Institute World for Development Economics Research
No. 1/2005
WIDER Thinking Ahead:
the Future of Development
Economics
UNICEF / HQ01-0505 / Shehzad Noorani
The present and the future of development economics
T
he World Institute for Development
Economics Research was established 20 years
ago as the first research and training
centre of the United Nations University to offer policyoriented critical thinking and analysis for the
improvement of the living conditions and sustainable
development of the poorest of the poor. UNU-WIDER
celebrates its 20 th a nniversary by organizing
an international conference on the theme of
WIDER Thinking Ahead: the Future of Development
Economics.
Some 200 participants from academic, policy, UN,
NGO, and other development communities will
participate in this conference on 17-18 June 2005 in
Helsinki, Finland. Approximately 100 papers on all
aspects of the present and the future of development
economics are presented and discussed during the
two-day conference. The conference highlights new and
emerging issues in development, how research
can best address these issues, and the promising
methodologies that can push the frontiers of research
and practice forward.
Programme, papers, list of participants, and other
details are available at:
www.wider.unu.edu
Aid and Poverty Reduction
by Oliver Morrissey
A
id effectiveness has attracted considerable
attention in the economic development
literature since the late 1990s, both in terms
of research publications and policy debates.
Something of a consensus is emerging that aid does
have a positive impact on growth, although
debate remains as to whether or not good policy is
necessary to ensure aid effectiveness.
Recently, research has begun to examine the impact
of aid on poverty reduction. This reflects the
increasing emphasis being placed on poverty
reduction in policy debates, and demands that the
objective of reducing poverty requires an increase in
aid to poor countries (e.g. the UN Millennium Project
and the report of the Commission for Africa). In this
context, what do we know about the effects of aid
on reducing poverty?
Many will be familiar with arguments along the lines
that growth reduces poverty, so if aid is effective in
increasing economic growth it will contribute to
reducing poverty. Advocates of this argument tend to
suggest targeting aid to countries with large numbers
of poor people that also display an ability to use aid
to increase growth (typically, good policy is accepted
as evidence of this ability). This is a reasonable
argument (if growth benefits the poor and aid
increases growth, then aid benefits the poor), but is
not the whole story. On the one hand, growth is not
necessarily pro-poor (even if sustained growth is
important for sustained poverty reduction). On the
other hand, growth is not the only way that aid can
benefit the poor; in stagnant economies aid may
be able to benefit the poor, and even in a growing
economy aid may ensure greater benefits go to
the poor.
It is important to allow for the various ways in which
aid can impact on the poor. Furthermore, it is
important to take a broad concept of poverty.
Improvements in aggregate welfare (better health and
education for example) may benefit the lives of the
poor just as much as reductions in income poverty.
Aid that generates income-earning opportunities or
United Nations University
angle-spring-2005-a.p65
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that provides social services, such as
donor-funded projects in health or
sanitation, can increase welfare
directly and may be targeted on the
poor (even if targeting is imperfect).
Aid that contributes to economic
growth should lead to long-run
increases in aggregate welfare.
Furthermore, much aid is directed
through government spending,
and aid can increase welfare by
increasing expenditures towards
those social services that contribute
to welfare. Box 1 summarizes
the main channels.
The research findings discussed here
allow for these various channels,
especially through the level and
allocation of public spending.
Although some studies do use data
on poverty, comparative crosscountry data on poverty over time is
extremely scarce, and such data as
exist are based on income measures
of poverty (which do not capture all
dimensions of poverty and are not
fully comparable across countries).
Researchers avail of the fact that
there is a strong correlation between
levels of poverty and levels of
aggregate human welfare across
countries, specifically as measured
by the human development index
(HDI) and the infant mortality rate
(IMR). If there is evidence that aid
is associated with higher welfare
(higher HDI or lower IMR), then it
is likely that aid benefits the poor
(at least by improving access to
public services).
Evidence on Aid and Welfare
In an effort to try and capture some
of the channels through which aid
affects welfare, one can include
government spending in addition to
aid as an explanatory variable. One
has to be careful in doing this to
avoid double-counting, as much of
the aid directly finances government
spending (and is therefore present
in both variables). The results
presented here control for this (in
effect, by stripping out the aid
component of government spending). This still leaves the question of
how to measure spending to capture
only those components most
likely to benefit the poor. The
literature suggests that social sector
expenditures health, education, and
sanitation are the most likely to be
pro-poor. Social spending not only
increases human welfare but tends to
do so in a manner that is pro-poor.
Thus, one can define pro-poor
public expenditure (PPE) as the sum
of spending on health, education, and
water and sanitation (as a share
of GDP).
Tables 1 and 2 present results for
HDI and IMR respectively. Three
explanatory variables are reported.
Initial GDP controls for the tendency
of richer countries to have higher
levels of welfare. The PPE variable
captures the efficiency of public
Box 1: Channels for Aid
affecting Poverty
Direct: Aid projects may be
targeted at the poor (e.g.
microcredit)
or
may
support the provision of
public services that are likely
to benefit the poor, e.g.
rural health or primary
education.
Indirect via growth: To the
extent that aid is effective
in increasing economic
growth
this
provides
opportunities for sustainable
poverty reduction.
Indirect via government
spending: M ost aid is
delivered through support for
government spending. If aid
allows for higher levels of
spending on social sectors
(especially health, education,
clean water and sanitation)
this contributes to higher
levels of human welfare. The
poor can be expected to
benefit from enhanced
access to better quality
public services.
Pro-poor policy: Aid underpins a donor-recipient
relationship
and
may
encourage recipient governments to place poverty
reduction higher on their
policy agenda. An example
would include Poverty
Reduction Strategy Papers.
spending in increasing welfare. If the
coefficient is positive and significant,
this implies that public spending (and
aid that finances such spending)
contributes to increasing welfare.
The coefficient on the Aid variable
captures the effects of aid, either
directly through aid projects or
indirectly through growth (as it
is lagged).
There is robust evidence that aid
improves welfare indicators,
HDI and IMR, and this effect is
predominantly through direct
impacts (aid provides incomes or
social services) or growth. This
beneficial effect of aid is present for
low-income and middle-income
countries. We only provide illustrative results here, but this is a
common finding in a number of
recent studies. However, only for
middle-income countries is PPE
associated with increased welfare,
and here only for the HDI measure.
This suggests an issue of concern, as
government spending does not
appear to be very efficient. This may
be in part because the levels of PPE
spending are quite low, especially in
the poorest countries.
Aid effectiveness in benefiting the
poor could be enhanced if the
efficacy of public spending is
increased. Attempts to increase the
targeting of expenditure in areas that
are more likely to benefit the poor
could yield a high pay-off. The use
of aid to guide or influence the
allocation of government spending
offers a way to increase the leverage
of aid on poverty alleviation (the
final channel in Box 1). Increasingly,
aid is being used in the way we
consider, to support public spending
under the HIPC initiative for
example.
