Multilateral aid, politics and poverty: past failures and future challenges
ABSTRACT This chapter presents an overview of empirical evidence on the successes and failures of aid programs with the aim of recommending a future role for multilateral aid agencies. We examine the impact of aid programs that have come into operation since the first Bretton Woods meetings, including long term grants and concessional assistance, major infrastructure projects operated by the multilaterals, and short term aid programs to support new governments or governments in crisis.
This evidence provides one clear message: long term aid programs have broadly failed to achieve their poverty reduction goals. Some forms of short-term aid programs, on the other hand, have been more successful.
- SourceAvailable from: Jean-Paul Faguet
Conference Paper: FEDERALISM AND INDUSTRIAL POLICY: Competing Away Government Failure?[Show abstract] [Hide abstract]
ABSTRACT: Industrial policy hovers in the intellectual space between market failure and government failure. Can subnational competition overcome government failure and make industrial policy more effective? The empirical evidence is limited and inconclusive. This paper analyzes the first and second-order effects of federalist reforms, and then distinguishes 'between' vs. 'within'-competition. Federalism's first-order effects are on public sector efficiency, effectiveness, and the quality of public decision-making – that is to say, government failure or success. It only affects industrial policy indirectly, through this channel. When diverse economic interests and civic groups interact through politics to reveal, debate, and trade off their competing interests, and so fashion policy, government will tend to be responsive and accountable. Where economic interests are homogeneous or civil society is inert, government failure looms. Further second-order effects of federalism include increasing the level of competition in a political system, and limiting the power of government against citizens in ways that make democracy compatible with open access regimes. Industrial policy is far more likely to succeed in this context due to greater economic participation and dynamism.Making Growth Happen: Implementing Policies for Competitive Industries, World Bank, Washington, D.C., World Bank, Washington, D.C.; 10/2013
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ABSTRACT: Decentralization or the devolution of power and resources from upper level to lower level governments has become one of the hot topics of our time. It is squarely in the forefront of the development debate throughout Latin America, Africa and Asia. And under the guises of subsidiarity, devolution and federalism it is also at the center of public policy-making in Europe and North America. And yet despite real experiments in decentralization under way in scores of countries, and literally hundreds of empirical studies, the economic and political effects of decentralization are still unclear. This paper seeks to provide the policy community with a synoptic guide to the state of current knowledge on decentralization and governance. Because ideal governance is an inherently subjective notion, the analysis is focused on the effects of decentralization on largely uncontroversial aspects of governance such as the degree of corruption and other arbitrary government interventions as well as efficiency in the provision of basic public services. Section I emphasizes several aspects of decentralization related to accountability and governance. Decentralization is thought to lead to improved governance through four main channels: (i) Improved public oversight of government activity makes officials more accountable to citizens and may reduce corruption and improve efficiency in the provision of public services. This effect may be enhanced if decentralization also involves taxation. In this case both citizens and public officials face even stronger incentives to ensure efficient use of public funds. Better public oversight of government activity may improve governance more generally by making public services and policies more responsive to people’s needs. Finally, improved public oversight and government accountability may allow specific disadvantaged groups to be targeted for benefits or welfare improvements. (ii) More equal power distribution between private actors and local instead of national government agencies may reduce arbitrary government interventions and promote the efficiency of public service. (iii) Competition among local jurisdictions may improve governance at large by giving citizens the possibility to exit a given jurisdiction and allowing them to compare policy performances across jurisdictions. (iv) Political competition at the national level may be enhanced via the creation of new political platforms at the local level and new avenues to power within established parties. Governance may be improved by a more vigorous and competitive national politics leading to political entrepreneurship and policy innovation. On the other hand, governance may be worsened if the decentralizing reform allows local elites to capture the political process. As the subsequent discussion will make clear, decentralization is not an easy fix for unresponsive or inefficient government. In order for decentralization to enhance welfare, a number of conditions must be met in addition to the basic decentralizing reform transferring power and resources from upper to lower levels of government. These can be divided into