Does Aid Contribute to Sustainable Development Goals? Empirical Evidence from a Donor Comparison

Faust, Paul

Does Aid Contribute to Sustainable Development Goals? Empirical Evidence from a Donor Comparison

by Paul Faust (Author)

Summary

No Poverty, Zero Hunger, Good Health, Well-being and Quality Education – these are the first priorities of the Sustainable Development Goals (SDGs) that were launched jointly by all UN Member States on January 1, 2016. The agenda of this agreement contains 17 main goals with a total of 169 targets and is dedicated to improving global living conditions and to address issues of environmental and economical sustainability with a planning horizon through to 2030. Development assistance from economically advanced countries, also referred to as aid, is one of the major means to provide financing for countries with less developed economies that face severe social problems, and which often cannot handle these problems alone.
Previous studies have shown, however, that aid is ineffective and recommend comprehensive restructuring of the common aid practices. Investigations that analyse the pattern of aid flows find, moreover, that granting aid to certain recipient countries cannot only be explained by altruistic motives. They show that several strategic or non-strategic reasons have a high explanatory power for individual donor aid allocation.
Against this background, the present study explores aid effectiveness of distinct bilateral donors. This is achieved by a large-scale panel data analysis applying per-capita economic growth, infant mortality and primary growth as indicators for measuring the contribution of aid to achieving the different SDGs.

Excerpt

Faust, Paul: Does Aid Contribute to Sustainable Development Goals? Empirical

Evidence from a Donor Comparison, Hamburg, Anchor Academic Publishing 2017

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Contents

List of Abbreviations

List of Tables

III

List of Figures

List of Appendices

Introduction

The Debate on Aid Effectiveness

2.1

The aid-growth literature . . . . . . . . . . . . . . . . . . . . . . . .

2.2

Looking beyond the effect of growth . . . . . . . . . . . . . . . . . .

2.3

Evidence from donor investigations . . . . . . . . . . . . . . . . . . .

2.3.1

The aid allocation literature: Deriving donor interests . . . . .

2.3.2

Determining donor differences . . . . . . . . . . . . . . . . .

Research objectives

Preliminary Empirical Analyses

4.1

Data sources and definitions

. . . . . . . . . . . . . . . . . . . . . .

4.2

Disaggregating aid descriptive statistics . . . . . . . . . . . . . . .

A first approximation: Cross-Country Evidence

5.1

The effect on growth . . . . . . . . . . . . . . . . . . . . . . . . . .

5.2

The effect on social indicators

. . . . . . . . . . . . . . . . . . . . .

5.3

Post-Cold War changes . . . . . . . . . . . . . . . . . . . . . . . . .

Insights from a Dynamic Panel Data Model

6.1

Reinvestigating the effect on growth . . . . . . . . . . . . . . . . . .

6.2

Reinvestigating the effect on social indicators . . . . . . . . . . . . .

6.3

Robustness tests . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Policy Implications

Conclusion

Appendix

References

List of Abbreviations

BA . . . . . . . . . . . . Bilateral aid

DAC . . . . . . . . . . Development Assistance Committee

G1 . . . . . . . . . . . . Group 1 (Denmark, Finland, the Netherlands, Norway, Sweden)

G2 . . . . . . . . . . . . Group 2 (France, Germany, Japan, the UK, the US)

GDP . . . . . . . . . . Gross domestic product

GMM . . . . . . . . . Generalised method of moments

GNI . . . . . . . . . . . Gross national income

HDI . . . . . . . . . . . Human Development Indicator

IMF . . . . . . . . . . . International Monetary Fund

INSCR . . . . . . . . Integrated Network for Societal Conflict Research

MA . . . . . . . . . . . Multilateral aid

MDG . . . . . . . . . . Millennium Development Goals

MENA . . . . . . . . Middle East and North Africa (region)

NGO . . . . . . . . . . Non-governmental organisation

ODA . . . . . . . . . . Official Development Aid

OECD . . . . . . . . . Organisation for Economic Co-operation and Development

OLS . . . . . . . . . . . Ordinary least squares

SDG . . . . . . . . . . Sustainable Development Goal

SSA . . . . . . . . . . . Sub-Saharan Africa

UK . . . . . . . . . . . . United Kingdom

UN . . . . . . . . . . . . United Nations

UNDP . . . . . . . . . United Nations Development Programme

US . . . . . . . . . . . . United States of America

USD . . . . . . . . . . . US Dollar

WDI . . . . . . . . . . World Development Indicators

List of Tables

Group assignment of bilateral donors

. . . . . . . . . . . . . . . . .