Debt Relief, Aid, and the Poor
In most respects debt relief is
equivalent to aid and can be treated
accordingly. Under HIPC, countries
are required to establish a good
record of implementing economic
and social policy reform and prepare
a Poverty Reduction Strategy Paper
(PRSP) indicating how they will
tackle poverty reduction. The funds
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Table 1. Aid, Public Expenditure,
and the HDI
Table 2. Aid, Public Expenditure,
and Infant Mortality
Dependent variable Log(HDI)
All
LowMediumcountries income
income
GDP (initial)
PPE
Aidt-1
N
R-squared
Dependent variable Log(IMR)
All
LowMediumcountries income
income
0.137
(4.57)**
-0.005
(0.57)
0.021
(2.93)**
289
0.17
-0.327
(4.03)**
-0.018
(0.73)
-0.049
(2.65)**
311
0.17
0.185
(3.15)**
-0.017
(1.35)
0.031
(2.33)*
128
0.17
0.096
(3.58)**
0.027
(2.01)
0.021
(3.13)**
161
0.35
-0.187
(2.20)*
-0.005
(0.27)
-0.037
(2.03)*
138
0.11
-0.420
(3.30)**
-0.096
(1.55)
-0.068
(2.21)*
173
0.25
Notes: The data cover an unbalanced panel of four four-year and one five-year period averages over 1980 to
2000 for 104 countries. All variables measured in logs; estimates are fixed effects. Absolute values of t-ratios
in parentheses; *, **, indicate significance at 5% and 1% levels respectively. PPE is a measure of pro-poor
public spending. Explanatory power for fixed effect estimates reported by R2 rather than adjusted R2. The
F-statistic tests the joint significance of all coefficients (rejects the null that all are jointly zero).
Sources: Gomanee, K., O. Morrissey, P. Mosley and A. Verschoor (2005), Aid, Government Expenditure and
Aggregate Welfare, World Development 33:3, 355-370. See also P. Mosley, J. Hudson, and A. Verschoor
(2004), Aid, poverty reduction and the new conditionality, The Economic Journal, 114, F217-F243.
made available by debt relief would
be then channelled into povertyreduction, typically through a
Poverty Action Fund (PAF) that
identifies pro-poor expenditures (i.e.
the PRSP has a similar emphasis to
PPE above).
To qualify for debt relief countries
must demonstrate their ability for
sound economic management
through satisfactory implementation
of policy reforms over three years
under IMF and World Bank
programmes. The inherent defect
with this approach is that the
resources to fund pro-poor expenditures are not released fully until the
end of the process. The essential
pro-poor policies in PRSPs can be
considered under two headings
those relating to the provision of
and access to public services
(like PPE) and those relating to
the rural sector; increased public
spending on the provision of social
services is a central element of
PRSPs. The role of debt relief
itself is to provide increased government resources to finance these
pro-poor policies.
It is generally easier to identify and
implement pro-poor expenditures
than it is to implement an economic
reform programme that includes
pro-poor policies. If the primary
objective is poverty reduction,
therefore, the prior policy is pro-poor
expenditures. Pro-poor policies,
however desirable, are of secondary
priority. The current approach to
HIPC conditionality reverses these
priorities. This is not necessary, as
eligibility for the release of resources
(aid and debt relief) could be based
on pro-poor expenditure criteria.
Reversing these implicit priorities
could enhance the provision and
effectiveness of debt relief.
Aid can and does contribute to
poverty reduction, by contributing to
growth, by providing direct benefits
to the poor, and by supporting and
financing increased social sector
spending. It is evident that more can
be done, especially in improving the
effectiveness of public spending in
delivering improvements in welfare,
especially of the poor. Aid and
donors will continue to play an
important role. It is also evident that
greater coherence is needed debt
relief should be aligned with aid in
tackling poverty, and this means that
the emphasis should be on pro-poor
spending and providing services.
This can be achieved before or in
conjunction with macroeconomic
policy reform, it does not need to
wait until after.
Box 2: Pro-Poor Debt
Relief Sequencing
Aid resources should
be deployed to support
pro-poor expenditures,
the only condition
being the existence of
expenditure monitoring.
Debt relief should be
initiated subject only
to a PRSP plan being in
place. This facilitates
the initiation of propoor policies.
Debt relief can be
accelerated when an
appropriate package of
pro-growth policies is
in place.
Source: O. Morrissey (2004),
'Making Debt-Relief
Conditionality Pro-Poor',
chapter 12 in T. Addison,
H. Hansen and F. Tarp (eds),
Debt Relief for Poor Countries,
Palgrave/WIDER.
Oliver Morrissey is Professor in
Development Economics and the
Director of the Centre for Research
in Economic Development and
International Trade (CREDIT),
School of Economics, University of
Nottingham.
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Effectiveness of Development Cooperation
by Pertti Majanen and Riitta Oksanen
Effectiveness for poverty
reduction and the MDGs
T
he Finnish Government
adopted a new development
policy in 2004. The white
paper links Finlands development
policy and development cooperation
to the framework of the Millennium
Development Goals and the
Millennium Declaration. The main
goal of Finlands development policy
is to contribute to the eradication of
extreme poverty from the world. In
striving towards this goal, Finland
emphasizes the rights-based
approach and the principles of
sustainable development. The 2004
development policy defines three
main strategies for implementation:
(i) promotion of policy coherence for
development; (ii) improving
the quality and effectiveness of
development cooperation; and
(iii) strengthening of partnerships for
development. More than one year
into the implementation of the new
policy, interesting experiences can be
shared from all three areas. In this
article, the focus is on Finlands
efforts to improve quality
and promote effectiveness in
development cooperation.
Doing more and better to
implement the MDG # 8
In the 2004 development policy,
Finland made an explicit
commitment to implement the
Millennium Development Goal
number 8. This goal focuses on the
establishment of a global partnership
for development, and particularly on
the responsibilities of the donor
countries. Finland is committed to
do both more and better to
implement the MDG8.
The MDG8 is related to increasing
the finance for development,
including more ODA, development
of a non-discriminatory trading
system and dealing comprehensively with the debt problems of
developing countries. In terms of
volume, Finnish ODA will be
increased to achieve the 0.7 per cent
GNI share. The growing ODA will
be allocated according to criteria
that reflect the priorities of the
development policy. This means
increasing financing for LDCs, for
sub-Saharan Africa and for
NGO-cooperation.
the commitments made. Finlands
national harmonization action
plan was approved in 2004. The
challenges and priorities have been
identified using the DAC Good
Practice Papers on harmonization
as a frame of reference.
But resources are scarce even if they
are increasing. Best use must be
made of them through improving
efficiency and effectiveness. Parallel to the quantitative commitments,
Finland strongly emphasizes the importance of quality. Systematic work
has been on-going already since the
1990s for quality improvements in
Finlands development cooperation.
Finnish priorities include e.g.:
Finland participates in partner
country-led harmonization processes
for practical results. In some
countries harmonization efforts are
integrated in the implementation of
PRS-processes
and
sector
programmes (e.g. Mozambique), in
others the governments have
launched specific harmonization
processes (e.g. Vietnam). Revision
of the administrative and
management guidelines for Finnish
development cooperation has been
started to accommodate the
principles of harmonization. An
example is the development of the
financial management system
to improve the predictability
of Finnish funding. An interdepartmental harmonization team
has been established in the Ministry
for Foreign Affairs to coordinate,
facilitate, and monitor implementation. One challenge that was
recently highlighted is to strengthen
communication between the country
teams that are responsible for
implementation and the policy
teams.
Finlands quality agenda for
increased effectiveness of
development cooperation
Finlands development policy
establishes a quality agenda for
increasing effectiveness. Efforts
focus on the following priorities:
Strengthening ownership and
poverty-focus through alignment:
Finlands support to partner
countries is always channelled in the
framework of the partners own
priorities. During the past years, the
poverty reduction strategies of
the poor countries have become
the basis for aligning Finnish
contributions. All new bilateral
support is identified in the context
of PRSs.
Programme-based
modalities with joint financing
arrangement (e.g. budget support
and pooled funds for sector
programmes) are increasingly used.
Stronger ownership and increased
poverty-focus are the prerequisites
for sustainable results and effectiveness. Finland promotes the same
principles also when contributing
through the EC and multilateral
institutions.
