved by the year 2015. The first seven goals are directed toward a range of social objectives that include eradicating extreme poverty, achieving universal primary education levels, promoting gender equality, reducing child mortality, improving maternal health, combating major diseases, and ensuring environmental sustainability. Goal 8 is more of a strategic objective, directed at facilitating the attainment of Goals 1 through 7. Recognizing the overwhelming resources necessary to achieve these objectives, Goal 8 calls for a global partnership between the rich and poor countries so as to share the immense burden. To this end it proposes a number of targets, primarily of an economic nature, including debt relief and development assistance. Official development assistance, in the form of foreign aid or unilateral capital transfers, represents an important channel through which wealth is transferred from rich, developed nations to poorer, underdeveloped economies. Both the magnitude and the scope of these international transfers have increased significantly over the last four decades. Between 1985 and 1999, total flows of official development assistance from OECD and OPEC countries to developing countries increased from approximately $6 million to more than $59 million. By the end of this time, these funds had come to represent between 3 and 5 percent of the Gross National Income of the recipient low and middle-income countries, and to finance between 10 and 20 percent of their Gross Capital Formation. (1) The decision to grant however, raises several important questions. The first and most basic concerns whether foreign aid does in fact succeed in improving economic growth, and more generally, economic performance. Indeed, the link between foreign economic growth and macroeconomic performance has been the source of intense economic and political debate since the reconstruction of Europe after World War II under the Marshall Plan. Over the three decades between 1960 and 1990, a large, but mainly inconclusive, literature has developed exploring the causality between foreign aid and economic development. (2) Early literature on the subject was constrained by limited availability of data, leading to considerable disagreement over the mechanisms by which aid may affect Recently, in a panel study of 56 developing countries over six four-year periods (1970-93), Burnside and Dollar argued that aid is most effective when complemented by sound or economic policymaking by the recipient government. (3) Consequently, their conclusions call for greater selectivity on the part of donor countries when making aid decisions. Burnside and Dollar's influential findings have now become an effective weapon for donor countries and aid agencies to persuade prospective recipients to enforce more disciplined fiscal and monetary policies in order to receive aid; see Easterly. (4) However, several papers, including Dalgaard and Hansen, Collier and Dehn, and Easterly, Levine and Roodman, have shown that Burnside and Dollar's empirical results are not robust to the definitions of aid, good and growth. (5) They show that broader definitions of these terms and extended data sets weaken the link between aid and the quality of policy, and consequently economic As a result, there seems to be no emerging consensus as to whether foreign aid can promote growth in poor countries. A second critical concern for both donors and recipients is how foreign aid should be spent in the recipient economy. Either guided by self-interest, or to prevent the possibility of mismanagement of external funds, donor countries often impose restrictions on how such aid can be used by the beneficiary. This has given rise to a long-standing debate, both in academic and policy circles, as to whether international transfers should be tied to investment in public capital (i. …
Publication Year: 2005
Publication Date: 2005-03-22
Language: en
Type: article
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Cited By Count: 1
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