three categories: (i) Information. Politicians must have good information on what local voters want, and voters must in turn have good information on what government does. (ii) Openness and Competition. This refers to both the political party system and local firms and other economic actors that finance political parties and candidates. Openness and competition facilitate the role of policy entrepreneurs, who identify gaps in the policy offerings and devise new policies to fill these gaps. (iii) Social Trust and Civic Organization. Individuals do not participate in politics only as individual voters, but also collectively according to different cross-cutting cleavages that change over time, grouping a given set of voters in different ways. Local government depends on the relationships that collectively comprise civil society to elicit information necessary to the policy-making process, judge the efficacy of previous interventions, and plan for the future. It will be argued that complementary institutions and organizations can contribute powerfully to information, openness and competition, and social trust and civic organization. As will be made clear below, successful decentralization also requires good governance at the center, as well as a working relationships between central and local governments. In section II the focus is on such intergovernmental relations, and to their connection with the structure of central government itself. Section II begins with an argument why it is that any discussion of decentralization has to take intergovernmental relations into account. The next subsections describe the fiscal and political aspects of intergovernmental relations, highlighting their potential to affect the impact of decentralization. The section closes with a brief discussion of the mechanisms by which accountability (emphasized in section I) and intergovernmental relations (emphasized section II) are intertwined. The paper begins with the question of decentralization and governance, and then moves on to intergovernmental fiscal and political relations.04/2003; Initiative for Policy Dialogue, Columbia University.
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ABSTRACT: Bolivia decentralized in an effort to deepen democracy, improve public services, and make government more accountable. Unlike many countries, Bolivia succeeded. Over the past generation, public investment shifted dramatically toward primary services and resource distribution became far more equitable, partly due to the creation of new local governments. Many municipalities responded to decentralization with transparent, accountable government, yet others suffered ineptitude, corruption, or both. Why? Jean-Paul Faguet combines broad econometric data with deep qualitative evidence to investigate the social underpinnings of governance. He shows how the interaction of civic groups and business interests determines the quality of local decision making. In order to understand decentralization, Faguet argues, we must understand governance from the ground up. Drawing on his findings, he offers an evaluation of the potential benefits of decentralization and recommendations for structuring successful reform.Cloth 06/2012; University of Michigan Press., ISBN: 978-0-472-11819-9
Forthcoming as Chapter 2 in R. Grant and J. Nijman (eds.). 1998. The Global Crisis in Foreign
Aid, Syracuse: Syracuse University Press.
Multilateral Aid, Politics and Poverty
London School of Economics and Political Science
London School of Economics and Political Science
The last half-century of foreign aid programs has comprised a broad economic
experiment without historical precedent. Beginning modestly with the goal of promoting
economic development and alleviating poverty, no one could have guessed in 1944 that five
decades later industrial countries would be giving annual grants equal to 8% of recipient
countries' GNP. Nor could anyone have predicted the spectacular growth in the number and
size of bilateral and multilateral aid agencies. Gross disbursements of aid by industrialized
countries in 1994 amounted to over $100 billion dollars, nearly three times the GNP of Ireland,
or half the GNP of Australia.
And yet fifty years on most of Africa and much of Asia is still mired in chronic poverty.
The scale of global inequality remains vast: several dozen of the poorest countries register a
yearly GNP per capita1 barely equal to a few days' pay in the richest countries. Human
development indicators present an equally stark picture. Of those reporting data, more than
twenty countries have primary-school gross enrollment ratios below 75%2, and some as low as
19%, and in forty-two countries (mostly African, Arab and South Asian) more than ten percent
of children die before age five. These figures are much better than they were fifty years ago,
but it would be a mistake to conclude that past improvements imply we can be complacent with
our current efforts at poverty reduction. In Figure 1 we have extrapolated past trends in order
to project the pattern of child mortality to 2025. The top two poverty maps show the gradual
progress made in reducing child mortality over the last thirty years. But as shown in the lower
map, even if this progress continues unabated, by 2025 more than 10% of children will
continue to die before age 5 in thirty-four countries (mostly African), and this figure rises to
above 20% in ten countries.3
1World Bank (1994a)
2World Bank (1994a)
3These figures were projected from historical data compiled by the United Nations.