Aid allocation of bilateral donor groups . . . . . . . . . . . . . . . .

OLS cross-sectional estimations: Aid and growth . . . . . . . . . . .

OLS cross-sectional estimations: Aid and infant mortality . . . . . . .

OLS cross-sectional estimations: Aid and primary completion

. . . .

First evidence of post-Cold War changes in aid effectiveness . . . . .

Aid and growth: GMM panel data evidence . . . . . . . . . . . . . .

Aid and social indicators: GMM panel data evidence . . . . . . . . .

Robustness of panel data estimations - the effect on growth . . . . . .

Robustness of panel data estimations - the effect on social indicators .

III

List of Figures

The development of aid payments by donor . . . . . . . . . . . . . . .

Conditional relationships between aid and growth . . . . . . . . . . .

2a)

G1 aid and growth . . . . . . . . . . . . . . . . . . . . . . . . . . .

2a)

G2 aid and growth . . . . . . . . . . . . . . . . . . . . . . . . . . .

List of Appendices

Appendix A: The UN Development Goals . . . . . . . . . . . . . . . . . . . .

Appendix B: Data description and sources . . . . . . . . . . . . . . . . . . . .

Appendix C: Patterns of aid allocation . . . . . . . . . . . . . . . . . . . . . .

Appendix D: Cross-sectional estimation results . . . . . . . . . . . . . . . . .

Appendix E: GMM estimation results: Aid and growth . . . . . . . . . . . . .

Appendix F: GMM estimation results: Aid and social indicators . . . . . . . .

Appendix G: Robustness tests - main regression . . . . . . . . . . . . . . . . .

Appendix H: Additional tests for robustness . . . . . . . . . . . . . . . . . . .

Appendix I: Hausman specification tests . . . . . . . . . . . . . . . . . . . . .

1 Introduction

No Poverty, Zero Hunger, Good Health, Well-being and Quality Education - these are

the first priorities of the Sustainable Development Goals (SDGs) that were launched

jointly by all UN Member States on 1 January 2016. The agenda of this agreement

contains 17 main goals with a total of 169 targets and is dedicated to improving global

living conditions and to address issues of environmental and economical sustainability

with a planning horizon through to 2030. Development assistance from economically

advanced countries, also referred to as aid, is one of the major means to provide

financing for countries with less developed economies that face severe social problems

and which often cannot handle these problems alone.

Half a century ago, several major industrialised countries began to launch large aid

programmes after establishing the Development Assistance Committee (DAC) that

serves as a platform for dialogue and discussion about the way international donors can

contribute most effectively to the development of economically poorer countries. Since

1964, aid flows from DAC member countries are recorded as Official Development

Assistance (ODA) and corresponding data is made publicly available. The number of

donors, as well as the amount of funds, is consistently growing, reaching a maximum

of almost USD 95 billion spent by 30 member countries in 2014. Over certain periods

of time, aid payments accounted for a large share of the domestic economy of single

recipient countries. In the most extreme cases, aid flows from various donors added up

to more than 50% of the government budget often spanning several years.

Such extensive monetary flows that aim to improve economic and social conditions

in a broad range of developing countries were unknown until that time, leaving open

the question of the resulting effect. Because the topic also implies a moral importance

due to the donors' commitment to eliminate global poverty and inequality, the topic

immediately attracted world-wide interest among the research society. The first studies

dealing with the subject appeared almost simultaneously as the first aid flows were

disbursed. These studies assess the possible impact of aid, theoretically based on former

growth models. As soon as first data became available, researchers began to directly

estimate the effect of aid on economic parameters. By now, the topic of aid effectiveness

covers an immense amount of contributions with a variety of different research fields.

Estimation methods, as well as quality and availability of data on developing countries

have improved over the time. However, despite the emergence of more accurate

methodology and an increasing number of scientific contributions, the entire history

of research on this topic is accompanied by a lack of consensus. On the one hand,

several studies find that aid has a significant positive impact on growth, whereas an

equally large share of contributions cannot find an effect at all, or even demonstrate a

negative correlation between aid and growth. The disagreement among researchers is

not only consistent over time, but also across different estimation methods and even

between studies that apply the same approaches based on identical data. The perennial

debate that has emerged over the past twenty years particularly leaves the reader with

the impression that research in this area is going around in circles. Studies that take up

the finding of a preceding investigations, apply small changes to the original approach

and end up with a different result largely shape the image of the latest aid effectiveness

literature one can therefore conclude that the question whether aid as a positive impact

on growth or not still remains unanswered.

