Does Aid Work? Is That the Right Question?

By Jonathan Cali
posted on February 9, 2014 in Global Development

With traditional donor countries in North America and Western Europe facing budget constraints, the debate over the effectiveness of aid is likely to continue. Before this issue is debated, practitioners and academics must first establish what the purpose of aid is, how the impact of aid and international development organizations should be evaluated, and what types and amounts of assistance are most beneficial in each circumstance.

Firstly, aid and other development assistance can serve two general purposes. One of these purposes is not to turn poor countries into rich countries. The process of development is incredibly complex, and often involves the complete political, economic, and social (and sometimes cultural) transformation of a nation and its people.  There is still much debate on the causes of development, but domestic governments, businesses, and social groups, not foreign donors, are the driving forces of development.  

What aid can do is to a) contribute to the process of development through small, yet important contributions at key moments to feed a virtuous circle, or b) help to relieve the suffering caused by extreme poverty. Contributions that spark a virtuous circle may include the transfer of technology or training that improves agricultural productivity, lays the foundation for start-up businesses, or drastically improves the ability of government ministries to do their jobs. The additional income from agriculture or a new industry, or better public management could lead to better policy, increased economic growth, and eventually development and poverty reduction. Interventions that relieve the suffering of the poor include the elimination of infectious diseases, programs to improve and expand education, and micro-lending to help poor people start small businesses. In one example of this type of aid, this author is working on a project with the Inter-American Development Bank to reduce the burden of Elephantiasis and other tropical diseases in Latin America.

Now that we have defined the purpose of foreign aid, we need to change the way aid is evaluated. That being said, the effectiveness of assistance programs should be measured on an individual basis through randomized trials and other evaluation techniques. Policy-makers should ask if each program has achieved its objective: Has it created a virtuous circle of development? Has it relieved the suffering of the extreme poor? Foreign aid should not be evaluated based on how many countries “graduate” from poor to developed. Aid alone cannot achieve such an ambitious goal, and that is not its purpose.

Finally, understanding the purpose of aid should make it easier to determine what type of foreign assistance should be deployed in which context. Regions that are poor yet relatively stable are more likely to benefit from aid to spur a virtuous circle. The virtuous circle of development requires a peaceful and somewhat orderly environment that would allow local businesses and the government to take advantage of foreign assistance. Very poor, conflict-ridden countries and middle-income regions would benefit most from aid meant to relieve the suffering of the extreme poor. Conflict-prone, wildly unorganized regions are unlikely to be able to take advantage of a transfer of technology or capacity building, as combatants and dictators are free to disrupt aid projects or siphon off the funds for their own benefit.  Middle-income countries already have strong and growing economies and capable civil servants, and are less in need of transfers of technology and capacity building. Aid can still be used, however, to improve the lives of poor and marginalized populations that are not benefiting from economic growth.  

In a future article, I will expand on this idea that different types of aid should be targeted to different contexts, and discuss some case studies of countries in which aid was squandered or contributed to a virtuous circle of development.