Logarithmic projections were made based on trends from 1950 (before which very little data is
The main theme of this chapter is that we need to do much more to address poverty in
the future. No reader should be surprised that the human costs of poverty will continue to be
large in the future. Much more worrying is the observation that fifty years of aid work and
investment have not done more to reduce deprivation to achievable levels in most of the world.
And if the trends that brought us here continue, thirty years hence the global situation will be
little better in relative terms, and much worse in absolute terms as population growth in the
poorest countries multiplies the masses of their poor. It is time to ask what five decades of
work have accomplished, and to reassess the role and effectiveness of foreign aid.
This chapter presents an overview of empirical evidence on the successes and failures
of aid programs with the aim of recommending a future role for multilateral aid agencies. We
examine the impact of aid programs that have come into operation since the first Bretton
Woods meetings, including long term grants and concessional assistance, major infrastructure
projects operated by the multilaterals, and short term aid programs to support new governments
or governments in crisis.
This evidence provides one clear message: long term aid programs have broadly
failed to achieve their poverty reduction goals. Some forms of short-term aid programs, on
the other hand, have been more successful.
The failure of long term aid programs leaves open the question of how aid can best
serve development goals in the future. This is discussed in the final section of this chapter,
which argues that improved capital markets, the rapid rise of foreign funding available for
infrastructure investment, and the general globalization of world markets sharply reduce the
need for multilateral institutions. Multilaterals should accordingly restrict the number of
countries they deal with, and gradually phase out their infrastructure and other large-scale,
capital-intensive lending programs.
An important role remains for aid agencies, however, in the provision of short term aid
available for developing countries) and 1970.
to new governments, governments in crisis, and governments embarking on serious poverty
reduction programs. We believe that foreign aid can and should be used as a creative tool to
encourage countries to embark on serious poverty reduction programs, and in the conclusions
we discuss several means to achieve this.
Multilateral agencies may also play a role promoting the development of commercial
markets for infrastructure investments. The advantage of using private markets instead of
development institutions to provide capital instead of development institutions is that loans and
projects are subjected to market discipline. But for this to function efficiently, we need to
carefully consider international laws, regulations and procedures that can best ensure efficient
private capital flows.
Thirdly, multilateral aid can provide technical assistance and support for world public
goods such as the environment. Fourthly, these institutions should continue to take advantage
of the substantial technical expertise which they have accumulated in a number of technical
areas. But they should be forced to compete in a market with other providers of such services.
This implies much smaller and less capital-intensive organizations.
The chapter is organized as follows: Section 2 outlines early arguments for and against
aid, showing the theoretical ambiguity surrounding the question of the potential impact of aid.
Section 3 summarizes evidence from previous research on the impact of foreign aid on growth,
investment and human development indicators. Section 4 examines the effectiveness of
public infrastructure programs and relates these to the debt crisis in Sub-Saharan Africa,
arguing that the major legacy of large aid flows in the sixties and seventies is not higher income
but rather a large debt burden. Section 5 discusses several examples of short term aid
programs that have been successful, and Section 6 concludes with a general discussion of the
future role for development assistance.
2. Early Arguments For and Against Aid
Despite the rapid growth in aid, there have never been compelling theoretical
underpinnings or empirical evidence showing that foreign aid programs actually work. John
Maynard Keynes took the view that capital shortages were a primary cause of poverty. The
World Bank was created in part due to his assessment that developing countries needed
financing for major public and private investment projects. This argument was developed
fully in the fifties and sixties by economists such as Rostow (1990) and Chenery (1966). Aid
proponents argued that developing countries have low savings because of their absolute
poverty. Since they cannot afford to save, and world capital markets are imperfect, they need
a "jump start" with foreign aid in order to take off.