It is certain, however, that aid in general is falling short of the initial expectations

that donors and first researchers had. Therefore, a wide range of the literature aims

to find out why aid does not show to have the desired effect. Several studies find that

aid increases non-productive government expenditures instead of benefitting the poor.

Others argue that aid only shows to be effective when directed to recipient countries

with a high level of institutional quality and good policies, and conclude that funds have

largely been transferred to the wrong countries. A further avenue of research that has

developed over the past decades pursues a different objective than estimating the effect

of aid: By analysing the pattern of aid flows, the aid allocation literature determines the

main driving forces behind the donors' choice of recipient countries. Resulting insights

prove to be plausible explanations for the missing effectiveness of aid. The parameters

that presumably shape the allocation decisions are either related to the recipient, such

as humanitarian needs, institutional quality or the level of economic openness; or to the

donor, e.g. political and economic interests or ties with recipients that have formerly

been colonised by the donor.

One of the major conclusions of one strand of the aid allocation literature, most of

which published during the past 15 years, is that there are striking differences among

donors regarding their prioritisation of recipient needs or their own objectives. Several

studies find that major industrialised countries, such as the US, Japan or France, put

less emphasis on recipient needs and more on their own objectives. In contrast, aid

from multilateral donors or smaller bilateral donors, such as Scandinavian countries

or the Netherlands, is considered to be far less driven by economic or power-political

interests and proves to be distributed with a high regard for the different recipient-related

parameters.

Taking this observation into consideration, it appears evident that the effectiveness of aid,

equal to the pattern of allocation, differs among donors. Yet, nearly all investigations

focus on the effect of aggregated aid i.e. total aid funds from all donors. Only in

recent years, research begins to consider this issue, mostly distinguishing between the

impact of bilateral and multilateral aid. Empirical evidence on potential differences

in aid effectiveness between single bilateral donors, however, remains very limited.

Because bilateral aid accounts for most of the total supplied funds, further research on

this topic is indispensable.

Consequently, the main research objective of this thesis is to investigate whether the

insight of the aid allocation literature, i.e. bilateral donors differ significantly regarding

the motives behind allocating aid, can be applied to determine measurable differences

in aid effectiveness. In other words, are differences in the way distinct donor countries

allocate aid large enough to result in quantitative differences in the impact on develop-

ment of recipient countries? The answer to this question could offer an explanation for

why aid research often fails to find a positive effect of aid. And more importantly, it

could provide insight on the types of aid that appear to be unrelated with development

and those that show a positive impact on recipient countries.

In order to estimate differences between bilateral donors, this study forms two groups

that are assumed to allocate aid in a significantly different manner an approach that

is not applied up to the present. The first group comprises Denmark, Finland, the

Netherlands, Norway and Sweden; all of which seem to exclude personal interest and

to put great emphasis on recipient needs. France, Germany, Japan, the United States

of America (US) and the United Kingdom (UK) form the second group as bilateral

donors that are considered to allocate aid with high regard to their own objectives. To

determine the possible difference in aid effectiveness between these two donor groups,

the aim of this thesis is to follow the latest and established strategies of estimating the

effect of aid on growth in a first place.

As several recent studies argue that growth is not the only appropriate measure of

development, this thesis additionally investigates the impact of aid on the two most

often researched social indicators. These are infant mortality, as a key indicator for

heath standards, and primary education to measure the quality of the educational system.

Both of these indicators are explicitly included in the agenda of the eight Millennium

Development Goals (MDGs) of 2000 and are concrete targets of the current SDGs.

Thus, an analysis of the effect on the two indicators also covers a more concrete answer

to the question whether aid contributes to sustainable development goals.

Moreover, because the literature does not agree on whether or not multilateral aid is

more effective than bilateral aid, the analyses of this study are accompanied by a further

differentiation between these two types of aid. In addition to the separate analysis of

two bilateral donor groups, this kind of disaggregating aid offers a further opportunity to

decompose aid into potentially ineffective or beneficial types. As bilateral aid comprises

both donor groups of the main investigation, this additional analysis enables a direct

comparison of aggregated and disaggregated aid flows, which possibly achieves more

valuable results.

The investigations of this study consider two further insights of the previous literature.

The first one is that aid is assumed to affect development with a partially large time lag.

The rationale behind this assumption is that development assistance largely comprises

projects in areas such as infrastructure, energy, education or health, which require a

long implementation period until they may achieve benefits. Second, several studies

suggest that the aid allocation of major donors has significantly changed since the end

of the Cold War, implying changes in the underlying motives. As the latter finding

indicates that aid effectiveness increases after 1989, additional estimations shall reduce

the observation period to 1990-2014.