Harmonization: Harmonization has
been high on the international agenda
since the Millennium Declaration
and the Monterrey conference on
development finance. The OECDDAC is the key forum to follow-up
Focusing on fewer but bigger
cooperation programmes: Concentrating Finlands relatively limited
contributions in a strategic way on
fewer but bigger well-selected
entities is one of the keys for
improved effectiveness and impact.
Major efforts have been put into
this process since 2001. It takes time
since existing commitments need to
be completed in a responsible
manner. The objective is to focus
Finlands bilateral cooperation
increasingly on eight long-term
partner countries (Ethiopia, Kenya,
Mozambique, Tanzania, and Zambia
in Africa; Nicaragua in Latin
America; and Nepal and Vietnam in
Asia). In these countries Finlands
support will be focused on three
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sectors or development programmes
(and budget support may be used to
complement this).
Complementarity and division of
labour based on strengths and
comparative advantage: Finlands
involvement will increasingly be
based on an analysis of the value that
our participation adds. This
approach combined with the strategy
of focusing on fewer cooperation
programmes is the basis
for establishing complementary
cooperation relations with other
development partners. Reducing the
number of actors involved at sector
or programme level in partner
countries, and doing this based on
an analysis of comparative
advantages, is one of the obvious
challenges of the next few years.
Finland welcomes the initiative and
leadership taken by some partner
countries in the form of establishing
joint assistance strategies (e.g. the
JAS in Tanzania) to facilitate
the process.
Results- and outcome-based
management: A shift of focus is
necessary in the management of
development cooperation. The
tradition has been to emphasize
the resources and the input side, and
to micro-manage activities and
operational details. Quoting the
discussions on management for
development results in the Paris
High-level Forum on Aid
Effectiveness this spring: Two
simple guiding questions must
increasingly complement the
traditional emphasis. These are:
Are we being effective? and How
do we know?. In Finland, too, work
is on-going to improve our
results-based management systems.
Major efforts are put into developing the state budget, including a
budget for development cooperation
that uses result indicators. At the
same time, the Ministry has
introduced a new annual reporting
mechanism emphasizing the followup of outcomes and results. This
mechanism is based both on internal
monitoring by the Ministry and
external evaluation by the national
Development Policy Committee.
In results- and outcome-based
management we have a shared
interest with the governments of
developing countries. The partner
governments are accountable to their
parliaments and people for the
correct and effective use of national
and external funds. To justify the
continued use of public funds and to
maintain tax payers support, the
donor governments have to provide
open information on the results
and secure the good quality of
development cooperation. It is,
therefore, in our common interest to
strengthen the poverty-monitoring
systems in the partner countries.
This is an important governance
issue.
Decentralization of the management of development cooperation:
Compared to many peer institutions,
Finlands development cooperation
management is still centralized and
Helsinki-based. Decentralization
will be piloted in four embassies in
2005. A mapping of experiences of
our peer institutions has just been
finalized. A clear message that we
get from colleagues is that for the
effectiveness of development
cooperation, decentralization of its
management to the embassies is the
right solution. Decisions need to be
taken as close to the reality of
implementation as possible. This is
particularly important in the context
of programme-based cooperation
(budget support, pooled funding
of sector programmes).
Working in close cooperation
internationally to promote
effectiveness
For Finland, close international
cooperation for the promotion of
effectiveness has been very
important. The OECD-DAC has
been the leading forum in this
area during the past years. Close
involvement of representatives
of partner countries as well as
multilateral institutions in the DACwork has been an important resource
and very obviously contributed to the
quality of results. Good practice
papers on harmonization and
alignment, work on budget support,
sector programmes and strengthening of public financial management
capacities are examples of the results
of the DAC work that Finland finds
particularly useful. The OECDDAC also provides the framework
to finalize the mechanism for
future monitoring of progress
in effectiveness before the UN
Millennium Event in September
2005.
Effectiveness is also high on the
EU agenda in the discussion on
achieving the MDGs. The EU
made eight commitments when
preparing for the Monterrey
conference in 2002: increasing ODA
levels to achieve the 0.7 per cent
target; promotion of harmonization;
further work on untying of aid;
increased trade related technical
assistance; further work to identify
relevant Global Public Goods;
further exploration of innovative
sources of financing; influence on the
reform of the international financial
system; and efforts to restore debt
sustainability in HIPCs. The EU
is now preparing for the UN
Millennium Event 2005 by taking
stock of progress made and by
discussing new commitments for
accelerated progress.
In addition to the formal cooperation,
Finland is actively involved in the
informal cooperation in the so-called
Nordic+ group (Denmark, Iceland,
Norway, Sweden, Ireland, the Netherlands, UK). Sharing of views and
experiences is particularly useful
in effectiveness issues for peer
encouragement and when needed,
also for peer pressure.
Development cooperation efforts
will only be effective if
complemented by coherent policies
and actions in other sectors that are
relevant for poverty reduction in
developing countries. Promotion of
policy coherence for development is
an enormous challenge that calls for
new kinds of partnerships both
at home and abroad. In its
development policy, Finland is on
this road.
Pertti Majanen, is the
Under-Secretary of State,
Ministry for Foreign Affairs,
Finland; Riitta Oksanen, is an
Adviser on development policy
and management at the
Ministry for Foreign Affairs,
Finland.
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Reshaping the International Aid Architecture
Aid Works, But Lets Make it Work Better by the Joint
Determination of Aid Allocations
by Mark McGillivray
G
I. Introduction
rowth in developing
countries would be lower
in the absence of aid. This
is clear from the results of recent
research on the macroeconomic
impact of aid, evidence from micro
studies, and field experience. One
can reasonably infer that by
implication poverty would be higher
without aid. Aid works, on balance,
therefore. Yet it is also true that aid
has many failings.
Reform to the international aid
architecture should not simply be
reform for the sake of having reform.
It should aim at improving the
developmental effectiveness of aid
by i nter alia a ddressing these
failings. This note addresses three
perceived failings: (i) insufficient
consideration of absorptive capacity
constraints; (ii) under- and overaiding; and (iii) year-on-year
aid instability. It looks at why
they are failing, and floats some
proposals that aim to fix them.
These proposals involve greater
inter-donor coordination of aid
allocation decisions than currently
appears to exist. Ideally, this
coordination should result in the joint
determination of country level aid
allocations, involving all donors,
bilateral and multilateral. The case
for this becomes stronger the greater
the level of global aid, especially if
it reaches the levels called for
to achieve the Millennium
Development Goals.
II. Aid Effectiveness Issues
Absorptive Capacity Constraints
While aid is positively associated
with growth, there can be too much
of a good thing, with aid being
subject to diminishing returns. This
is based on the findings of a number
of studies that tested for nonlinearity in the aid-growth relationship, with aid being positively related
to per capita income growth up to a
certain level of aid relative to
recipient GDP and negatively related
thereafter. This is a seemingly highly
robust finding, with almost all
studies testing for such a relationship
finding evidence of its existence.
These studies find that negative
returns set in when the aid inflow
reaches anywhere between 15 and 45
percent of GDP. This has been
interpreted as indicating limited aid
absorptive capacities, with recipient
governments being limited in the
amounts of aid they can use
efficiently. Even if this constraint was
removed, there will still be an upper
limit to the amounts of aid that an
economy can efficiently absorb. This
issue is especially relevant to fragile
states (those with critically poor
policy regimes and weak institutions)
as they will inevitably have very
limited absorptive capacities, as
conventionally defined. Increased
aid to these countries, in line with
proposals to achieve the MDGs,
could actually increase poverty. Yet
diminishing returns will in principle
always be an issue in all countries;
an economy can only efficiently
absorb aid up to a particular level no
matter how good its policies and
institutions might be.
Absorptive capacity constraints need
to be addressed urgently. Clarity is
required over the precise levels at
which aid impact becomes negative.
