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The Effectiveness of Aid to Development. Focus on the Aid-Growth literature.

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par François Defourny
Facultés N-D de la Paix de Namur - Université Catholique de Louvain - Master in International and Development Economics 2005

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8. Contemporary consensus and controversy

After all these reactions, Burnside and Dollar's results appear to be seriously weakened. The idea that «foreign aid has a positive impact on recipient's economic growth provided that those countries have sound economic policies» is not so well accepted anymore38. Actually, while it is difficult to deny that «good» policies and institutions could enhance aid effectiveness, there is still a strong controversy regarding what constitutes good policies or institutions. Nowadays, an incontestable majority of studies find some positive impact of aid on economic growth irrespectively of policy variables39. We lack time to present in details

38 Still, some studies confirm Burnside and Dollar (1997): Burnside and Dollar (2004), Collier and Dollar (2001 2002), Collier and Dehn (2001), Collier and Hoeffler (2002).

39 Some of these optimistic articles have already been mentioned amongst the reactions to Burnside and Dollar (1997), in the previous section.

this optimistic literature40. In order to illustrate this real consensus, we will rather present some extracts that speak for themselves:

Dalgaard (2005, p1): «Recently, there appears to be an emerging consensus that aid does increase growth - on average. By the same token it is also well accepted that aid does not seem to be equally effective in all countries.»

Dalgaard et al. (2004, p1): «In the last few years, the pendulum has swung, and a gradually forming consensus view has emerged that aid `works'... Nevertheless, controversy remains since it also seems clear from the data that foreign aid is far from equally effective everywhere.»

Morrissey (2005, p5): «At one extreme is the Burnside and Dollar (1997) view that aid is only effective in a good policy environment. At the other extreme, is the Hansen and Tarp (2001) view that aid is effective irrespective of policy... An intermediate position is that better policies will improve growth performance and therefore may be associated with more effective aid.»

McGillivray (2005, p1-4): «The overwhelming majority of recent, widely circulated empirical studies find that economic growth would have been lower in the absence of aid... Inclusive Burnside and Dollar (1997), 36 studies have been conducted during 1997 to 2004, therefore. Thirty-four of these studies conclude that aid works»

Beynon (2001, p29): «In summary, while the question of whether aid is effective irrespective of policy remains disputed, there is at least agreement that aid works better in good policy environments.»

Hansen and Tarp (2000, p16-17): «When all studies are considered as a group, the positive evidence is convincing. The micro-macro paradox is non-existent. Microeconomic studies indicating that aid is beneficial are consistent with the macroeconomic evidence.»

Quibria (2004, p3 1): «The single most robust conclusion that has emerged from recent cross-country regression studies is that aid has in general been effective in developing countries across a wide variety of policy environments. This result repudiates the idea of conditional effectiveness, a much-vaunted notion that argues that aid works only in countries with good polices and as such should be directed only to those countries.»

These few examples are convincing enough. Although the dominating tendency in the present literature is bringing aid back into favour, there is also some kind of agreement around the idea that aid's productivity is subject to diminishing returns.

In addition, beside this optimistic stream, we should not neglect a few influent outliers. Among this pessimistic resistance we find Easterly et al. (2003), Rajan and Subramanian (2005), Jensen and Paldham (2003), Ovaska (2003), Brumm (2003), etc41. These studies are beneficial in the sense that they stimulate the debate and the production of new analysis.

40 Not exhaustive list of recent optimistic aid-growth studies: Durbarry et al. (1998), Hansen and Tarp (2000, 2001), Lensink and Morrissey (2000), Lensink and White (2001), Dalgaard and Hansen (2000), Guillamont and Chauvet (2001), Hudson and Mosley, (2001), Lloyd et al. (2001), Lu and Ram (2001), Chauvet and Guillamont (2002), Dalgaard et al. (2004), Cungu and Swinnen (2003), Dayton-Johnson and Hoddinott (2003, Gomanee et al (2003), Ram (2003, 2004), Economides et al. (2004), Clemens at al. (2004), Heady et al. (2004), Outtara and Strobl (2004), Roodman, (2004).

41 The «pessimistic» articles published in the Cato Journal are amongst the most aggressive against foreign aid. However, we have never seen them cited in any other article. They seem to be a bit too committed to be really reliable.

Though, they also deteriorate the handsome consensus abovementioned. On the other hand, they should not attract too much attention as they clearly represent a small minority of the literature.

Another observation about the optimistic consensus seems to be important. If the majority of studies agree on the fact that foreign aid enhances economic growth, there is no harmony at all on the extent of this improvement. This debate about the degree of unconditional efficiency of aid remains largely inconclusive. Furthermore, as we have seen earlier, some authors may observe a better effectiveness of aid in presence of some conditioning variables. All this together encourages us to qualify the statement that «aid works».

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