Comments on "Foreign Aid Effectiveness And Selectivity: New Results"

Comments on "Foreign Aid Effectiveness

And Selectivity: New Results"

The Massachusetts Avenue Development Seminar (MADS)Center for Global Development

Washington, DCApril 13, 2004

Nicholas EberstadtHenry Wendt Chair in Political Economy

American Enterprise Institute<[email protected]>

“Selectivity” and Aid, 1984-2002

There are indeed indications that the relationship between aid absorption

and local policy climate in low-income areas has been changing

somewhat over time—although not necessarily in the expected

directions…

Sources: The World Bank, World Development Indicators 2003 CD-ROMGwartney, James and Robert Lawson, Economic Freedom of the World: 2003 Annual ReportThe Fraser Institute, 2003.

ODA as Percent GNI vs. Economic Freedom Rating, 1985

y = -1.0891x + 11.314 (-1.49) (3.01)

R2 = 0.0426n = 50

0

10

20

30

40

0 5 10

Economic Freedom Rating

OD

A a

s P

erce

nt

GN

I

1985

Linear(1985)

Sources: The World Bank, World Development Indicators 2003 CD-ROM

Gwartney, James and Robert Lawson, Economic Freedom of the World: 2003 Annual ReportThe Fraser Institute, 2003.

ODA as Percent GNI vs. Economic Freedom Rating, 2001

y = -3.0479x + 24.24 (-2.52) (3.32)

R2 = 0.1076n = 55

0

10

20

30

40

50

0 5 10

Economic Freedom Rating

OD

A a

s P

erce

nt

GN

I 2001

Linear(2001)

Beyond Policy Climate:

Other Possible Criteria and Attendant Indicators For

Measuring Aid Effectiveness • Economic Performance [per capita output, per

capita exports]• Living Standards [per capita output, life

expectancy]• Structural Aid Dependence [ODA/GNI,

ODA/exports, ODA/imports, ODA/FDI]• Admittedly crude indicators—but relatively

reliable data (cf. international poverty lines, etc.)

Disaggregating Performance By Region, 1984-2002

• “Low and Middle Income Countries”: World Bank Designation for All Developing Regions

• East Asia

• South Asia

• Latin America and the Caribbean

• Middle East

• Sub-Saharan Africa

• Also, two “special cases” of highly “political” aid: Israel and the Russian Federation

Note: Constant 1995 US DollarsSource: The World Bank, World Development Indicators 2003 CD-ROM

GDP Per Capita, 1984-2002Relatively Successful Economies

100

1000

10000

100000

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Year

GD

P Pe

r Cap

ita

East Asia &Pacific

Israel

Latin America &Caribbean

Low & middleincome

South Asia

GDP Per Capita, 1984-2002 Less Successful Economies

0

500

1000

1500

2000

2500

3000

3500

Year

GD

P P

er C

apit

a

Middle East

Russia

Sub-Saharan Africa

Note: Constant 1995 US DollarsSource: The World Bank, World Development Indicators 2003 CD-ROM

Note: Series adjusted to 2002 US Dollars by PPI deflatorSources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002

(Paris :OECD, 2004); idem., International Development Statistics, 2002. CD-ROM

Net ODA, 2002 DollarsRelatively Successful Economies

100

1000

10000

100000

Year

Net

OD

A

East Asia

Israel

LatinAmerica/Caribbean

Low Middle Income

South Asia

Net ODA, 2002 DollarsLess Successful Economies

0

5000

10000

15000

20000

25000

Year

Net

OD

A

Middle East

Russia

Sub-Saharan Africa

Note: Series adjusted to 2002 US Dollars by PPI deflatorSources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002

(Paris :OECD, 2004); idem., International Development Statistics, 2002. CD-ROM

Exports per Capita, 1984-2001

Source: The World Bank, World Development Indicators 2003. CD-ROM

Exports Per Capita, 2002 DollarsRelatively Successful Economies

10

100

1000

10000

Year

Exp

ort

s P

er C

apita

East Asia & Pacif ic

Low & middle income

South Asia

Latin America &Caribbean

Israel

Exports Per Capita, 2002 DollarsLess Successful Economies

0100200300400500600700800900

Year

Exp

ort

s P

er C

apita

Middle East

Russia

Sub-Saharan Africa

Source: The World Bank, World Development Indicators 2003. CD-ROM

Sources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004) The World Bank, World Development Indicators 2003. CD-ROM

ODA as a Percentage of Exports,Relatively Successful Economies

0%

5%

10%

15%

20%

25%

Year

Perc

enta

ge o

f Exp

orts

East Asia

Israel

Latin America& CaribLow MiddleIncomeSouth Asia

Sources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)OECD, International Development Statistics, 2002. CD-ROM