In order to gradually answer these research questions, the study first presents a detailed

investigation of the existing literature, beginning with a section that outlines the origin

and history of the research field. This section aims at identifying problems and solutions

associated with the estimation of aid effects and additionally addresses the current debate

on the impact of aid on growth. The closer inspection of the recent research covers

studies from the last 20 years; the aid effectiveness literature has seen a remarkable

upswing during this period, which has led to a persistent discussion. In a next step,

the literature review shifts the focus away from the aid-growth debate to the usage of

alternative development indicators for measuring the impact of aid.

A further section then discusses those investigations that determine the pattern of aid

allocation. Studies of this strand of literature provide an important theoretical foundation

for this thesis, i.e. the indication that aid effectiveness might differ between donors.

Investigations of this kind also demonstrate changes in motives for providing aid after

the end of the Cold War. The insights of the aid allocation literature lead to a final

section that discusses the approaches and results of previous studies that attempt to

measure differences in aid effectiveness among donors. Following the literature review,

a separate chapter utilises the obtained insights in order to draw implications for the

subsequent analysis and to precisely define the research objectives of this study.

A descriptive analysis initiates the empirical part of this study. After describing the

applied data and corresponding issues, the main section of this chapter attempts to

confirm the findings of the aid allocation literature in the case of the donors that are

analysed in this study. An investigation of the temporal development of each donor's aid

flows, followed by a more detailed analysis of the individual pattern of aid allocation

shall amplify the evidence achieved from the literature. Subsequent cross-sectional

estimations of the actual aid effects provide reader with a first approximation of the

results among different donors. The analysis of cross-country data based on ordinary

least squares (OLS) method is among the first approaches for estimating the effect

of aid, and is still applied by a number of recent studies. The initial assessment is

divided into three parts. The first section identifies donor-specific aid effects on growth

as the indicator that is most-often applied for estimating the impact on development

in recipient countries. The second part observes both infant mortality and primary

completion as social indicators. A final section approximates how aid effects vary in

the post-1989 period after the end of the Cold War.

The application of cross-sectional data, however, is for several reasons afflicted with a

certain inaccuracy, compared to more sophisticated estimation strategies based on panel

data that have emerged over the past decades. The main estimation method of choice,

therefore, is a generalised method of moments (GMM) based dynamic panel analysis.

Chapter 6, as the main of the empirical analysis, begins by discussing the benefits of

the GMM dynamic panel data approach in contrast to cross-sectional investigation.

Subsequently, the effect on growth and on both social indicators is reassessed. As

the application of GMM estimators is not free from bias either, a third section of

chapter 6 tests for robustness of the panel data approach. This is based on simple OLS

methodology and a fixed effects (FE) estimator, both of which are also applied in recent

research. A further step is to derive policy implications from the obtained results, and

chapter 8 concludes.

2 The Debate on Aid Eectiveness

Following the establishment of the Development Assistance Committee in 1960, nearly

all the major developed countries started extensive aid programmes with the objective of

alleviating global poverty (cf. Doucouliagos and Paldam 2006: 227). Shortly afterwards,

first researchers began to assess the effects of aid against the high expectations of the

donors. The first studies were published at the end of the 1960s and the early 1970s.

Since then, a great variety of researchers have been dealing with the question whether

and to which extent development assistance impacts economic growth of recipient

countries. Underlying theories and the methodical procedure to filter out the effect of

aid have been reconsidered and adapted to more sophisticated empirical approaches

several times up to the present.

More surprisingly, but very characteristic for the aid research, the numerous outcomes

for the effect of aid vary to a high extent and are inconsistent in sign and degree up until

now. For this reason, and for the great number of contributions in this area, multiple

studies attempt to categorise the research field by classifying contributions by their

findings or the methodical framework put to use. Scientific approaches from the first

decades of research have repeatedly been refined and further developed and hence are

less relevant for the empirical part of this thesis. Yet, their contributions are useful for

understanding the nature of the aid effectiveness debate and shall, thus, be summarised

briefly. Because the most influential and still discussed studies have been published

over the past 20 years, their procedure and findings shall be analysed in more detail.

At the beginning of the debate in this field, aid effectiveness was generally seen in

an economical context. After initial attempts to analyse the impact on more precise

macroeconomic determinants such as savings and investment, the approach of analysing

the direct impact on economic growth has prevailed so far in this strand of the literature.

A first section explains this development and the predominant strand of research, the

aid-growth literature. Recently, several contributions consider the impact of aid on

social indicators in addition to growth. A second section illustrates the reasons behind

this choice, as well as the approaches and outcomes of influential studies in this field.

