Aid and Performance: A Reassessment

TLDR

Aid effectiveness is debated between a policy‑dependent view that requires appropriate domestic policies and an environment‑dependent view that posits greater effectiveness in more adverse external conditions. This study compares these two visions and proposes reconciling them through performance‑based aid allocation that adjusts outcomes for environmental impacts. Performance is measured in multiple ways, with one approach allocating more aid when the external environment is worse and domestic policy is stronger. Econometric tests on two 12‑year pooled periods of GDP growth consistently support the environment‑dependent view.

Abstract

Two visions of aid effectiveness and allocation are compared. The first, corresponding to the new aid paradigm, argues that aid is only effective if domestic policies are appropriate. The second, in contrast, argues that aid effectiveness depends on the external and climatic environment: the worse this environment, or the more vulnerable the recipient countries, the greater the effectiveness of aid. Cross-sectional econometric tests related to GDP growth on two 12-year pooled periods clearly favour the second view. The two views can be reconciled through the principle of performance-based aid allocation, where performance is defined as outcomes adjusted for the impact of environmental factors. Performance can then be measured in several manners which are subject to comparison. One approach would lead one to allocate more aid the worse the (external) environment is (for a given policy) and the better the policy is (for a given environment).