31 October 2013 What Do We Know About Foreign Aid at the Aggregate - PowerPoint PPT Presentation

31 October 2013

What Do We Know About Foreign Aid – at the Aggregate Level? Finn Tarp UNU-WIDER

Overview • Introduction • Aid, growth and development: what do we know? • Poverty: what do we know about developments since 1990? • Looking post-2015

A reference – 2000

Recent WIDER research on foreign aid • : A comprehensive research, documentation and communications initiative (initiated in early 2011) • Motivated by our desire to understand better four key questions about aid: – What works? – What could work? – What is scalable? – What is transferrable?

Point of departure • Aid is diverse and complex – no single individual can encompass it all => rely on global network of researchers and policy practitioners • A sizeable research output now available under 5 core themes (incl. 200 WIDER WPs) – see http://recom.wider.unu.edu/ – this presentation meant to provide a ”big picture” perspective – after which we will focus more specifically on aid and fragility

Aid, growth and development: what do we know?

Where to begin? • The macro aid and growth literature • Probably the most controversial theme – Many critical voices: Peter Bauer, Bill Easterly, Dambisa Moyo and others • They often frame and strongly influence the development debate and there is frequently talk of a micro-macro paradox? – What do we mean by that? – Aid and macroeconomics – Aid, political economy and institutions • But is it true that the impact of aid “evaporates” as we move from the project (micro) level up to the macro economy? What can we say on balance about aid’s aggregate impact?

It is difficult! • Aside from ideological debates….. • A thorny econometric challenge: attribution somewhat elusive – Progress typically associated with less aid – Causality not so easy to establish, so debate ripe with rhetoric: • Africa, aid, Africa still not developed….. • Anecdotes…. – We need a credible counterfactual (what would have happened without) -> we use statistical methods

Back to basics • What does lack of statistical significance mean? • “Absence of evidence” vs “evidence of absence” • Just because economists have had a hard time at the macro level does not in and by itself prove aid impact is not there • Time has been passing: the macro-evidence now piling up – and, yes we can say quite a lot – based on WIDER research • A brief summary: – Cross country (vs. Rajan & Subramanian): Journal of Globalization and Growth + update and unpacking: World Development – Time series – 36 individual African countries (Juselius): Oxford Bulletin of Economics and Statistics – Time series (vs. Dreher, Klasen, et al.): World Development – Meta (Doucouliagos and Paldam): Journal of Development Studies – Simulations –> heterogeneity….BUT OVERALL RESPECTABLE RATE OF RETURN

Poverty: what do we know?

Poor nations: some questions and answers Q. Why are some countries poor? A. Poor countries produce very little. Q. Why do poor countries produce so little? A. Poor countries employ rudimentary technology, possess limited stocks of human and physical capital, and weak institutional structures. Q. Why do poor countries lack the wherewithal to produce? A. Poor countries have not managed to accumulate over time. Growth is a long run and fragile process of accumulation. What does this mean for the analysis of aid and development?

Poverty is falling – but remains a huge challenge % of people living on less than $1.25 USD (2005 PPP) • Since 1990: people living Caucasus and Central Asia on less than $1.25 has Oceania fallen in every region, including sub-Saharan Western Asia Africa: South-Eastern Asia – In 1990 ≈ 46% (or ≈ 2 billion 2008 Southern Asia excluding I ndia people) were extremely poor 1990 Southern Asia – Estimates predict that that the MDG target of cutting Eastern Asia (China only) extreme poverty by half will Latin America and the be achieved by 2015 Caribbean – Still: ≈ 1 billion people ( ≈ 14%) Sub-Saharan Africa remain in extreme poverty Northern Africa – Fragile states not on track to reach MDGs Developing Regions 0 20 40 60 80

Under-five mortality rate: 1990-2010 200 180 Sub-Saharan Africa 160 140 Southern Asia 120 100 South-Eastern Asia 80 LAC 60 40 Eastern Asia 20 0 Developed countries 1990 2010