2.1 The aid-growth literature

The first contributions from the early 1960s mostly focus on the estimated capital

required by developing countries. Theoretically based on the Harrod-Domar growth

model, these studies address the relationship between foreign assistance and total

savings with the underlying assumption that filling up the saving gap implies higher

Extensive investigations of the first decades of research can, for instance, be found in Hansen und Tarp

(2000) or the meta-analyses of Doucouliagos and Paldam (2006, 2009).

investments and therefore an increase in growth. With a positive expectation towards

the effect of aid on growth, they assume that aid payments contribute in an equal amount

to the developing countries' savings and thus investment, such as Rosenstein-Rodan

(1961: 136), to name one of the most influential studies of this period.

The arguments of a subsequent strand of the literature likewise draw on the effect

on savings. However, questioning the high expectations of the previous literature,

these studies find out a negative impact of foreign assistance on domestic savings of

developing countries. Since they attempt to determine the extent of aid for the first

time by applying cross-sectional or time series analyses, they are often regarded the

first contributions to the aid effectiveness literature (cf. Clemens et al. 2012: 591).

The earliest publication of this strand of the aid-savings literature, Griffin and Enos

(1970: 320), states that the former expected relationship between aid and savings would

be too simple and that a general negative tendency between foreign assistance and

domestic savings points towards a negative effect on growth. Weisskopf (1972: 37)

even concludes that the effect of aid on ex ante domestic savings would be significantly

negative.

Soon afterwards, Papanek (1972, 1973) marks an early turning point in the literature by

shifting away the focus from analysing the effect on savings towards directly measuring

the impact of aid on growth. He argues that savings had so far been determined by

subtracting inflows from investment, which would lead to a self-explanatory negative

correlation (cf. Papanek 1972: 945-947). Considering the issue of causality between

low savings in least developed countries (LDC) and high aid payments for the first time,

he questions the validity of previous results. Furthermore, he disputes the approaches

of his predecessors because of their aggregation of all foreign inflows. He attempts to

separate these, resulting in a regression for predicting the various effects of aid, savings,

investment and other components of foreign inflows on growth (Papanek 1973: 121)

and concludes that there is a strongly significant correlation between aid and growth

(ibid.: 129).

The approach of Papanek is taken up by a series of subsequent studies that investigate

the effect of aid on either investment. Amongst these is Mosley (1980: 81-84), who

introduces a further methodical advancement to the aid literature by instrumenting

for aid in a two stage least squares regression. He comes to the conclusion that the

overall relation between aid and growth is negative and insignificant, but positive when

only considering the poorest countries (ibid.: 89-90). Although several subsequent

publications take up this procedure, the actual impact of aid remains controversial: Levy

(1988: 1781-1787), for instance, finds a strongly significant positive impact on both

investment and growth in African countries. Snyder (1993: 484) even reports an overall

positive effect of aid after controlling for population growth of the recipient countries.

On the opposite side, various studies find that aid and growth prove are unrelated, such

as Mosley et al. (1987: 636).

The recent literature, considering the current status, is introduced by the work of Boone

(1996). With the help of more complete data, he performs panel data analyses with

five-year averages while controlling for country specific effects (ibid.: 305). Moreover,

he uses three new instruments for dealing with potential endogeneity in the regressors

and analyses aid effects on growth, infant mortality, life expectancy and primary school

attendance (ibid. 308-309). Boone (1996: 322-323) arrives at the conclusion that aid

does not show to have any significant effect on neither of the parameters. Instead, he

observes a connection between aid and higher total consumption. He states at the same

time, however, that there is no evidence that higher consumption would benefit the poor

(ibid.: 315). Boone's findings have been addressed by many studies up to the present.

The literature that has emerged since then can be classified into three strands of studies

in the following also termed studies of strand 1-3.

A first line of studies finds a positive

impact of aid under certain circumstances, such as the existence of specific policies or

relations between the donor country and the recipient. A second series of studies, strand

2, confirms the results of Boone, i.e. aid and growth are uncorrelated. On the contrary,

a third strand of the literature determines a positive effect of aid that holds regardless of

certain conditions.

The first strand, which Clemens et al. (2012) term the "conditional strand" (p. 592),

comprises several of the most influential studies of the aid-growth literature. These

studies reflect Boone's results of an absent effect of aid on growth in a total sample, but

determine a positive effect of aid only under certain circumstances and, thus, imply op-

portunities of (re)structuring aid flows in an effective manner. The arguably best-known

example is Burnside and Dollar (2000), which extend the instrumentation strategy by

including an interaction term of aid and economic policies. After determining a signifi-

cantly positive coefficient of this variable, Burnside and Dollar (2000: 857) conclude

that aid works better in countries that feature strong economic policies and institutions.

