6.2. Two turning points for a new aid-growth
literature
Actually, two major turning-points took place in the
literature during the second half of the nineties. Though they are very
different in their philosophy, together, they gave birth to a new generation of
aid-growth empirical studies leading to both improved methodology and
modifications in the conclusions.
6.2.1. Boone (1996): the methodological turning point
Boone's (1996) pessimistic conclusions are quite in line with
most of precedent articles and so it confirms Mosley's idea of the
«micro-macro paradox». As we already mentioned, he finds
that aid does not increase growth nor benefits the poor because it tends to
finance consumption rather than investment. So, the main result of aid seems to
be an increase of the size of governments. Nevertheless, this article is a kind
of turning-point in the sense that it is probably the first one to initiate the
movement of a methodological revolution. Compared to previous studies the new
generation of articles brings several significant innovations.
First, they are now working with panel data covering a larger
number of countries and years. As Hudson (2004, p1 87) explains, data are more
reliable than ever: «The problems relating to data are declining gradually
over time as both more and better quality data becomes available.»
Secondly, authors are now taking account of innovations in matters of growth
theory. Variables reflecting the quality of institutions and economic policies
of the beneficiary countries are now included in the regression. Third, it has
become the rule to address explicitly the possibility of endogeneity of
aid21. Last but not least, the inclusion of regressors such as
aid² and aid×policy enables a non-linear aid-growth
relationship22. Quibria (2004, p9) confirms this major innovation:
«Perhaps the principal contribution of the Boone study has been to
stimulate further professional interests in a research area that was fast
approaching rapid diminishing returns.»
21 The amount of aid allocated to a country is not independent
from its initial level of GDP since aid appears to go primarily to poor
countries.
22 Cfr. Arguments discussed earlier
6.2.2. Burnside and Dollar (1997): the ideological turning
point
In 1997, in this context of aid's legitimacy crisis and
constantly decreasing international assistance flows, Burnside and Dollar wrote
their «extraordinarily influential paper»23: Aid,
Policies and Growth. Initially known as a World Bank working paper it was
only published three years later in the American Economic Review. By
means of a new data base of the World Bank, they want to revisit the
pessimistic conclusions of Boone (1996) and other recent articles. In this
sense, it gave a new impulse to the debate. The following statements confirm
this new dynamism:
(Roodman 2004, p2): «The work of Burnside and Dollar has
brought corroboration and challenges.»
Easterly (2003, p26): «The Burnside and Dollar (1997)
paper gained prominence because it addresses the scepticism implied by Boone
and by the lack of consensus from the early literature». Although, from a
methodological point of view their innovation was quite minor, their
conclusions brought new arguments to the discussion about aid
effectiveness.»
Quibria (2004, p9): «The paper that has done the most to
stimulate the interest in the topic is the one of Burnside and Dollar
(1997).»
McGillivray (2005, p2): «The turning point in the
literature is defined by two, very well-known studies. The first is Burnside
and Dollar (1997) and the second is a Assessing Aid: What Works, What Doesn't
and Why (World Bank, 1998). The latter report results presented in the
former.»
Their major novelty is the inclusion in the equation of an
interaction term between foreign aid and economic policies. This
«aid×policy» interaction term enables to make a distinction
between countries with adequate economic policies and those with unfavourable
ones. Hence, the simple correlation of aid and growth appears to be close to
zero24 but this is only true for country with mean policy level.
Indeed, the impact of aid on growth appears to be significantly positive in
good policy environments. Their conclusion is that aid effectiveness in the
growth process is directly dependent on the quality of economic
policies25. Whereas Boone's (1996) conclusions offered no
opportunity to increase aid effectiveness, Burnside and Dollar (1997) suggest a
more encouraging discourse since better selectivity in aid allocation
should enhance its impact on economic growth.
Obviously, such a finding has led to important political
consequences: «This work has clear implications for how to make foreign
aid more effective... If they (donors) want to have a
23 See Easterly, Levine and Roodman (2003, p1)
24 In this sense Burnside and Dollar (2000) is in consistent with
Boone (1996). 25 They also found that foreign aid suffers from diminishing
marginal returns.
larger impact on growth and poverty reduction, then they
should place greater weight on economic policies of recipient.» (Burnside
and Dollar, 1997, p4) In the years that follow this publication many
development agencies adapted their allocation behaviour to adopt the
selectivity principles recommended by Burnside and Dollar. The Economist
(June, 1999) also expressed this concept of selectivity that became so
popular at that time: «Countless studies have failed to find a link
between aid and faster economic growth.... Rich countries should be more
ruthless about how they allocate their largess, whether earmarked or not.
Emergency aid is one thing. But mainstream aid should be directed only to
countries with sound economic management. In other words, aid could work if
properly directed.» Such strong statements gave rise to abundant
reactions. As we will see, the application of the selectivity principle as
suggested by Burnside and Dollar (1997) was probably not a very opportune
decision.
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