Catalog

Assessing Aid Effectiveness
ADB Review [ June 2005 ]

Researchers take a fresh look at the impact of assistance, using poverty reduction as the yardstick

By Judy Bryant
Consultant Writer

As the international development community endeavors to achieve poverty reduction, there is increasing urgency in the question: how effective is foreign aid in developing countries? This was the point of the Second High-Level Forum on Aid Effectiveness.

While in the past a country’s economic growth was seen as a measure of the impact of foreign aid, the Asian Development Bank (ADB) working paper Poverty and Foreign Aid Evidence from Cross Country Data, published in March 2005, sought to take “a fresh look from a macro perspective” at the impact of assistance, using poverty reduction as the yardstick for measuring development.

The paper was written by senior statistician Abuzar Asra and consultant Gemma Estrada, both with ADB’s Economics and Research Department; Yangseon Kim, a lecturer with the University of Hawaii’s East-West Center; and M.G. Quibria, an advisor with ADB’s Operations Evaluation Department. They say their approach was motivated by the development community’s growing focus on poverty reduction as an overarching goal rather than economic growth, citing among others, the international community’s adoption of the Millennium Development Goals, and the vision statements of multilateral aid institutions, including ADB’s own goal of reducing poverty in the Asia and Pacific region.

FINDINGS Aid has been effective in diverse countries under diverse policy environments

The researchers based their study on information from six regions—East Asia and the Pacific, Europe and Central Asia, Latin America and Caribbean, Middle East and North Africa, South Asia, and Sub-Saharan Africa.

They examined a menu of issues: how aid affects poverty reduction, if aid effectiveness depends on the size of aid, to what extent is aid effectiveness contingent on macroeconomic policy, the role of quality of governance in poverty reduction, the extent to which aid effectiveness is contingent on quality of governance, the extent to which aid effectiveness varies with a region, and how macroeconomic policy impacts on poverty reduction.

Though the researchers cautioned that their findings should be seen as “tentative,” they say their most important finding is that aid is effective when it is moderate in volume, but becomes largely ineffective when the size of the aid program exceeds the capacity of a country to absorb it.

Their results indicate that while the macropolicy environment and the quality of governance have a direct bearing on poverty reduction, aid effectiveness is not critically contingent on them—on average, aid has been effective in diverse countries under various policy environments with differing quality of governance.

Greater openness in macroeconomic policies was found to help reduce poverty; however, fiscal profligacy associated with big governments could also have a negative impact on poverty reduction.

Poverty reduction has been more effective and more rapid in East Asia and the Pacific, compared with other regions, such as Sub-Saharan Africa. The factors for this, the researchers say, could be social, cultural, or geographical—elements that were not included in their analysis.

The authors hope that their work—an “exploratory first attempt in directly linking poverty reduction (rather than growth) to aid”—will inspire more research.

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