Many subsequent papers, for example Easterly (2003: 24) or Clemens et al. (2004:

8), highlight the great influence of Burnside and Dollar (2000) on both research and

the policies of major aid organisations, such as the World Bank and other multilateral

development banks. Furthermore, there are various papers that confirm the relationship

between good policies and the effectiveness of aid on growth, as for example Alvi et al.

(2008: 702). Other studies belonging to this strand of the literature identify a positive

effect of aid on growth in countries that are, for instance, geographically located outside

the tropics (cf. Dalgaard et al. 2004: 201) or in a longer period of peace (cf. Collier and

Doller 2002: 1135).

The following categorisation of the recent aid into three strands is inspired by Clemens et al. (2012:

592-593) and extended up to the present.

A further number of publications can be assigned to a second strand due to their common

conclusion that aid and growth are unrelated, regardless of certain circumstances. To this

category belongs Roodman (2007: 266), who tests the robustness of several influential

first strand studies - amongst them Burnside and Dollar (2000) and Dalgaard et al.

(2004). He concludes that all outcomes of the analysed studies are characterised by

fragility and that aid "is probably not a fundamentally decisive factor for development"

(ibid.: 275). One of the most prominent publications of the past decade, as many studies

highlight (cf. Clemens et al. 2012: 595), can also be found in this category: Rajan and

Subramanian (2008) analyse the causal relation between aid and growth based on both

cross-sectional and panel data analyses in a comprehensive way. They test for several

assumptions, such as the decisive role of good policies and the geographical location,

as well as the timing of the impact of aid; and conclude that aid over all their findings

has no significant positive effect on growth (ibid.: 660).

Opposed to the findings of the second cluster, the third strand of the recent literature

reveals an overall positive impact of aid on growth. An early influential work is Hansen

and Tarp (2001), who also address the insight of Burnside and Dollar (2000) that aid

would only work in good policy environments. They are the first within the aid literature

to apply a GMM estimator. This procedure has attracted particular attention within the

aid literature and is adopted by many subsequent studies, such as the aforementioned

Rajan and Subramanian (2008: 658-660).

Hansen and Tarp (2001: 552) retain the

strategy of instrumenting for policy, but modify the original set of instruments and

include lagged values of the aid regressors for modelling the assumption of non-linear

returns of aid. Accounting for both original least squares and GMM-estimations, Hansen

and Tarp (2001: 563) conclude that aid has a positive and significant effect on growth

via investment.

Gomanee et al. (2005A: 1068) arrive at the same result in a sample of 25 countries in

Sub-Saharan Africa (SSA). Several publications of the past years can also be classified

as studies of the third strand. Arndt et al. (2010: 19-21), as well as Clemens et al. (2012:

608) draw on the original specification of Rajan and Subramanian (2008) demonstrate

a modest but general positive effect of aid on growth. Both studies have in common

that they turn away from GMM-estimations, although this method has been recognised

as a sound practice in the aid literature since the work of Hansen and Tarp (2001).

The robustness check, carried out in section 6.3, revisits this recent doubt about the

applicability of GMM-estimators. Finally, Brückner (2013: 131-135) also achieves a

significantly positive effect of aid. Remarkable for his approach is that he tackles the

endogeneity problem by explicitly estimating the effect of an increase in gross domestic

product (GDP) per capita growth in recipient countries on the amount of foreign aid in

a first step.

Chapter 6 contains detailed information on the GMM approach and its benefits, as well as its limitations.

2.2 Looking beyond the eect of growth

The investigation of the impact of aid on economic growth in developing countries may

be considered the classical strand of the aid effectiveness literature. As indicated in the

introduction, however, there are several reasons why the growth effect should not be

the only criteria to use for measuring the effectiveness of aid. Several researches of the

past two decades shift their focus towards investigating the effect of aid on different

indicators of human development. These studies include key indicators in the areas of

health and education, as well as poverty indices. In the following, this section analyses

research in this rather novel field with a focus on the underlying theoretical assumptions

for turning towards a focus on social indicators.

A fundamental objective of investigating the effectiveness of aid regarding its impact

on social indicators is to evaluate whether it contributes to achieving the goals that

have jointly been defined by the United Nations (UN) member countries. At the UN

Millennium Summit in 2000, both developing and developed countries met for the first

time to establish a common target catalogue for promoting international development,

labelled Millennium Development Goals. These targets include improvements in the

fields of global health, education, poverty reduction, equality, as well as peace and

freedom promotion with an objective horizon of 15 years (cf. UNDP 2003: 31). After

the expiration of the 15 years planning horizon, the common goals were redefined in

2016 and laid down in the 17 Sustainable Development Goals of the UN (cf. DESA:

2016).