The wide range of levels currently
reported in the research literature is
of little operational use to policy
makers. Moreover, these aid levels,
expressed as ratios of GDP, have
typically been obtained from panel
data for diverse samples of countries.
One size will not fit all: country- or
category-specific levels are required.
It must also be recognized that
empirical evidence of diminishing
returns is based almost entirely on
aid flows that have gone to recipient
country governments. There are
other potential, non-government
channels through which aid might be
efficiently provided. There will
presumably be optimal levels of aid
that each channel can absorb, and
information is needed on these
levels. The different forms in
which aid is provided will
require individual consideration.
Information is also needed on how
to increase the absorptive capacities
of the various channels. Both the
research and donor communities
should collaborate to work towards
the provision of this information. The
donor community should provide aid
amounts up to but not beyond these
optimal levels, working directly with
government and non-government
sectors in developing countries.
Under- and Over-aiding
In an ideal world the donor
community would provide aid to all
recipient countries up to the point at
which the incremental impact on
poverty falls to zero in each. 1
Moreover, in such a world the
incremental efficiency of aid should
be equal in all recipients, so that
reallocating a given amount of aid
from one country to another results
in no change in global poverty.
The second of these criteria is
perhaps an impossible dream. But
the first is not, and it should be a
guiding principle for donors.
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The current evidence suggests
that fragile states as a group are
substantially under-aided, having
received far less aid than their
populations, per capita GDPs and
policy and institutional performance
levels would predict.2 B ut there
appears to be tremendous diversity
within this group, with some
countries being over-aided and
others being under-aided, in this
sense. The under-aided countries are
typically those of little global
political or strategic significance and
supported by relatively few donors.
While this information doesnt quite
tell us how donors are performing in
terms of the first above-mentioned
criterion, it certainly rings alarm
bells. Nor does it tell us anything
about less fragile states; under- and
over-aiding is relevant to all aid
recipients.
What would appear to be needed is
the better absorptive capacity
information, and coordination
among donors to minimize
deviations from the maximum
levels of aid consistent with these
capacities. While this ideally
requires agreement among donors
regarding aid allocation criteria and
allocative processes, it certainly
requires much greater coordination
among them.
Aid Instability
Year-on-year instability in
government revenues is bad for
growth and poverty reduction. Yet
research shows that aid inflows are
more volatile than other sources of
developing country government
revenue. Fragile states are particularly subject to this phenomenon, as
aid to these countries appears to be
roughly twice as volatile as aid
to other low-income countries.
Possibly worse still, the volatility of
flows to the under-aided countries is
roughly twice that of the aid to the
over-aided countries. This would
on the surface be a relatively
straightforward matter to address.
Donors need to be more conscious
of aid allocations over time, seeking
to stabilize year-on-year variations,
possibly through increased use of
longer-term partnership agreements.
But it is also a matter of greater
coordination among donors, as a
lack thereof could inter alia simply
make smaller year-on-year variations
much larger.
III. Whats Next?
The absorptive capacity, under- and
over-aiding and instability issues
discussed above all converge. The
second and third of these issues arise
if there is deviation, spatial and
inter-temporal, from aid levels
corresponding to full capacity or
optimal levels. Thus there is a clear
message for the research community,
which is to do more work and
provide more operational clarity on
absorptive capacities. It is up to
donors to both evaluate and use
where appropriate this information.
Yet this is only part of the story.
Donors need to decide how to use it,
on what to do. This includes
decisions on appropriate channels
within recipient countries, so as to
alleviate absorptive capacity
constraints. Beyond this, what
donors will hopefully do is better
coordinate among themselves to
ensure that variations from optimal,
poverty reducing country level
allocations are minimized.
One way of achieving the preceding
outcome is, of course, some sort of
global fund that administers all aid.
But that will not happen. Less
utopian is the joint determination of
recipient country level allocations.
This would involve all donors,
bilateral and multilateral, or if not at
very least the largest agencies,
coming together to finally decide
how much aid will be allocated in
the following year or years and
then acting in accordance with
these decisions. If the DAC, in
conjunction with major multilateral
agencies can organize senior level
fora on selected policy issues, why
cannot it organize a similar annual
event specifically to coordinate
inter-recipient aid allocation?
Recognizing that politics imposes
constraints on bilateral agencies,
selected multilateral agencies could
play a balancing role in this
process, ironing out any residuals
between actual and optimal
allocations to the full extent
possible. This is broadly consistent
with the Multilateral Balancing
Fund recently proposed by DFID.
If joint determination is not possible
across the board, for all country-level
aid allocation decisions, then it at
least should be possible for certain
country groups. The fragile state
group, arguably that with the
greatest per capita need for aid, is
a good starting point.
1 T his reasonably assumes an
inverted-U relationship between aid
and poverty, consistent with
the absorptive capacity issue
just discussed. Ideally this
relationship would be observed
directly, using data on aid and
poverty. But given the lack of
poverty data one would need to use
GDP data instead, drawing
appropriate inferences for poverty
reduction. The best approximation of
this outcome is the level of aid
at which the incremental impact on
per capita GDP growth reaches zero.
2 T he fragile state for the
current purposes is defined as
one belonging to the bottom two
quintiles of the World Banks
Country Policy and Institutional
Assessment (CPIA).
This paper was originally prepared
for the OECD Development Centre
Workshop The International Aid
System: What's Next?, held on
4 February 2005 at the OECD
Headquarters in Paris.
Mark McGillivray is the Director
of WIDER research projects
Measuring Human Well-being,
Development Aid: a Fresh Look
and Millennium Development
Goals: Assessing and Forecasting
Progress.
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Aid Volatility & Aid Heterogeneity
by George Mavrotas
R
ecent years have witnessed
a growing interest in aid
effectiveness issues and
although recent empirical work
seems to suggest that overall aid
works in enhancing growth a number
of issues still remain unresolved.
An issue that has attracted
particular attention quite recently
is related to the volatility
of aid inflows.
The issue of volatility of aid
inflows is now becoming particularly
important in view of the ongoing
discussion and debate on how
to finance the Millennium
Development Goals (MDGs). Aid
volatility, and in particular
the unpredictability of aid flows,
is of crucial importance for the
attainment of the MDGs.
Aid volatility issues have also
been raised recently within the
context of the British proposal for an
International Finance Facility (IFF),
a mechanism to frontload aid flows
so that MDGs can be met by 2015.
Very recently, aid volatility
issues have also been briefly
discussed in connection with aid
to difficult partnership countries
and fragile states.
Finally, there has been much
recent debate on whether more
aid can be spent effectively in
developing countries, particularly in
sub-Saharan Africa, in view of
potential absorptive capacity
constraints and diminishing
returns to aid.
However, despite these pressing
policy questions, there has been
surprisingly little empirical work on
the measurement of aid volatility.
Using simple measures of aid
volatility a few papers have found
that aid volatility is bad for economic
growth, ceteris paribus, and that aid
is often among the most volatile
sources of foreign exchange income.
volatility, since they are designed to
deal with local economic and social
crises. On the other hand, sector aid
volatility, which is designed to
promote investment in physical and
Lehtikuva / AFP PHOTO / Jewel Samad
Aid volatility issues of growing
importance for the attainment
of the MDGs
The international community responded rapidly to provide aid
to the victims of the tsunami disaster
More recently, it was found that
aid flows are more volatile than
domestic fiscal revenues and tend
also to be pro-cyclical; another
finding was that fiscal planners are
highly uncertain of aid receipts,
the information content of aid
commitments being either very small
or statistically insignificant.1
Linking together aid volatility
and aid heterogeneity is crucial
One drawback of much of the recent
work on aid volatility (and actually
of the aid effectiveness empirical
literature a as whole) is the use of a
single aggregate for aid. However,
distinguishing among different aid
modalities is crucial, because
different types of aid are likely to
have different degrees of volatility.