Primary school enrolment, 1990-2010 (%) 1990 2010 Boys Girls Boys Girls Developing world 84 75 91 89 Sub-Saharan Africa 57 50 78 74 Latin America and the Caribbean 88 84 96 95 Eastern Asia 99 96 97 97 Southern Asia 83 66 94 91 South-Eastern Asia 94 91 95 96 Western Asia 87 79 94 89 Developed Regions 95 95 97 97

Growth has been poverty reducing

Poverty increasingly associated with middle-income countries (often with high levels of inequality) 100 MENA 90 80 Latin America 70 Low-income % of global poverty 60 Countries East Asia 2008 50 Middle- 1990 Sub-Saharan 40 income Africa 30 Countries 20 South Asia 10 0 20 40 60 0 % of global poverty 1990 2008 People living on less than $1.25 USD a day (2005 PPP)

Inequality remains a major challenge Income gap between country Inequality measured by mean-log groupings deviations of income Constant 000 US$ (2005 PPP) 1 Latin America 35.0 0.9 sub-Saharan Africa 30.0 East Asia 0.8 25.0 0.7 20.0 0.6 15.0 0.5 10.0 0.4 5.0 0.0 0.3 Gap between high- Gap between high- 0.2 and low-income and upper-middle 0.1 countries income countries 0 1980 2010 1981 1990 1999 2008

Looking post-2015

The new faces of the development challenge • To the extent the existing aid system was designed at all, it was designed to improve the livelihoods of poor people in poor countries. • Much has been achieved. Many countries (including former fragile states) have “graduated” and new donors have emerged (Republic of Korea). • And looking beyond 2015: in 10 years 36 of 68 current IDA recipients will graduate out of IDA – Especially the large countries will graduate: India, Vietnam, Pakistan, Nigeria, Ghana and Kenya – Population in IDA eligible countries will fall from 3 to 1 billion)

So: should we worry about aid post- 2015? • Aid’s critics would say no – Some even say growth will rise if aid is eliminated, others say aid has no effect • The weight of the existing up-to-date analytical and big-picture evidence clearly suggests this is unfounded: – Aid has (on average) helped countries grow and reduce poverty over the past decades • But while progress has been realized major challenges remain which future aid efforts must address

Key challenges moving forward • Aid must post-2015 adapt to emerging national and global contexts, including how to deal with: – Increased complexity (on supply side) – The new geography of poverty – Global public goods (climate, health) – And a “hard core” of fragile states (including building state capability): TODAY’S FOCUS • Much of this is unknown territory -> the need for high quality policy research • With ReCom UNU-WIDER hopes to have helped move this agenda forward in a constructive manner

A Bird’s-eye View of Current UNU-WIDER Research on Fragility Rachel M. Gisselquist UNU-WIDER

ReCom: Governance & Fragility • ReCom works with an interdisciplinary, global network of experts – to address identified knowledge gaps, and – to communicate and discuss findings with a wider audience. • The Governance and Fragility theme draws on some 80 UNU-WIDER studies, including 7 collaborative projects. • For more, see wider.unu.edu/recom

Theme 1 The challenge of chronic state weakness Chronically Weak In Conflict (state-building, ( peacemaking, conflict peacebuilding) prevention ) Post-conflict (DDR, reconstruction)

Theme 2 Context matters a lot. And, so what? • Ignoring contextual factors has exacerbated the challenges of institutional development. • But, accepting that context matters is not enough. We need greater precision on how – and how not – and what precisely to do about it.

Theme 3 The dilemmas of local ownership • A “lack of political will” • A “lack of capacity” to provide basic public suggests the inability to goods suggests the lack lead and implement a of a genuine national national development development agenda agenda  Provide technical  Incentivize political will? assistance?  Deal with other actors  Act in place of the state? (local governments, civil society, traditional authorities)?