Wednesday, April 04, 2007

Donor Politics and the Channels and Effectiveness of Foreign Aid

Event Title: Donor Politics and the Channels and Effectiveness of Foreign Aid
Sponsor: Center for Global Development
Location: Center for Global Development
Date: Thursday, March 1, 2007
Time: 12:00 – 1:30
Approximate Number of Attendees: 35
Intern Attending: Blake Dublin

Speakers: Andrew Powell, Matteo Bobba, Inter-American Development Bank

Andrew Powell and Matteo Bobba, economists at the Inter-American Development Bank, presented two papers in a roundtable event. The papers, “Aid and Growth: Politics Matters,” and “Multilateral Intermediation of Foreign Aid: What is the Trade-Off for Donor Countries?” complement each other and use regression analyses and complex economic techniques. They show not only that country politics do indeed determine the amount of foreign aid a nation receives, but also that aid to non-allies is more effective than aid to allies.

Foreign aid distribution is fragmented and not necessarily proportional to countries in the most dire conditions. But there is a clear correlation between being an ally with the United States and receiving bilateral or multi-lateral aid. More findings show that if a country tends to give little aid as a percent of its GDP, it will mostly give it to allies instead of non-allies. Thus, aid by many donors is politically driven. These findings are consistent with previous studies, but go on to assess effectiveness of aid in relation to allies versus non-allies, a study not previously undertaken.

Literature exists that aid is effective, aid is ineffective, and that aid is more effective when good recipient policies are in place. But what affects aid effectiveness in terms of ally politics? The fact that being an ally makes aid less effective reveals some interesting findings. As previously noted, allies receive more aid quite possibly to buy political influence to be repaid later. These political allegiances imply a close relationship and often less monitoring of aid implementation and processes. Lack of accountability and monitoring is one of the biggest problems plaguing aid programs, and ultimately leads to less effective aid endeavors. When aid is allocated to non-allies, fears of rent-seeking behavior are less prevalent, perhaps explaining why aid is more effective. Instead of buying allegiances, aid motivation is centered on real development, which is more likely to be monitored and thus more likely to be effective. Aid between allies appears to be tied in different dimensions than aid between non-allies.

The papers show that aid allocation should be scrutinized carefully to make aid as effective as possible. Findings show that foreign aid can be very beneficial to economic development around the world, independent of recipient policies. In contrast to literature available that focuses on recipient country policies, the authors suggest that donors’ allocation policies should be seen as a leading determinant of aid effectiveness.

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