Furthermore, different aid modalities
have different conditionality. Certain
types of aid such as emergency aid
and, arguably, programme aid,
should exhibit a high degree of
human capital, is more likely to be
detrimental to long-term economic
and social development.
New evidence on aid volatility
The present article briefly discusses
new evidence obtained on the
volatility of aid by a very recent
WIDER empirical study on the
subject conducted by Fielding and
Mavrotas (2005). The key purpose
of the above study (which was
prepared within the WIDER project
Development Aid: A Fresh Look)
was to determine the factors driving
the cross-country variation in aid
volatility. The approach employed
differs from previous studies in
a number of ways:
First, the important issue of aid
heterogeneity was taken into account
instead of treating aid as a single
aggregate. In view of this, the
WIDER study focused on two types
of aid, namely sector-specific aid
(i.e. project aid) and non-sector
8
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allocable aid (programme aid)
which, if taken together, make up
more than 95 per cent of total aid
volumes.
important factors concerning the
volatility of programme assistance.
S econd, the key volatility
concept that was employed was that
of a shock to aid, so the aid series
were conditioned on an information
set of lagged macroeconomic
variables.
The above empirical findings
emphasize inter alia the importance
for donors of speedy implementation
of the Rome Declaration on Aid
Harmonization, which will lead to
substantial reductions in aid
volatility.
Third, the work explored the
factors affecting aid volatility by
using a modelling framework that
includes the size of aid flows, per
capita income, institutional quality
and policy regime in aid recipients.
Finally, the study examined aid
volatility using data for 66 aid
recipients spanning the period 19732002 thus incorporating more recent
data on aid volatility as compared to
earlier work.
Key findings of the WIDER
aid volatility study
Sector aid volatility is positively
correlated with programme aid
volatility:
a 1 per cent increase in aid as a
proportion of GNI is associated with
a fall in conditional sector aid
volatility of around 0.16-0.17 per
cent, and a 1per cent increase in per
capita income is associated with a
rise in volatility of around 0.35-0.40
per cent; similar results were found
regarding programme aid volatility,
despite the fact that programme
aid is rather more volatile than
project assistance;
the institutional quality of the
aid recipient seems to reduce the
volatility of sector aid;
more open economies, which
tend to be smaller and richer, ceteris
paribus, experience more volatile
sector aid flows;
the quality of institutions and
the degree of openness in
aid recipients do not seem to be
Some policy implications
More generally, it is imperative
that donors explore new sources of
financing accompanied by less
volatility (for example, the IFF) so
that the MDGs can be attained
by 2015.
Last but not least, the WIDER
study points to the importance of aid
heterogeneity in explaining the
volatility of aid inflows. This has
crucial policy implications
with respect to progress towards
achievement of the MDGs, since the
differing degrees of volatility would
not be apparent if a single aggregate
for aid were employed. This is
particularly important for aid
recipient governments who are
attempting to manage aid volatility
by some combination of adjustment
to tax and spending plans,
adjustment of foreign exchange
reserves or domestic non-monetary
financing. For these countries,
improved forecasting of both shortterm and medium-term aid is
also crucial.
George Mavrotas is a Research
Fellow & Project Director
at UNU-WIDER currently
co-directing two WIDER
research
projects
on
Development Aid: A Fresh
Look with Mark McGillivray
and
Financial
Sector
Development for Growth and
Poverty Reduction, with
Basudeb Guha-Khasnobis.
1 Bul, A. and J. Hamann (2003),
Aid Volatility: An Empirical
Assessment, IMF Staff Papers,
50: 65-89.
Recent WIDER papers on aid
volatility & aid heterogeneity
Fielding, D. and G. Mavrotas (2005),
The Volatility of Aid, WIDER
Discussion Paper No. 2005/06,
Helsinki: World Institute for
Development Economics Research.
Mavrotas, G. (2003), Which Types
of Aid Have the Most Impact?,
WIDER Discussion Paper No. 2003/
85, Helsinki: World Institute for
Development Economics Research.
Mavrotas, G. and B. Ouattara (2003),
Aid Disaggregation, Endogenous
Aid and the Public Sector in
Aid-Recipient Economies, WIDER
Discussion Paper No. 2003/15,
Helsinki: World Institute for
Development Economics Research,
forthcoming, Review of Development Economics 2006.
Mavrotas, G. and B. Ouattara (2003),
The Composition of Aid and the
Fiscal Sector in an Aid-Recipient
Economy: A Model, WIDER
Discussion Paper No. 2003/11,
Helsinki: World Institute for
Development Economics Research.
Mavrotas, G. and B. Ouattara (2005),
Public Fiscal Behaviour and Aid
Heterogeneity in Aid-Recipient
Countries, Journal of Developing
Areas, forthcoming.
Mavrotas, G. (2002), Foreign aid
and Fiscal Response: Does
Aid Disaggregation Matter?,
Weltwirtschaftliches Archiv (Review
of World Economics), Vol.138,
No.3, pp. 534-559.
Mavrotas, G. (2002), Aid and
Growth in India: Some Evidence
from Disaggregated Aid Data,
South Asia Economic Journal ,
Vol. 3, No.1, pp. 19-49.
9
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Equity, Economic Growth, and Aid in Finland
by Markus Jntti
F
inland is now a solid member
of the European Union and the
OECD. While Finland is not
one of the richest countries, as
measured by GDP per capita, its
economic performance has been
quite adequate. Finland is far from
the top of the league table of aid
donors and lies behind both UN
recommendations and its own set
goals. Finland is, however, more or
less in the middle pack of aid donors
among OECD countries.
It is worth recalling, however, that
Finland is a fairly late arrival among
the high-income countries. Finland
was a recipient of multilateral aid as
late as in the 1970s. Drawing on
recent work commissioned by the
World Development Report team
and conducted in part at WIDER,
I point to the severity of several
crises that occurred since 1860,
including the famine of 1867-68, the
civil war in 1918, and mass
migration in the 1960s. I also point
to a number of equity-oriented
reforms, undertaken in part to
resolve social conflicts, which may
have contributed positively to
economic development. Thus, while
Finland is known as a quite tranquil,
prosperous, ICT-intensive, and
egalitarian country in the European
periphery, things were remarkably
different 140 years ago.
The Great Famine of the 1860s
The three deepest dips in Finnish
population growth post 1860
occurred in 1867-68, 1918, and 1969
(population growth was of course
very slow during World War II). The
famine of the 1860s occurred after
several years of poor harvests, driven
in large part by bad weather
conditions. A very bad harvest in
1867 led to mass migration from the
hardest hit rural areas into the larger
cities, where the migrated persons
were gathered in various temporary
poor houses and often put to work
in various public works projects.
While many deaths occurred even in
the countryside, so to speak on
location, mortality in the urban
areas and poor houses reached very
high levels. A significant cause of
death was typhoid fever and other illnesses that could spread easily in the
dense and unhygienic conditions that
prevailed in the poor houses and
which the undernourished migrants
contracted easily.
The poor harvests were driven by
bad weather conditions, but Finnish
agriculture had throughout the 19th
century suffered from poor harvests
driven by bad weather. It seems, the
very large increase in mortality that
occurs during a famine requires
additional problems. An important
circumstance that contributed to the
social upheaval during the 1860s was
the fact that Finland, at that time an
autonomous part of the Russian
empire, had by the Czar been granted
the right to issue its own currency,
the silver Markka. With the need to
build up foreign currency reserves in
anticipation of the issue of the
Markka, Finnish economic policy
(which as conducted independently
of Russia) was during those
years very restrictive. This may have
contributed both to lower
purchasing power among the rural
communities, making it more
difficult to make up for the shortfall
in grain by buying it from markets,
and to an unwillingness on the part
of central government to import,
rather than export, grain. Indeed,
when a decade later Finland was to
move to the gold rather than silver
standard, many who had in the 1860s
supported the tight fiscal stance had
considerably more sympathy for
its critics.