But careful examination calls this argument into question. During the late nineteenth
century and in the interwar period world capital markets functioned quite well. Britain was a
major exporter of capital to the new world, where both private and public investment, most
notably railways, were financed by bond issues. This capital mobility reemerged after the
second world war. Korea financed substantial investment through foreign borrowing
beginning in the early sixties. A true explosion of international capital flows began in the
The idea that poor countries have low savings because households cannot afford to save
is also dubious. Today the richest 20% of the population earn 50% of total income in low-
income countries. It is really the high-income elite that conduct what investment and savings
go on in these countries, and they command the resources to do so. The question should then
be rephrased: Why do the high-income elite save and invest in some countries while in others
they do not?
The early critics of foreign aid programs, notably Bauer (1973) and Friedman (1958),
argued that the root cause of poverty was not capital shortage but rather government failure. If
low investment is due to a lack of opportunities to invest, say due to corruption and
distortionary economic policies, then giving aid will not lead to higher investment or growth.
Growth can only come from removing the distortions that prevent development and poverty
alleviation, which itself requires a fundamental shift in economic policy. If aid allows
governments to reduce distortions, say through reducing tax rates or strengthening the
government so it can enforce laws, then aid could still lead to growth and investment. But if
governments do not have incentives to change these policies, and if aid does not change the
basic incentives of government, then foreign aid will fail and aid funds will be wasted.
Basic Facts about Aid
(in the sample of 97 countries)
Average Aid/GNP ratio
81-90: range 0.00-0.54, sdev 0.112 71-80: range
0.00-0.35, sdev 0.035
in Base Sample:
81-90: range 0.00-0.144, sdev 0.039
71-80: range 0.00-0.146, sdev 0.045
Grant component (1980) 0.93
Restrictions on Procurement
(fraction by category):
Uses of Aid (fraction by type):
Social and Admin. Infrastructure
Sources of Aid
Bilateral (of which):
Aid as a fraction of GDP from Donor Countries
(members of DAC)
Note: Social and administrative infrastructure applies to health care, education,
technical assistance to governments, etc. Economic Infrastructure is highways,
electricity, irrigation, and other large public investment projects. Program aid is
balance of payments support.
3. The Cross-Country Impact of Aid
Given the ambiguity surrounding the theoretical case for aid, we now turn to its
empirical effects. We begin by examining the impact of the largest component of aid flows:
non-military concessional assistance, called Official Development Assistance, which includes
all non-military aid with at least a twenty-five percent grant component. Basic summary
statistics are shown in Table 1. The empirical results in this chapter summarize previous
research examining the impact of foreign aid on economic and human development indicators
using cross-country regressions.4 We present simple graphs that summarize the relation
between aid and improvements in human development indicators based on regression results
from approximately 100 developing countries.
There are two major difficulties with measuring the impact of aid in cross-country
regressions. The first is the potential simultaneity bias caused by the fact that aid is given to
relatively poor countries, so that a simple regression of, for example, infant mortality on aid
would erroneously predict that higher aid leads to higher infant mortality.5 In order to get
around this problem, we take advantage of the fact that a large portion of the variance in aid
flows is caused by political determinants. Former French colonies, for example, receive
substantially more aid than their equally poor neighbors. It is possible to test whether the
additional aid that these countries receive, when compared to other similar countries, has
positive effects on growth and human development indictors. In previous research we have
taken advantage of this insight, using appropriate instrumental variables, to test the impact of
aid and also to conduct a large number of robustness and sensitivity tests.