The World Bank, World Development Indicators 2003. CD-ROM

ODA as a Percentage of ExportsLess Successful Economies

0%

5%

10%

15%

20%

25%

30%

Year

Per

cen

tag

e o

f Exp

ort

s

Middle East

Russia

Sub-SaharanAfrica

Source: The World Bank, World Development Indicators 2003. CD-ROM

ODA as Percentage of ImportsRelatively Successful Economies

0

5

10

15

20

Year

Per

cent

age

of Im

port

s

East Asia &P acific

Israel

Latin America &Caribbean

Low & middleincome

South Asia

ODA as a Percentage of ImportsLess Successful Economies

0

5

10

15

20

25

Year

Per

cen

tag

e o

f Im

po

rts

Middle East

Russia

Sub-SaharanAfrica

Source: The World Bank, World Development Indicators 2003. CD-ROM

FDI as Percentage of ODA, 1984-2001

FDI as a Percentage of ODARelatively Successful Economies

0%

500%

1000%

1500%

2000%

Year

Per

cen

tag

e o

f OD

A

East Asia &Pacific

Israel

Latin America &Carib

Low MiddleIncome

South Asia

Sources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)OECD, International Development Statistics, 2002. CD-ROM

The World Bank, World Development Indicators 2003. CD-ROM

FDI as a Percentage of ODALess Successful Economies

-20%

80%

180%

280%

380%

Year

Perc

enta

ge o

f OD

A

Middle East

Russia

Sub-Saharan Africa

Sources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)OECD, International Development Statistics, 2002. CD-ROM

The World Bank, World Development Indicators 2003. CD-ROM

Performance Indicators for Developing World and by Region

1984 versus 2002

(regions listed in descending order of overall performance)

Low/Middle Income Countriesc. 1984 c. 2002

GDP Per Capita (1995 $) 972 1279

Life Expectancy at Birth 62 65

Per Capita Exports (2002 $) 185 352

ODA as a Percentage of GNI 1.0% 0.9%

ODA as a Percentage of Exports 5.6% 1.7%

ODA as a Percentage of Imports 4.5% 2.9%

FDI as a Percentage of ODA 47% 279%

Average Economic Freedom Rating 4.6 6.1

Total ODA 1984-2002 (2002 $) 1.2 trillionSources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)

OECD, International Development Statistics, 2002. CD-ROM The World Bank, World Development Indicators 2003. CD-ROM

Gwartney, James and Robert Lawson, Economic Freedom of the World: 2003 Annual ReportThe Fraser Institute, 2003.

East Asia & Pacificc. 1984 c. 2002

GDP Per Capita (1995 $) 367 1048

Life Expectancy at Birth 66 69

Per Capita Exports (2002 $) 81 332

ODA as a Percentage of GNI 0.7% 0.5%

ODA as a Percentage of Exports 3.3% 1.1%

ODA as a Percentage of Imports 3.7% 1.2%

FDI as a Percentage of ODA 99% 751%

Average Economic Freedom Rating 6.1 6.8

Total ODA 1984-2002 (2002 $) 141 billion

Sources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)OECD, International Development Statistics, 2002. CD-ROM

The World Bank, World Development Indicators 2003. CD-ROMGwartney, James and Robert Lawson, Economic Freedom of the World: 2003 Annual ReportThe Fraser Institute, 2003.

South Asiac. 1984 c. 2002

GDP Per Capita (1995 $) 270 486

Life Expectancy at Birth 56 63

Per Capita Exports (2002 $) 28 66

ODA as a Percentage of GNI 1.5% 1.0%

ODA as a Percentage of Exports 21.9% 9.4%

ODA as a Percentage of Imports 13.1% 5.1%

FDI as a Percentage of ODA 2% 47%

Average Economic Freedom Rating 4.6 5.8

Total ODA 1984-2002 (2002 $) 139 billionSources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)

OECD, International Development Statistics, 2002. CD-ROM The World Bank, World Development Indicators 2003. CD-ROM

Gwartney, James and Robert Lawson, Economic Freedom of the World: 2003 Annual ReportThe Fraser Institute, 2003.