Civil War in 1918
The causes of the Finnish civil war
of 1918 are under considerable
debate. The immediate reason was
the fact that parliament, which had a
socialist majority, was dissolved by
the then narrowly non-socialist
controlled senate (government).
A contributing factor to this
political crisis and its escalation into
a bloody civil war was that despite
having been on the agenda for
several years, a land reform to
provide farms for crofters farmers
who rented a less than 0.5 hectare
farm was yet to be implemented.
The civil war was fairly brief,
lasting from January to early May in
1918. Some idea of the level of
hostilities, however, can be gleaned
from the causes of death on the red
(i.e., socialist) and white (nonsocialist or bourgeoisie) sides. The
overall death toll was 34,277 persons
(27,426 reds, 4,821whites and 2,030
others). Of the reds that died,
however, less than one in five, i.e.,
5,324, persons died in battle. Most
of the reds died of executions and
murders (7,207) or perished from
hunger or diseases in prison camps
(11,785) after the war. While a
number of whites were also
murdered, the vast majority of those
on the white side who did die were
killed in action.
Land Reform Act of 1918
A land reform act which allowed
crofters to purchase, through a
publicly-regulated process, their
farms was enacted in the fall of 1918,
just months after the prison camps
closed. A few years later parliament
passed a law that gave public loans
to farmers who had acquired farms
using the land reform act in order to
enlarge their farms.
The land reform act was passed by a
coalition of moderate bourgeoisie
parties and social democrats. It can,
at least in part, be understood to have
been enacted to avert further violent
unrest. Indeed, the 1920s were a
period during which many modern
progressive reforms were enacted.
Legislation that made primary
schooling compulsory was enacted
in 1926, although its full implementation took a few decades. Infant and
10
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LEHTIKUVA / HEDE-FOTO
maternity care was
centrally developed,
progressive income
and wealth taxation
was
introduced
starting in 1920 and
the separate taxation
of married couples
income was enacted in
1936 after having been
debated since the inception of progressive
income taxation.
reforms can be
debated, at the very
least many of these reforms created a setting
in which economic
actors chief among
them labour unions
and employers had
fewer conflicts to
resolve and could,
therefore, concentrate
on
productive
activities.
Thus, many equityIt is useful to recall in
oriented reforms were
the current debate on
enacted quite soon
development aid that
after a bloody civil
Helsinki was seriously damaged during World War II
Finland
received
war. The reality of
substantial assistance
politics is quite complex and
which central government has
from other countries during its
assigning a conscious, united will
intervened in the economic process
golden age. Early on in the form
to further equity to these reforms
in Finland. It is arguably just a
of Marshall Aid and through
would probably be unjustified.
different way of resolving conflicts.
multilateral organizations, such as
Their enactment did, however,
the World Bank, whose first loan to
Finnish economic development
require much consensus. It seems
Finland was given in 1949. The last
from the 1950s onwards is fairly
reasonable to assign part of the
World Bank loan was granted as late
well-known. State intervention,
reason that so many reforms of this
as in 1972. It is possible that a
using a variety of methods over time,
type came into place to the recent
critical examination of the Finnish
was frequent. Economic growth and
memory of civil war and the turmoil
development experience would help
industrialization proceeded at a fairly
that both preceded and followed it.
in the design of bilateral aid
rapid pace, as witnessed by Finlands
and bolster the case for a more
catching up, in relative terms, the
Post World War II developments
pluralistic view of how multilateral
income levels of other industrialized
aid institutions are run. While the
Finnish economic policy in the
nations. While Finland now has one
Finnish experiences can not provide
post-World War II period has often
of the most equal distributions of
the blueprints for development
been characterized as corporatist
income in the world, historical data
cooperation, they can and should
and driven by consensus. Arguably,
suggest that inequality has not been
be noted. In particular, state
however, central government
low for a very long time. Indeed,
intervention and the management of
continued to provide in the 1950s
inequality seems to have increased
social risk have worked through
and late 1960s what it had done in
substantially from 1950 to the
many different mechanisms and
the 1920s, namely an institutional
late 1960s.
have at the very least been
framework within which private
compatible with, and have possibly
producers could operate with little
What can we learn from Finnish
been supportive of, beneficial
fear of unproductive conflict. In the
experiences? An important lesson is
long-term development.
agricultural society of the 1920s,
that while Finland is today a country
land reform may have been the chief
with low income inequality, stable
Acknowledgements: The author is
way of solving conflict in the
political conditions, and an extensive
grateful to Juho Saari and Juhana
economy. In the 1950s and 1960s,
social safety net, these are of
Vartiainen for permission to use
wage and price freezes and social
fairly recent origin. Finland has
material from our working paper, to
policy legislation were used as
experienced during the past
Lauri Sarkki and Vappu Ikonen for
methods to pacify the now industrial
4-5 generations substantial
information on loans to Finland
conflicts. In the late 1960s,
humanitarian crises and is a late
from the IMF and World Bank.
governments refined their ways to
arrival among the rich club of
intervene by participating directly,
nations. The development of various
starting in 1969, in the wage
equity-oriented reforms land
Markus Jntti is Professor of
settlements between labour unions
Economics at the bo Akademi
and educational reform, various
and employers organization.
University, in Turku, Finland and
mechanisms for handling social
a Senior Research Associate at
risks, such as old-age pensions and
WIDER. He has published widely
This latest stage of state intervention,
family benefits pre-dated rapid
on income distribution issues.
government-sponsored collective
economic development. Even if the
bargaining, is the best known way in
causal effect on growth of such
11
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Effective Aid to the Pacific: Big Challenges in Small States
by Simon Feeny
T
he Pacific region covers
Melanesia, Polynesia, and
Micronesia. Its developing
countries and territories include the
Cook Islands, Federated States of
Micronesia, Fiji, Kiribati, Marshall
Islands, Nauru, Niue, Palau, Papua
New Guinea, Samoa, Solomon
Islands, Tokelau, Tonga, Tuvalu,
Vanuatu, and Wallis and Futuna.
Although important differences
exist, Pacific countries are generally
characterized by political instability,
large inefficient public sectors, large
informal sectors, ethnic tensions, and
a vulnerability to external shocks
such as natural disasters and falls in
the prices of their key exports.
Although some Pacific countries are
rich in mineral resources, they are
primarily reliant on agriculture and
fishing for income and employment.
Development in Pacific countries is
constrained by their geographic
remoteness, and the small size of
their domestic markets. Recently,
there has been a renewed interest
from the international community in
the Pacific region, due to the poor
performance of a number of countries and concerns over regional
security and stability. Questions have
been raised regarding whether
foreign aid to the region has been
effective and how to make it more
effective in the future. This article
offers answers to these questions.
Pacific Countries are Large
Recipients of Foreign Aid
Pacific countries receive the highest
amounts of per capita aid in the
world. Most aid has been bilateral
from Australia, Japan, France, and
New Zealand. The majority of aid
flows have been provided in the form
of grants with a large component
provided as technical assistance. In
2002, Pacific countries received an
average of over US$700 of aid per
capita and aid flows accounted
for an average of 20 per cent of
countries Gross National Income
(GNI). These figures are very high
in comparison to other regions in
the world (see Table 1).
