Fads, Fashions, Fluctuations and
Functionality in Foreign Aid
Robert W. Herdt
Michigan State University
August 30, 2006
Fads, Fashions, Fluctuations and
Functionality in Foreign Aid
• Aid is beset by fads and fashions –
The Silver Bullet Syndrome
– Lead to fluctuations
– Politically driven – Democracy
– Effectiveness and impact > evaluation
• Functionality – Does aid work?
• Does agricultural aid work? What kind?
• Need more agricultural aid that works!
Where does aid go ?
Public services (Education, Health, Population, Water&
Sanitation, Government, Environmental)
Production (Transport & Storage, Energy, Agriculture,
Forestry, Fisheries, Industry, Mining)
Business services (Communications, Banking,
Financial, Business, Trade, Tourism)
Macroeconomic adjustment (Structural adjustment,
Debt relief)
Commodities (Food aid, other commodities)
Relief (relief food, Emergency Distress Relief)
Other multisectoral and unallocated
Fluctuations: Where does aid go?
(from all OECD countries)
five year moving averages, million 2001 $
40,000 Public services
35,000
Production
30,000
25,000 Business
20,000 services
Macroeconomic
15,000 adjustment
10,000 Commodities
5,000
Disaster relief
0
Multisectoral
75
79
83
87
91
95
99
and other
19
19
19
19
19
19
19
What difference has development
assistance made? Does aid…
• Speed economic growth ?
• Sometimes speed growth ?
• Help the poor?
• Improve quality of life?
• Speed human development?
Three views on
aid and growth
(Radelet, 2006)
Does aid work?
i.e. does it speed economic growth?
(Chenery, 1970; Papaneck 1973)
typical first generation effectiveness studies
• Growth rate of GNP (1950s, investment
1960s)
=> savings education region
=> aid
GNP
=> foreign direct investment growth rate
• Significant association:
aid exports
sometimes
• Other Influences?
savings
=> regions
=> exports, manufacturing
=> education
• Significant association: rarely
Why Focus on Growth?
Because it is central to poverty reduction
(... And the data are available)
Source: Dollar and Kraay (2001), from sample of 285 country-years over 1950-1999
Does aid speed economic growth?
(81 countries, 1970s; Mosley, Hudson, Horrell, 1987)
typical second generation effectiveness studies
•=> No significant association of aid with growth
Other Savings
GNP
financial Growth
flows rate Growth of
Exports
Aid Mortality Growth of
Literacy
OPEC GNP/capita Mortality
Prior change
year
When does aid speed economic growth ?
(Burnsides and Dollar 2000) -- typical third generation effectiveness studies
• Growth in GNP, 56 countries, 1970-73, 74-
77, …
• “Good policies” : low inflation, openness to
trade, exchange rate not overvalued,
government budget surplus (“Washington
Consensus”)
• Finding: Aid to governments that have good
policies has a significant, positive effect on
GNP growth
• Advice to donors: concentrate aid on
countries with good policies
• However: Additional analysis: aid is not
significant but economic and weather shocks
are! (Guillaumont and Chauvet, 2001)
• Study results are interesting but not
analytically robust
Functionality: Meta-analysis of Impact
on rate of economic growth
• “First generation studies”: few variables, single
equations relating aid to savings
18 of 39 studies showed positive effects
• “Second generation studies”: Many variables,
several equations; relate aid to growth
40 of 72 studies aid had positive effects; 30 neutral
• “Third generation studies”: multiple equations;
many countries, many years; many conditioning
factors examined – „it depends”
What helps the poor?
(Gallup, Radelet & Warner, 1999)
• Income growth of poorest 20%
• 60 countries (3 SSA), av. 19 yrs growth
• Also examined each available period: 488
growth episodes for 69 countries
• No significant association of growth rates
of population, life expectancy, education,
woman‟s education with income of the
poor
What helps the poor? II.
(Gallup, Radelet & Warner, 1999)
Each 1% growth of average incomes, incomes
of the poor grew 1.2%
Incomes of the poorest 20% grew faster the:
- lower the country‟s initial average income
- higher initial share of poor in total income
- higher initial life expectancy
- more open to international trade
- higher total government savings
- higher the % of government spending on health
and education
- greater political stability
Does economic growth speed
human development?
