New Directions in Foreign Aid Steven Radelet Center for Global Development June 6, 2005

Some Criticisms of Aid 1. No effect on growth and development 2. Poorly allocated 3. Too many objectives 4. Too bureaucratic 5. Too little local ownership or participation 6. Lack of harmonization & coordination 7. Not performance-based 8. Too little funding, and too little predictability in funding

Three Views on Aid and Growth No relationship, or a negative relationship Conditional relationship: –Depends on recipients (good governance; strong policies) –Depends on donors Positive relationship, on average, with diminishing returns

Disaggregating aid Net aid = gross aid – repayments = “short-impact” aid + “long-impact” aid + humanitarian aid – repayments From: Clemens, Radelet, and Bhavnani, “Counting Chickens When They Hatch: The Short-Term Effect of Aid on Growth,” Center for Global Development

The relationship between aid and growth

Aid and Growth: Core result

Basic Aid Data (2004): Official Flows Global official development assistance (ODA) from major donors: $79 billion US: $19 billion – the largest 24% of the total US constitutes 40% of total donor income 0.16% of US income – 21 st (of 22) Assistance to other countries (e.g., Israel, Russia) – not considered development assistance - $1.5 billion.

Largest recipients of US foreign assistance in 2004 (millions) Iraq $2,944 Afghanistan $875 Egypt $602 Colombia $500 Russia $671 Israel $499 Ethiopia $410 Jordan $372 Sudan $351 Peru $212

Some New Directions Less emphasis on traditional conditionality; more on selectivity and achieving results More emphasis on country ownership and local participation Much discussion (but less action) on harmonization & coordination

Two broad trends Budget, program, or sector-wide support (SWAps, baskets) Issue specific initiatives: –Global Fund –HIV/AIDS programs –Education for All

Millennium Challenge Account: Basic concepts Select a small number of recipient countries based on their commitment to: –“ Ruling justly ” –“ Investing in people ” –“ Establishing economic freedom ” Provide them with large sums of money, Give them more say in designing aid-funded programs, and Hold them accountable for achieving results.

The 16 MCA Indicators

Qualification Requirements Score above the median on: –3 of 6 “ruling justly” indicators. Countries must be above the median on corruption to qualify. –2 of 4 “investing in people” indicators –3 of 6 “establishing economic freedom” indicators. (Inflation: 15% rather than the median)

17 countries selected in 2004 Selected: Armenia, Benin, Bolivia, Cape Verde, Georgia, Ghana, Honduras, Lesotho, Madagascar, Mali, Mongolia, Morocco Mozambique, Nicaragua, Senegal, Sri Lanka, and Vanuatu Exceptions: Added: Bolivia, Georgia, Mozambique Dropped: Bhutan, Guyana, Mauritania, Philippines, Swaziland, and Vietnam