Effects of Aid on Recipients: Sectoral Approach International Development Cooperation: Theory & Practice SNU GSIS Effects of Aid on Recipients: Sectoral Approach

Does Aid Work? The objectives of ODA From the OECD definition, ODA should be designed to promote economic development and welfare as their main objectives to stimulate economic growth through building infrastructure, supporting productive sectors such as agriculture, or bringing new ideas and technologies, to strengthen education, health, environmental, or political systems, to support subsistence consumption of food and other commodities, especially during relief operations or humanitarian crises, to help stabilize an economy following economic shocks.

The purpose of most aid is to improve the living standards of people in developing countries by contributing to key services, such as education, health, water and sanitation Aid for this purpose can possibly strengthen economic performance in the long run, but is not likely to lead to faster economic growth in the short or medium term.

Does aid work? Does aid lead to economic growth? Yes vs No In some circumstances With diminishing returns Most studies on aid effectiveness focus on its macroeconomic impact, on the country as a whole, with mixed results and methodological criticisms Does aid improve living standards in developing countries? Aid is working everyday! (Barder 2011) The quality of life in developing countries has improved appreciable over last fifty years, and aid has contributed significantly to this gain. For example, 80% of the world children now get basic vaccinations, over half of which in low-income countries are financed by foreign aid Surprisingly much less research conducted on its impact on social indicators

Aid, Social Development and Growth Interactions and trade-offs

Different Perspectives on Aid effectiveness Aid objectives and effectiveness Objectives evolved from industrialization programs in 1950s to recent poverty-reducing objectives such as MDGs Need to examine whether aid flows have a positive impact on human development Effectiveness of aid can be judged by Sustained economic growth, resulting in permanent improvements in living standards A better quality of life for people in developing countries The alleviation of suffering Effectiveness of sector-specific aid Need to disaggregate aid by specific objective Sector-specific indicators reflecting the objectives

Measuring effectiveness of sector-specific aid Aid objectives and indicators Education Sector Health Sector Objectives (in MDGs) Achieve universal primary education Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria and other diseases Indicators Enrollment rate Completion rate Failure or repetition rates Pupil-teacher ratio Test scores … Life expectancy Infant mortality rate Maternal mortality rate HIV/AIDS rate Immunizations Other factors contributing to objectives Government expenditure Household poverty level Educational status of parents Urbanization Institutions

Effectiveness of aid for education Empirical analysis by Dreher, et al (2008) High per capita aid increases primary school enrollment, while domestic government spending on education dose not.

Effectiveness of aid for health Empirical analyses: conflicting results Williamson (2008) Mishra and Newhouse (2007) (1973-2004)

Limitations of measuring sectoral aid effectiveness Implications Limitations of measuring sectoral aid effectiveness regression model specification data availability CRS sector-specific data is only available after 1990 multi-sector aid, budget support limited indicators Evaluations of aid effectiveness micro-level investigation impact evaluations

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