Yet Pacific Countries Have
Experienced a Mixed Record
of Development
Despite receiving large amounts of
foreign aid, Pacific countries have
failed to prosper. While there have
been some important improvements
in some measures of well-being, real
per capita incomes in some Pacific
countries have fallen in recent
years and poverty and inequality
have increased. This makes the
achievement of the Millennium
Development Goals (MDGs) in the
region particularly challenging.
Melanesian countries have fared
particularly poorly. Recent
deterioration of living standards has
been most acute in the Solomon
Islands and in Papua New Guinea.
These two countries are now
commonly referred to as fragile
states. However, the World Banks
Country Policy and Institutional
Assessment (CPIA) ratings indicate
that at least another three countries
could be classified as fragile states.
These countries are Kiribati, Tonga,
and Vanuatu, each of which belong
to the bottom two quintiles of the
ratings. CPIA ratings for other
Pacific countries are not available
but many of them have experienced
similar problems.
Recent Aid Initiatives
Providing aid to the Pacific
highlights many of the challenges
donors face when engaging with
fragile states throughout the world.
When there are serious doubts over
the capacity of recipient public
sectors to manage aid inflows
effectively, alternative mechanisms
for providing aid can be used.
Foreign aid can also be used to
strengthen the capacity of public
sectors. The difficulties experienced
by some Pacific countries have led
to unique responses from Australia.
Civil and political unrest in the
Solomon Islands led to the Regional
Assistance Mission to the Solomon
Islands (RAMSI) in 2003. The
Mission, led by Australia, includes
the personnel from ten countries
positioned in the Solomon Islands to
restore peace and security and
stabilize government finances.
Further, in 2004, the Enhanced
Co-operation Program (ECP) in
Papua New Guinea led to a number
of Australian public servants taking
positions in various government
departments to help strengthen law
and order and improve the level
of economic and public sector
management. Although it is too
soon to effectively evaluate the
effectiveness of such interventions,
and the ECPs future is uncertain
given recent challenges in the Papua
New Guinea Supreme Court, these
interventions are likely to provide
important lessons for other donors
when engaging with fragile states.
Has Foreign Aid Been
Effective?
For some commentators, the association between poor growth rates and
high levels of foreign aid has been
enough to conclude that aid has been
ineffective in the Pacific. Some
commentators have gone further
suggesting that aid has been part of
the regions problems rather than the
solution. However, evaluating aid
effectiveness is more complex than
examining simple associations.
Pacific countries have experienced
poor economic growth rates for a
number of reasons. When evaluating
the impact of foreign aid it is
important control for these other
factors and this is the role of
empirical aid effectiveness research.
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Surprisingly little empirical research
has focused on evaluating aid
effectiveness in the region. Pacific
countries are often excluded from
the analyses of previous aid
effectiveness studies, examining the
impact of foreign aid on economic
growth, due to the paucity of their
data. Although it is clear that foreign
aid to the Pacific has not been a
resounding success, it is heartening
that the few studies investigating the
issue indicate that foreign aid has
been effective at increasing
economic growth in selected Pacific
countries. This evidence suggests
that foreign aid has not contributed
to the poor economic performance
of these countries and that their
growth rates would have been lower
in the absence of aid.
Issues When Evaluating Aid
Effectiveness in the Pacific
The finding that foreign aid spurs
economic growth in the Pacific is
encouraging. However, it is often
asserted that the relationship
between economic growth and
poverty reduction in Pacific
countries is weak. This is because the
benefits of economic growth often
dont reach those in isolated rural
areas. The importance of sustained
economic growth in the region
should not be understated. But,
since poverty reduction and the
achievement of the MDGs are the
central objectives of international
donors these are the yardsticks that
should be used for evaluating aid
effectiveness. Unfortunately, poor
data availability often prevents such
an exercise.
However, recent research evaluating
the impact of aid to Melanesian
countries has attempted to move the
emphasis of aid effectiveness placed
on economic growth. The research
finds that although foreign aid has
been associated with higher overall
economic (GDP) growth, aid has had
no impact on agricultural GDP
growth. Since the majority of
people in the Pacific (and in many
other developing countries) live in
Table 1: Aid to the Pacific, 2002
Region
Average Aid per capita $US Average Aid as a % of GNI
Africa
Asia
Americas
Europe
Pacific
82
51
71
81
701
13
8
3
5
20
Source: OECD International Development Statistics Online Database 2005
rural areas, reliant on agriculture
for their livelihoods, increases in
agricultural GDP are more likely to
be associated with improvements in
well-being. Anecdotally this finding
is not too surprising. Although some
aid projects in Melanesia have a
rural focus, the vast majority of aid
projects are national in nature and
based in urban areas. Although the
rural sector could benefit from such
projects, and from economic growth
in general, there is a strong case for
more targeting of foreign aid to the
rural areas of the Pacific. Providing
greater assistance to those in rural
areas will reduce the rising tide of
rural-urban migration, reduce
vulnerability to external shocks and
stem increasing levels of inequality.
Removing the emphasis from
economic growth to agricultural
growth is potentially important for
evaluating aid effectiveness since it
can provide greater insights into the
impact of foreign aid on poverty.
There are a number of important
reasons why evaluating aid effectiveness in the Pacific is particularly
difficult. The first is that the
availability and reliability of data for
Pacific countries creates problems
for empirical research and makes
accurate tracking of development
progress difficult. Second, a large
proportion of foreign aid provided
to the Pacific is in the form of
technical assistance projects aimed
at improving governance. Improving
governance is currently the focus of
aid donors in the Pacific. Examples
of aid activities include improving
law and order, strengthening institutions, and reform of the public
sector. Such projects are designed
to impact on long-term development
and their effects are therefore
very hard to capture empirically.
Studies commonly evaluate the
impact of aid on economic growth in
the short term. Similar arguments
apply to aid projects in the health and
education sectors. The benefits from
such projects are likely to take many
years to have substantial impacts
and their effectiveness should not
therefore be assessed using
conventional methods.
Conclusion
Pacific countries have been large
recipients of foreign aid yet some
have experienced recent economic
and social decline. Some Pacific
countries are referred to as fragile
states and provide a big challenge for
foreign aid donors. Despite the
poor economic record of many
countries in the Pacific, there are
some encouraging signs that foreign
aid has been effective at spurring
economic growth. The current
emphasis of aid donors to the Pacific
is to improve the level of governance.
Evaluating aid of this nature is
difficult since its beneficial impacts
may take years to materialize.
Further, while it is true that
good governance is crucial for
development, improving governance
is difficult and will take time. With
only ten years left to achieve the
MDGs in the region, short-term
poverty reduction and improvements
in well-being must also be priorities.
Greater targeting of aid to those in
the rural and agricultural sectors
will assist with these goals.
Simon Feeny is a Lecturer at
RMIT University, Melbourne,
Australia. He was previously a
Postdoctoral Research Fellow,
sponsored by the Australian
Agency for International
Development (AusAID). He is
also a former WIDER intern.
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WIDER Publications
New Titles
2004 Annual Lecture
WIDER Annual Lecture 8
Rethinking Growth Strategies
Dani Rodrik
November 2004
New in paperback
Guest Editors: Ravi Kanbur,
Anthony J. Venables and
Guanghua Wan
Growth, Inequality, and Poverty:
Prospects for Pro-Poor Economic
Development
Books
Poverty, International Migration
and Asylum
The Lecture addresses one of the
core issues in development: how can
low income countries achieve faster
rates of economic growth? Rodrik
proposes a move away from a
blanket prescription and towards an
alternative strategy which focuses on
the particular constraints that prevent
a given country from growing
faster. The consequent policy
recommendations may be quite
different for countries that appear
superficially to share similar
problems, or for the same country at
different points of time. Rodrik
makes a persuasive case for an
alternative strategy which has
profound implications for the
construction of economic policy
in developing countries.