4There is surprisingly little research using cross-country regressions to examine the
impact of aid. There was substantial research on the impact of aid using cross-country
regressions in the 1970s. This literature abruptly ended when the problems with measurement
error and potential cause and effect biases were realized. See Papanek(1973) for references to
this literature and problems encountered. Paul Mosley has written several articles examining
the cross-country impact of aid more recently, see e.g. Mosley et. al. (1986). The regression
results reported here are discussed and justified more fully in Boone(1994a) and
5See Papnek (1973).
The second problem, as shown in Table 1, is that aid is targeted to many different
expenditure categories, so by pooling different types of aid we may bias our results.6 But in
fact the allocation of aid is quite flexible. Contrary to popular belief a surprisingly small
fraction of aid is tied (30%, see Table 1), and 30% of aid is pure cash grants (not reported). In
targeted aid donors and recipients initially negotiate over how to allocate aid, after which
recipients can freely dispose of project receipts and benefits over long periods of time.
Recipients can additionally avoid expenditures on maintenance if they choose (see discussion
related to infrastructure in World Bank (1994)). The overall implication is that aid is highly
The one exception to this is for those small countries that receive very large amounts of
aid. In these countries one investment project can be 50% of GNP, meaning that aid is no
longer fungible, and that these projects will necessarily cause sharp increases in investment.
But when aid comes in smaller amounts it is once again fungible; in this section we report
results from a subsample of countries with aid/GNP ratios less than 0.15.
Figures 2 and 3 show that in our sample of 96 countries most aid goes to consumption,
and there is no significant impact on investment. These are CPR (component plus residual)
plots which show the residuals from regression equations (reported in the appendix) after
controlling for other factors that are potentially correlated with aid and the dependent variable.
All regressions are run on World Bank data using long time averages over ten years in order to
control for business cycle effects.
In Figure 2 the marginal propensity to consume from aid is insignificantly different
from one (point estimate 1.08, t-statistic 3.56), while the marginal propensity to invest is
6Cassen(1994) and Killick(1990) discuss some of the problems encountered when trying
to measure the aggregate impact of aid.
7Pack and Pack(1993), and Khilji and Zampelli(1991) found that governments were able
to, ex-post, fully redirect expenditures agreed to under aid programs to alternative uses. Pack
and Pack(1990) found that aid flows were not fungible in Indonesia, and they concluded this
was due to the large amounts of aid that Indonesia was receiving.
insignificantly different from zero (point estimate 0.03, t-statistic 3.5). This implies that over
long time periods most aid is used to raise consumption with little overall impact on
investment. In results not shown here, we divided the sample into those countries where aid
led to higher public consumption, and a remaining group where aid was not used to raise
government expenditure. This allowed us to test whether aid allocated through the private
sector had a different impact from aid allocated through government consumption. But we
found that even when government did not spend aid itself, all funds went to private
consumption. This implies that neither the private nor public sector has a strong incentive to
invest in these countries.
Given that most aid goes to consumption, it is not surprising that it has no significant
impact on growth. Figure 4 shows this. The point estimate from this regression is
insignificant, but it implies that a 10 percent increase in the annual aid/GNP ratio causes a 0.4
percent rise in the average growth rate over the full ten years. These results imply that the
factors which cause high investment and growth in developing countries do not correlate with,
nor are engendered by, foreign aid receipts. They are strong evidence that capital shortage is
not the major cause of poverty in developing countries.
Figures 5, 6 and 7 show that the poor do not benefit when a country receives higher aid
flows. Infant mortality is highly related to nutritional standards, sanitation, provision of basic
health services, housing conditions, and maternal education. Evidence from many countries
(e.g. Chile, China and Sri Lanka) shows that infant mortality improves quickly when these
basic factors improve, so infant mortality can be considered a "flash" indicator of the
conditions of the poorest groups in the population.8
Figure 5 shows that aid does not correlate with more rapid improvements in infant
mortality. Figure 6 shows that higher aid flows do not have a significant impact on
improvements in life expectancy. Figure 7 shows that aid does not correlate with
8See Flegg (1982) for empirical evidence on the determinants of infant mortality.