Because aid is expected to be an essential instrument for achieving these

goals, several studies devote to explicitly analysing the correlation between aid and the

achievement of MDGs, e.g. Dreher et al. (2008: 292) or Masud and Yontcheva (2005:

3).

Apart from the rather self-evident objective of assessing the ability of aid to contribute

to commonly defined goals, there are more reasons why indicators for social welfare are

suitable for measuring aid effectiveness. First, several studies point out that aid targeted

towards improvements in social areas may only have an impact on growth in the very

long run. Arndt et al. (2015: 9) demonstrate this time-lagged growth effect of aid based

on the example of the education field. They consider only those kinds of aid which are

directed at improving educational quality and show that higher school attendance rates,

caused by these aid flows, may only have an observable influence on growth after a

considerable share of beneficiaries has passed through the education system. Boone

(1996: 293) already stresses that infant mortality, as a key indicator for health, would

respond quickly to improved conditions. In line with this, Dreher et al. (2008) argue

that social indicators would be "more specific outcome variables than growth" (292).

A further line of arguments emphasises the high explanatory power of social indicators

Annex A shows provides an overview of the agendas of both MDGs and SDGs.

in measuring welfare gains of the poor. Gomanee et al. (2005B: 300) point out that

increases in aggregate economic growth do not necessarily reflect better conditions

of the poor; which is, however, a main target of aid. For this reason, they attempt to

capture a broader measure of total welfare benefits by focusing on improvements in

both infant mortality and the Human Development Indicator (HDI). Chong et al. (2009:

60), as well as Alvi and Senbeta (2012: 955) share the same position. In contrast to their

predecessors, however, they both rely on poverty headcount and poverty gap indices.

They argue that this procedure gives indication on income distribution and equality,

representing additional important factors of development besides a countries' average

economic growth (ibid.: 957).

Corresponding to the overall conclusion of the classical aid-growth literature, the

findings of this strand of the aid effectiveness research are also diverse. However, a

majority of the studies report positive effects of aid. Recent findings, furthermore,

show a clear trend towards more optimistic findings. Boone (1996: 312-313) is the

first to incorporate social indicators into his estimations with the purpose of measuring

improvements in the living conditions of the poor. For this purpose, he chooses infant

mortality, life expectancy, as well as primary schooling. He finds out that aid does not

significantly influence neither of the variables. As mentioned in the previous section,

Boone rather observes a higher consumption rate correlating with aid payments and

concludes that these results "are consistent with a model where politicians maximize

welfare of a wealthy elite" (ibid.: 322).

In line with this finding, Chong et al. (2009: 79) are not able to detect a significant

impact of aid on their measures for poverty. This negative overall picture of the relation

between aid and social indicators, however, is only supported in a small number of

studies. Gomanee et al. (2005B: 305), as well as Masud and Yontcheva (2005: 13)

find that aid reduces infant mortality. While Gomanee et al. (2005B, 302) use total

aggregated aid flows, Masud and Yontcheva (2005: 9) distinguish between bilateral aid

(BA) and aid from non-governmental organisations (NGOs) and demonstrate that only

the latter has a significant effect.

Particularly in recent years, a predominantly positive perception of aid towards im-

proving social welfare has become apparent. Dreher et al. (2008: 299), for instance,

show that aid specifically assigned to the education sector contributes significantly to

higher school enrolment rates. In a similar approach, Mishra and Newhouse (2009: 865)

consider aid in the health sector and find that this type of aid contributes to alleviating

infant mortality. The two latter mentioned investigations apply a separation of aid flows

by their purpose. Because their target is to investigate only the assistance for education

and health respectively, they separate these aid types from the total aid numbers. Section

3.2 discusses the approach of disaggregating aid according to assignment in more detail.

Even without separating aid, Alvi and Senbeta (2012: 965) determine a negative and

significant impact of total aid flows on both poverty gap and poverty rate. Finally,

Arndt et al. (2015: 10-13) apply a two-step analysis with intermediate outcomes of

aid, amongst them measures for health and education, that contribute accumulatively to

final outcomes, represented by GDP growth and poverty indices. They conclude that

aid has an average positive long-run effect on the final outcomes by stimulating the

intermediate outcomes, such as better health and education conditions (ibid.: 15).

