Notes - Chapter 6: Development Assistance

In Africa today, we recognize that trade and investment, and not aid, are pillars of development.

- Paul Kagame, President of Rwanda, 2004.

Paul Kagame. Credit: Veni Markovski, CC BY-SA 4.0, via Wikimedia Commons

There is an extensive literature written on aid in general. Collier (2007), Easterly (2006) and Sachs (2005) all have discussions on the role of international community in promoting development, and offer their own perspectives on both the history of intervention and the prospects for future success. Riddell (2007) surveys the extensive policy literature. For an excellent recent survey of the literature on foreign aid, see Temple (2010), who also coined the term "Bauer Paradox" which we used in this chapter.

Chauvet and Collier (2006) put forward a conceptual framework for thinking through the impact of aid in failing states. Like this chapter, they emphasize the importance of understanding heterogeneity in responses dependingon state pathologies. Political institutions are also at heart of the analysis of fragility in Vallings and Moreno-Torres (2005), who emphasize the need to build institutions to overcome fragility. McGillivray (2006) surveys the literatureon aid to fragile states. He discusses the factors that shape whether states become aid orphans (i.e., cut-off from aid) or aid darlings (get extra aid) in response to fragility and the dilemmas faced by the policy community.

A huge amount has been written on the relationship between aid and growth using cross-country comparisons. Reviews emphasizing different aspects of this literature are Collier and Dollar (2004), Easterly (2003), Hansen and Tarp (2001) and Rajan and Subramanian (2008). A meta study canbe found in Doucouliagos and Paldam (2008). A more recent literature, following Boone (1996) and Burnside and Dollar (2000), has stressed the heterogeneity in the impact of aid according to the institutional and policy environment in place in a country. Aid conditionality is discussed and modeled in Azam and Laffont (2003), Svensson (2000b) and Svensson (2003).

Frey and Schneider (1986), among others, have studied the determinants of multilateral aid. Alesina and Dollar (2000) study the determinants of bilateral aid and find that a significant proportion of the variation in aid-flow disbursements is explained by colonial history, political and strategic interests of donors. Gstoettner and Jensen (2010) study the relationship between multilateral foreign aid flows and the quality of recipient countries' public finance institutions and argue that higher aid flows significantly deteriorate the quality of public finances.

The idea that aid can lead to a deterioration in institutions is an important theme in Bauer (1972). His critique has been taken up and endorsed more recently in Leeson (2008) and Shleifer (2009). It is explored theoretically in Svensson (2000a) and Smith (2006). Knack (2001) and Djankov, Montalvo and Reynal-Querol (2008) observe negative correlations between changes in the quality of governance foreign aid using cross-country data.

Collier et al (2003) review the issues surrounding aid and conflict. Addison (2003) emphasizes the importance of institutional change in sustaining peace post conflict, and discusses the role that international organizations and donors can play post conflict. Coyne (2008a) and Coyne (2008b) as well as Coyne and Boettke (2009) discuss post-conflict reconstruction and efforts to create democracy after conflict based on foreign intervention. Coyne and Pellillo (2011) discuss lessons from Afghanistan and Iraq.

We have focused on the carrot of aid and development assistance. Butwhether aid or sanctions is the best policy is an interesting issue in many contexts and is studied in Azam and Saadi-Sedik (2003) and Kletzer (2005).

Banerjee and Duflo (2009), and Duflo, Glennerster and Kremer (2007) provide comprehensive overviews of the role of RCTs in general, and the way such trials can provide an evidence base to guide policy interventions. Banerjee and He (2008) discuss more generally whether evidence-based policymaking shapes the aid agenda and lament the fact that many aid and multilateral organizations pay so little attention to policy evaluation.