Israel c. 1992 c. 2002

GDP Per Capita (1995 $) 14,259 17,068

Life Expectancy at Birth 76 79

Per Capita Exports (2002 $) 4383 6611

ODA as a Percentage of GNI 3.2% 0.8%

ODA as a Percentage of Exports 10.6% 1.9%

ODA as a Percentage of Imports 7.5% 0.3%

FDI as a Percentage of ODA 29% 428%

Economic Freedom Rating 4.2 6.5

Total ODA 1984-2002 (2002 $) 29 billionSources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)

OECD, International Development Statistics, 2002. CD-ROM The World Bank, World Development Indicators 2003. CD-ROM

Gwartney, James and Robert Lawson, Economic Freedom of the World: 2003 Annual ReportThe Fraser Institute, 2003.

Latin America & the Caribbeanc. 1984 c. 2002

GDP Per Capita (1995 $) 3391 4052

Life Expectancy at Birth 66 71

Per Capita Exports (2002 $) 423 771

ODA as a Percentage of GNI 0.5% 0.3%

ODA as a Percentage of Exports 2.1% 1.3%

ODA as a Percentage of Imports 2.1% 1.2%

FDI as a Percentage of ODA 162% 1356%

Average Economic Freedom Rating 4.3 6.4

Total ODA 1984-2002 (2002 $) 101 billionSources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)

OECD, International Development Statistics, 2002. CD-ROM The World Bank, World Development Indicators 2003. CD-ROM

Gwartney, James and Robert Lawson, Economic Freedom of the World: 2003 Annual ReportThe Fraser Institute, 2003.

Middle Eastc. 1984 c. 2002

GDP Per Capita (1995 $) 1843 1988

Life Expectancy at Birth 62 69

Per Capita Exports (2002 $) 728 672

ODA as a Percentage of GNI N/A 0.7%

ODA as a Percentage of Exports 3.3% 1.7%

ODA as a Percentage of Imports 3.0% 2.7%

FDI as a Percentage of ODA 172% 164%

Average Economic Freedom Rating 5.2 6.3

Total ODA 1984-2002 (2002 $) 74 billion

Sources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)OECD, International Development Statistics, 2002. CD-ROM

The World Bank, World Development Indicators 2003. CD-ROMGwartney, James and Robert Lawson, Economic Freedom of the World: 2003 Annual ReportThe Fraser Institute, 2003.

Russiac. 1992 c. 2002

GDP Per Capita (1995 $) 2967 2609

Life Expectancy at Birth 67 66

Per Capita Exports (2002 $) 570 776

ODA as a Percentage of GNI 0.5% 0.4%

ODA as a Percentage of Exports 6.2% 1.2%

ODA as a Percentage of Imports 2.6% 1.3%

FDI as a Percentage of ODA 15% 190%

Economic Freedom Rating 4.1 5.0

Total ODA 1992-2002 (2002 $) 50 billionSources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)

OECD, International Development Statistics, 2002. CD-ROM The World Bank, World Development Indicators 2003. CD-ROM

Gwartney, James and Robert Lawson, Economic Freedom of the World: 2003 Annual ReportThe Fraser Institute, 2003.

Sub-Saharan Africac. 1984 c. 2002

GDP Per Capita (1995 $) 621 575

Life Expectancy at Birth 49 46

Per Capita Exports (2002 $) 188 168

ODA as a Percentage of GNI 4.9% 4.6%

ODA as a Percentage of Exports 12.9% 16.4%

ODA as a Percentage of Imports 12.2% 11.0%

FDI as a Percentage of ODA 13% 74%

Average Economic Freedom Rating 4.5 5.7

Total ODA 1984-2002 (2002 $) 319 billion

Sources: OECD, Geographical Distribution of Financial Flows of Aid to Recipients 1988-2002 (Paris: OECD, 2004)OECD, International Development Statistics, 2002. CD-ROM

The World Bank, World Development Indicators 2003. CD-ROMGwartney, James and Robert Lawson, Economic Freedom of the World: 2003 Annual ReportThe Fraser Institute, 2003.

Preliminary Conclusions

• Did the policy climate in recipient low-income areas improve between 1984 and 2002? Very clearly, yes—improvement was marked and general.

• Did aid “selectivity” and aid “effectiveness” contribute positively to this outcome? The answer to this question is not at all self-evident.

• For low-income, aid-receiving areas as a whole, trends were generally positive for economic performance (up), living standards (up), and structural aid dependence (down).

• But performance “story lines” varied tremendously between regions—with the most heavily aid-dependent areas characterized by measured stagnation, or retrogression, in economic performance and living standards.

• How to explain the striking negative association among regions between high aid levels and poor trends in economic performance and living standards: Measurement error? “Neighborhood effects”? Independent influence of structural aid dependence? Some combination? Other factors?

• Perhaps surprisingly, markedly different performance records for highly “political” aid in different settings: the “story line” for Russia looks rather disappointing, while the “story line” appears more promising.