(Ranis, Stewart & Ramirez 2000)
• Cross-country study relating economic
growth and human development
• HDI not used -- composite index that measures a country's
average achievements in:
– Longevity, life expectancy at birth;
– Knowledge, combination of adult literacy, primary, secondary, and tertiary
gross enrolment rates
– Standard of living, GDP per capita (PPP US$)
• HD measured by the reduction in life
expectancy shortfall from 85; 1970-92
• EG measured by growth in GDP per capita
Capabilities of Human Development Other Gov‟t
Entrepreneurs Spending
Managers
Workers School, Health
Farmers Services
HH spending on HD
Technology
R&D, Transfers Gov‟t
Adaptation Priorities
Income,
Poverty Policy Environment
Social Capital
Composition
Government
Of Output
Income spending
And Exports
Distribution
Domestic
Foreign Aid + Savings
Investment
Gross National Product
Physical
Capital
Does economic growth speed
human development (Ranis, Stewart &
Ramirez 2000)
• Data: 1970-1992, 36 to 76 countries, depending on
data available
• HD positively associated with:
– Government spending on health, education
– Adult literacy
– Female school enrollment in 1965
– NOT with more equal income distribution
• Economic growth positively associated with:
– Higher HD given higher investment
– Higher HD given more equal income distribution
Functionality: Impact of Aid
• Aid associated with accelerated economic
growth under some conditions
• Aid associated with poverty reduction
under some conditions
• When average incomes grow, poor
people‟s incomes grow as much or more
• What about aid to Agriculture?
Fluctuations: Aid to Agriculture
(From all OECD countries)
• AgAid peaked in 1983 at $9 billion
– Fell to less than $5.0 billion by 1997
– Multilaterals went from $4 billion to $1.2 billion
• US aid to ag was 17.5% of US aid in 1980-
81 and 3.9% in 2000
• Aid to agricultural research is 3-4% of total
• Agriculture sector has no convincing story ?
Fluctuations: Aid to ag sub-sectors
OECD 5-year moving average, million $, deflated
35
Policy, administration,
30 services support
Irrigation, land resources,
25 forestry
Area development, crop
20 production, general
Livestock, vet services,
15 fisheries
Research on crops,
10 livestock, fish, forests
Credit, coops, land
5 reform
Fertilizer, other input
0 supply
Extension
75
78
81
84
87
90
93
96
99
19
19
19
19
19
19
19
19
19
Fluctuations: Agricultural Aid
2002 constant $ million
12000
10000
8000 IBRD IDA
Other bilateral
6000
US
4000 Total
2000
0
73
76
79
82
85
88
91
94
97
00
03
19
19
19
19
19
19
19
19
19
20
20
Fluctuations: US aid to Agriculture
$ million
1200
1000
800
Total current $
600
Total 2002 $
400
200
0
73
76
79
82
85
88
91
94
97
00
03
19
19
19
19
19
19
19
19
19
20
20
Fluctuations: Top 6 sub-sectors,
Current $ million
US aid to agriculture
350
300 Policy & admin.
Mgmt
250 Water resources
200
Area development
150
Services
100
50 Alternative
development
0 Agricultural research
73
77
81
85
89
93
97
01
19
19
19
19
19
19
19
20
Fluctuations: Sub-sectors 7-12
Current $ million
US aid to agriculture
180
160 Agrarian reform
140
Agricultural inputs
120
100 Agricultural
80 education/training
60 Agricultural land
40 resources
Forestry policy &
20 admin. management
0 Forestry
development
73
77
81
85
89
93
97
01
19
19
19
19
19
19
19
20
Functionality: USAID
Summary evaluation, McClelland,1996
Policy reform and Projects to build capacity were generally
planning successful – capacity was built
Rural roads, irrigation, Positive, but, impossible to disentangle
electrification effects of infrastructure from the water,
electricity or goods carried
Agricultural services Services like fertilizer sales and credit are
best left to private sector; land reform best
done by national government
Natural resources Five programs all had positive impact to
different degrees – resources protected
Technology development Rates of Return generally very high –
and diffusion – research productivity increased
Functionality: World Bank loans
Completed % satisfactory % satisfactory
evaluations agricultural all loans
1970-73 75 78
mid-1980s 65 80
1996-99 67 71
2000-01 81 78
Africa projects generally low
Functionality: Agricultural Growth?
• Multi-country studies
(Hayami-Ruttan, and dozens more) show
– Agricultural growth depends on:
• Inputs – explain 25-40% of output growth
• Intangibles – explain 50-75%
– Intangibles
• Technology
• Markets
• Human capital
• Institutions
Functionality: Aid impact on Inputs
World Bank irrigation and drainage
• 208 projects 1950-1993: $31 billion
• Summary evaluations
– 70% to Asia (85% of irrigated land)
– “benefits of most projects reached the poor”
– median beneficiaries: 2 ha.
