The debate surrounding foreign aid effectiveness is often framed around whether or not aid works, but that, according to a new working paper on the issue released this week, may just be the tip of the iceberg.
Nancy Qian, associate professor of economics at Yale University and author of the paper, which will be published in the Annual Review of Economics next year, suggests that the often polarizing discussion on aid effectiveness could very well benefit from asking slightly different questions.
Qian starts out by laying out some figures on foreign aid. Donors from the Organization for Economic Cooperation and Development’s Development Assistance Committee have spent up to $3.5 trillion on development assistance from 1960 — the first year that data was reported annually — to 2013.
Aid flows have also remained relatively constant over this period. But while the countries comprising the top donors have remained largely the same, the top recipient governments have varied significantly over time — a reflection of how strategic concerns, instead of the extent of poverty in these recipient countries, often guide donors’ aid policies and decisions. Qian’s analysis of total ODA by recipient income confirms this: only 1.69 percent to 5.25 percent of total global aid flows go to the poorest 20 percent of countries every year.
While the availability of data on ODA has enabled researchers to conduct their own studies on the impact of aid — and contributed to both the growing body of literature on aid and the divisive debate on its merits — challenges in measuring aid effectiveness remain.
For one, Qian notes that several studies on the subject use aggregate ODA. But aggregate ODA — which could be comprised of cash transfers, debt relief and food aid, among other types of assistance — can be difficult to evaluate because its components have different measurement issues, which consequently influence different outcomes. Trying to determine a link between aggregate ODA and growth in a recipient country can thus be a daunting task.
That a significant amount of aid is spent in donor countries themselves also complicates how to measure the amount of ODA that truly goes to a certain country. For instance, higher volume of ODA in terms of administrative expenses does not necessarily mean that more ODA went to that particular recipient, Qian emphasized.
Appraising the value of aid that is channeled to a country also poses a problem. One example is food aid, which Qian points out is valued at the price of the donor country — and can therefore be significantly higher than food prices in the recipient country.
These issues point to a need for future studies to assess “the effect of a narrowed definition of aid on a narrowed set of outcomes,” according to Qian. They also suggest that there is more to the conundrum that is the “Does aid work?” question.
“The polarized arguments of the necessity of aid versus the detrimental effects of aid are premature, and the discussion of total foreign aid and the lack of economic improvement for the poorest countries in the world is somewhat misleading,” Qian writes.
Still, she offers no easy answers, and suggests thinking about aid in terms of a) whether it has been effective; and b) whether and how it can ever be effective.
On the surface, the second question may seem to dismiss the discussion that arises from the first. It may even sound cynical. But there seems to be an underlying optimism beneath the point that Qian wants to make: While asking whether foreign aid has been effective involves delving into how aid policy could be improved, analyzing whether aid can ever be effective entails deciding whether researchers and policymakers should spend time and resources trying to understand — and, more importantly, improve — aid. The answer to the first question then determines whether the second one is even worth asking.
Qian concludes: “For policymakers, it is critical to avoid using negative answers to the first question to answer questions regarding the potential value of foreign aid.”
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