2.3 Evidence from donor investigations

So far, one major conclusion can be drawn from the literature analysis: A larger share of

the research on aid effectiveness fails to find a significantly positive impact of aggregated

aid flows (cf. Rajan and Subramanian 2008 and 2011, Burnside and Dollar 2000 or

Easterly et al. 2004). For this reason, a major current research goal in this field is to

gain insight into the reasons for the apparent failure of total aggregated aid. Section 2.1

already describes one empirical procedure for this purpose; by instrumenting for certain

characteristics of the developing countries, such as their institutional quality or climatic

circumstances, scholars try to find out under which circumstances aid generates positive

effects and when it appears to not have any significant impact. Studies of this type have

already had a strong influence on policy, such as the shift of aid allocation of major

agencies towards countries with a better policy environment (cf. Easterly et al. 2004:

774).

A further possibility of understanding why overall aid apparently does not achieve its

goals is to look at the single development assistance flows separately, i.e. disaggregating

aid numbers. The underlying assumption behind this approach is that different aid, or

aid flows to different countries, can vary in their effectiveness. The disaggregation,

again, can be done in different ways. The two major differences of these approaches are

the following: One way is to consider the underlying objective behind the different aid

flows and, consequently, to distinguish between the different purposes of aid, which

are defined by the donor. Many studies apply such a procedure, amongst them Headey

(2008: 169) and Clemens et al. (2012: 594), who subtract the share of humanitarian aid

from total ODA with the purpose of only considering the types of aid that are targeted at

increasing economic growth, or Dreher et al. (2008: 300), who find a positive impact of

aid and education indicators while considering only those aid flows that were assigned

to the education sector. This thesis, however, does not apply such a procedure. Section

4.2 provides the argumentation behind this choice.

Beside this kind of disaggregation, there is a second established way of breaking down

aggregated aid: Various studies subdivide aid flows according to the way they are

allocated to recipient countries. This type of studies is often referred to as the aid

allocation literature (cf. Harrigan and Wang 2011: 1282). One objective of several

of these investigations is to determine a pattern of aid allocation that is most effective

regarding the aggregated increase of welfare in developing countries. Another major

target of this kind of research is to determine factors that prove to be decisive for the

choice of the individual donor's allocation. Such factors, on the one hand, can be

derived at the recipient country level - humanitarian needs or the degree of poverty are

examples for this. But they can also be investigated from the donor country perspective

and include factors such as political or commercial interests. Finally, these approaches

are expanded by several studies in order to compare the aid allocation of different

donors. These studies argue that the patterns of aid allocation vary significantly between

different donors. Some of them conclude that inadequate aid allocations, presumably

caused by personal donor motives, are a major cause for the ineffectiveness of total

aggregated aid. The following section depicts this strand of the literature and their

implications for this thesis in more detail, with a focus on those studies that devote to

determining differences between different donors.

The conclusions of the aid allocation literature, however, do not provide information on

the eventual effects of different patterns of aid flows. Or put differently: They provide

insights about differences in aid allocations of different donors (qualitatively), but do

not quantify these. Only a few studies so far attempt a quantification of aid impacts

separated by donors. Their measurements are mostly based on implications of the aid

allocation literature. A further section depicts these approaches and their results.

2.3.1 The aid allocation literature: Deriving donor interests

To begin with, this section outlines the main approaches and findings of the aid allocation

literature. Implications derived from this strand of research serve as the main theoretical

foundation of this thesis. Similar to the aid-growth literature depicted in section 2.1,

there are numerous studies contributing to this research field with a history that goes

back to the 1970s.

McKinlay and Little (1977) already elaborate on explaining the allocation of official

bilateral aid by the example of the US development assistance. They develop five models

for each possible type of donor interest and analyse, based on a cross-sectional analysis

of the period 1960-1970, which of the models correlates most with the allocation of US

aid over this period (ibid.: 68-72). The interests represented by the five models include

fostering development, political stability and democracy in developing countries, but

also (own) economical, security and power-political interests of the US. The authors find

For further reading: Harrigan and Wang (2011: 1282-1283) provide a detailed review on the aid

allocation literature, including early research.

Details

Pages
Type of Edition: Erstausgabe
Year: 2017
ISBN (PDF): 9783960677161
ISBN (Softcover): 9783960672166
File size: 6.8 MB
Language: English
Institution / College: Justus-Liebig-University Giessen
Publication date: 2017 (December)
Grade: 1,0
Keywords: Aid Effectiveness Bilateral donors Bilateral aid Economy Economical sustainability Environmental sustainability Developing country Large-scale panel data analysis Economic growth Infant mortality Primary growth Globalization Sustainable Development Goals

Author

Paul Faust (Author)

Does Aid Contribute to Sustainable Development Goals? Empirical Evidence from a Donor Comparison

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Author

Paul Faust (Author)