The vital role of aid in development

The UNU-WIDER research programme on foreign aid (ReCom) began in 2010, in a period of strong aid scepticism. Dambisa Moyo’s well-known book, Dead Aid (2009), is just one example. The aid sceptics of the twenty-first century maintained that since economists could not find an aggregate relationship between aid and growth in the data, such a relationship did not exist. In response, the ReCom programme produced considerable literature demonstrating aid effectiveness and the impact of aid on growth and other outcomes.  

Does aid have a positive impact on economic growth?

Yes. There has been lately a body of evidence produced by researchers using longer and better economic data and models. This evidence suggest that aid has promoted economic development in developing countries on average and over the long run. UNU-WIDER research has estimated that if a country were to receive aid inflows equal in value to about 10% of its national income each year for over a generation, then its average growth rate would be about 1 percentage point higher than it would have been otherwise. But of course most countries — even low-income ones — receive aid in much smaller volumes. So we need to be realistic about what aid can deliver. And we also need to understand that the benefits of aid tend to accumulate over the long term, so big impacts may not be obvious from one year to the next but rather after decades or more of stable support.

What is the role of governance and institutions in the success or failure of aid efforts?

Even if we can see that aid has positive aggregate impact, it clearly does not always work. There are many examples of aid not being an effective catalyst for positive change. We wanted to dig deeper and find out what has and hasn’t worked and why. How do we know what we know, and why should we expect findings from one situation to apply elsewhere?

Should we expect a modern-day Marshall Plan, for instance, to work for today’s fragile states? We argue probably not. This is partly because ‘fragile’ is such a broad umbrella label for states with diverse challenges. Post-war rebuilding of effective state institutions in Germany and Japan, for instance, is very different to building such institutions where they did not previously exist.

Our answers also speak to the importance of ‘context’. It has long been clear that one-size-fits-all policies do not work because ‘context matters’. But, we argue, systematic thinking about context is still needed in order to develop our ‘off-the-rack’ range — which can then be further adjusted for a more bespoke fit. Not all factors are sui generis, and some policies do have similar impact across multiple contexts.

In the video we claim that good governance is important for poverty reduction. This sounds a bit like the ‘good governance agenda’ revisited, but our research has actually been quite critical of that approach. However, it is also clear that state capabilities influence development processes and that ‘fragile’ states have lagged behind others in meeting global development goals. When estimates suggest 80% of the world’s poorest people will live in fragile states by 2030, it’s clear that aid to fragile situations will remain a challenge over the next decades and we need to learn how to do it better.

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors. 

The video featured here is one of 10 Lessons for Development videos in which researchers shared insights from some of the projects undertaken by UNU-WIDER over the last decade. Watch them all on our YouTube channel.