– average ROR: 15%
– 67% >10% ROR (satisfactory)
– All bank projects: 76% satisfactory
Functionality: Aid impact on Inputs
World Bank multiple-goal water projects
• 336 projects completed 1988-99
• Evaluated against multiple goals:
outcomes in agriculture and health,
institutional development, sustainability
– 1988: 40% satisfactory
– 1991: 75% satisfactory
– 1996: 53% satisfactory
• No reference to ROR or impact on
agricultural or economic growth
Functionality: Aid impact on Technology
Research
• 3 to 4% of AgAid since 1980
• Few evaluations of aid for ag research
– But: Many evaluations of agricultural research
And many assessments of CGIAR
• Alston et. al. meta-analysis of 292 studies
reporting 1,886 rates of return
– Median ROR on research was 48%
– Median ROR on research+extension 37%
Functionality: Aid impact on Technology
Crop varieties & CGIAR (Evenson and Gollin)
• Crop varieties in developing countries
– 8000 varieties released 1965-1998
• # releases/year in: 1970s 1980s 1990s
160 240 350
• % of area covered: 1970 1980 1990 1998
9 29 46 63
• 36% were CG crosses + 17% one CG
parent
Functionality: Impact on Human Capital
Higher Education
• World Bank 68 institutions, 25 countries ‟64-‟90
– Strong support in 1970s; apologetic in 1980s;
reversed to strongly positive in 2000
• USAID: 70 institutions in 40 countries 1950-60s
$40 mil, India; $10 mil, Indonesia; $18 mil, Nigeria
Support evaporated in ‟70s: 18 in „74; 10 in „78
• Dozens of evaluations in 1980s (after the fact!):
– India: >1000 MS& PhDs: teaching capacity,
not research
– Nigeria:>44,000 students, lack financial support
– Not Land Grant model – teaching base
Functionality: Impact on Institutions
Agricultural credit 1950-80
• Major component US AgAid: cheap credit;
fertilizer tied to credit; created new government
agencies; required bank credit to agriculture
• Results:
– OK initially
– BUT: Price, Weather reverses => skyrocketing default
– Governments intervene to „forgive‟ loans
– New agencies or programs initiated
– Cycle repeated
• Evaluations:
– “disappointing”; “serious default” “poor farmers unable
to get loans;” “lenders floundering” Adams 1984
– “Impossible to assert that an intervention in the credit
markets is justified” Besley 1998
Functionality: Impact on Institutions
Integrated Rural Development
• “Integrated” provision of advice, soil testing, farm
planning, credit, fertilizer, marketing assistance
• # World Bank IRD projects:
1971-73 1974-76 1977-79 1979-82 1983-85
5 17 24 21 18
49% successful; average 10.4% ROR
• USAID: 1970s to 1987 over 100 IRD projects
1985 evaluation summary: “no longer encouraged”
too complex to manage; extra-institutional
Aid to Agriculture: What works?
• Agriculture aid is as effective as any
• “Intangibles” speed growth
• WORKS: Irrigation, Research, University
development (fellowships)
• DOESN‟T: Integrated rural/area development,
Subsidized credit, Land reform
– Complex institutional requirements
• SHOULD: Price information systems, Cheap
internet access, Cell „phones
Where are we going with
development assistance?
• Millennium Development Goals
– Return to the 1950s?
• Big push to get “take-off?”
– Ends not means?
The MDGs
1: Eradicate extreme poverty and hunger
2: Achieve universal primary education
3: Promote gender equality and empower women
4: Reduce child mortality
5: Improve maternal health
6: Combat HIV/AIDS, malaria and other diseases
7: Ensure environmental sustainability
8: Develop a Global Partnership for Development
MDGs – Target or Diversion?
• Health and education have little short-run
impact on economic growth
• Health and education have short-run
impact on health and education; long-term
on economic growth
• Appropriate agricultural aid contributes to
economic growth
• If 80% of people depend on agriculture,
how will countries fund health and
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How to Help Poor Countries
(Birdsall et. al.)
• Ask/Learn what really matters for development
• Progress mainly in the hands of the countries
• Check temptation to over-promise
• But there are things that can help:
– More aid, more trade
– More control over economic policy
– Development-friendly technologies
– Opening labor markets
How to give effective aid
(Herdt‟s views)
• Choose an appropriate strategy – 20%
– Suited to the problem and available resources
• Carefully identify opportunities beforehand – 20%
– But don‟t let analysis to lead to paralysis
• Find trustworthy, able grantees – 25%
• Provide the funds and get out of the way – 5%
• Evaluation – 30%
• Maintain support 10-15 years or more, until either
– The strategy has succeeded; OR
– It becomes clear it will not succeed
• Universities do Education Best - Fellowships
Building capacity takes a long time and
steady support
• Rockefeller Rice biotechnology program: 1986-2001
• Strategic research $31 mil; Applied $45 mil; Fellowships
$26 mil; Meetings $5 mil; Management $7.5 mil
Accomplishments
Crop molecular map
Genetic transformation
“Golden rice”
400 trained scientists
Anther-culture derived
rice varieties
Capacity in Asia for
informed debate &
policy making
Ongoing work w/local $