Journal
Review of Development
Economics
Vol 9 No 1 February 2005
Special Issue: Spatial Inequality
and Development in Asia
Edited by George J. Borjas
and Jeff Crisp
(hardback 1-4039-4365-6)
March 2005
Studies in Development
Economics and Policy
Palgrave Macmillan
a useful and accessible resource
for all those attempting to address
these complex issues. It will
be invaluable to students and
researchers internationally and
throughout the social sciences
Ann Singleton
Centre for the Study of Poverty
and Social Justice, University
of Bristol
has few parallels in the breadth
and depth of its treatment of
contemporary issues in migration. It
will satisfy those who thirst for
analytical rigour and factual
evidence in making up their minds
about the complex causes and
consequences of migration.
Manolo I. Abella
Director, International Migration
Programme, ILO, Geneva
Edited by Anthony Shorrocks
and Rolph van der Hoeven
(paperback 0-19-928224-2)
February 2005
UNU-WIDER Studies in
Development Economics
Oxford University Press
The volume is a timely and
coherent contribution to an
important area. The topic is
particularly significant in light of the
first Millennium Development Goal
of the United Nations the halving
of world poverty by the year 2015.
The methodological and empirical
analysis of growth, inequality, and
poverty will be of central concern to
academics and policymakers alike.
Sudhir Anand
Vice-Master, St Catherines
College, University of Oxford
Forthcoming books
New in paperback
Inequality, Growth, and Poverty
in an Era of Liberalization and
Globalization
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Edited by Giovanni Andrea Cornia
(paperback 0-19-928410-5)
July 2005
UNU-WIDER Studies in
Development Economics
Oxford University Press
This is an important book, helping
to correct the prevailing neglect of
distributional issues in analysis and
policies towards development.
It is essential reading for anyone
concerned with poverty reduction
and the impact of current policy
reforms.
Frances Stewart
Director, Centre for Research on
Inequality, Human Security and
Ethnicity (CRISE), Queen
Elizabeth House, University
of Oxford
An outstanding set of papers on
the central challenge of our age:
ambitious, analytically sound, and
thoroughly grounded in real
evidence. This volume deserves
careful reading by all students of
inequality and development.
Nancy Birdsall
President, Center for Global
Development
WIDER Perspectives on
Global Development
UNU-WIDER
(paperback 1-40-399631-8)
(hardback 1-40-399626-1)
October 2005
Studies in Development
Economics and Policy
Palgrave Macmillan
The first eight WIDER Annual
Lectures, by Anthony B. Atkinson,
Kaushik Basu, Jagdish N. Bhagwati,
Douglass C. North, Dani Rodrik,
Frances Stewart, Joseph E. Stiglitz,
and Jeffrey G. Williamson, explored
how to improve the well-being of the
poor, how to design effective
structures and institutions for
poverty reduction and what the role
of economic, political, and social
dimensions are (and should be) in
global development. This volume
brings together some of the
most influential scholars in
development economics to addresses
globalization; both its governance
and a historical perspective;
inequality, of income, and the
potential for conflict; trade and
labour practises in a transitional and
developing world, and; the natures
and characteristics of institutions
and markets.
DP2005/03 Rehman Sobhan:
A Macro Policy for Poverty
Eradication through Structural
Change
DP2005/02 Reema Nanavaty: From
Local to Global and Informal to
Formal: Entering Mainstream
Markets
DP2005/01 Elinor Ostrom: Unlocking Public Entrepreneurship and
Public Economies
Macroeconomic Policy in
the Franc Zone
Research Papers
RP2005/01 Satya R. Chakravarty
and Amita Majumder: Intersociety
Literacy Comparisons
Edited by David Fielding
(hardback 1-40-394952-2)
October 2005
Studies in Development
Economics and Policy
Palgrave Macmillan
RP2005/02 Alain Chateauneuf
and Patrick Moyes: M easuring
Inequality Without the PigouDalton
Condition
The CFA Franc Zone in West and
Central Africa represents the largest
monetary union in the Southern
hemisphere, predating the European
Monetary Union by decades. This
book analyzes the recent economic
experiences of the Franc Zones
member states and of its economic
institutions. It pays particular
attention to the way this disparate
group of countries exploit the
advantages and manage the costs of
adhering to a single currency. It also
analyzes the impact Franc Zone
institutions have on poverty.
Discussion Papers
DP2005/07 David M. Malone and
Heiko Nitzschke: E conomic
Agendas in Civil Wars: What We
Know, What We Need to Know
DP2005/06 David Fielding and
George Mavrotas: The Volatility of
Aid
DP2005/05 Tony Addison: PostConflict Recovery: Does the Global
Economy Work for Peace?
DP2005/04 Anne Trebilcock:
Decent Work and the Informal
Economy
RP2005/03 Charles Blackorby,
Walter Bossert and David
Donaldson: Population Ethics and
the Value of Life
RP2005/04 Christian Seidl, Stefan
Traub, and Andrea Morone: Relative
Deprivation, Personal Income
Satisfaction, and Average Wellbeing under Different Income
Distributions
RP2005/05
Osman
Zaim:
AFramework for Incorporating
Environmental Indicators to the
Measurement of Human Well-Being
RP2005/06 Tauhidur Rahman, Ron
C. Mittelhammer, and Philip
Wandschneider: M easuring the
Quality of Life across Countries:
A Sensitivity Analysis of Well-being
Indices
RP2005/07 Tony Addison:
Agricultural Development for Peace
RP2005/08 F. J. Arcelus, B. Sharma
and G. Srinivasan: T he Human
Development Index Adjusted for
Efficient Resource Utilization
RP2005/09 Tony Addison, George
Mavrotas and Mark McGillivray:
Aid, Debt Relief and New Sources
of Finance for Meeting the
Millennium Development Goals
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Research Papers arising from the EGDI-WIDER conference
on Unlocking Human Potential
RP2005/10 Martha Alter Chen: Rethinking the Informal Economy:
Linkages with the Formal Economy and the Formal Regulatory
Environment
RP2005/11 Keith Hart: Formal Bureaucracy and the Emergent Forms
of the Informal Economy
RP2005/12 Sugata Marjit and Dibyendu S. Maiti: Globalization, Reform
and the Informal Sector
RP2005/13 Peter Little: Unofficial Trade When States are Weak:
The Case of Cross-Border Commerce in the Horn of Africa
RP2005/14 Michael Grimm and Isabel Gnther: I nter- and
Intra-household Linkages Between the Informal and Formal Sector:
A Case Study for Urban Burkina Faso
RP2005/15 Amos Sawyer: S ocial Capital, Survival Strategies,
and their Potential for Post-Conflict Governance in Liberia
RP2005/16 Sally Roever: Enforcement and Compliance in Limas Street
Markets: The Origins and Consequences of Policy Incoherence toward
Informal Traders
WIDER was established by UNU as its first
research and training centre and started
work in Helsinki, Finland, in 1985. Through
its research and related activities, WIDER
seeks to raise unconventional and frontier
issues and to provide insights and policy
advice aimed at improving the economic
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WIDER A ngle i s the newsletter of
UNU-WIDER. Published twice a year, the
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research activities. It is distributed free of
charge. The newsletter is also available on
our Web site at: www.wider.unu.edu.
RP2005/17 Eduardo Sojo and Roberto Villarreal: Public Policies to
Promote Productive Occupation and Increase Formality among the
Moderately Poor: The Mexican Agenda
Editorial contents, design and layout
by Ara Kazandjian
(e-mail: [e-mail]),
and Basudeb Guha-Khasnobis
(e-mail: [e-mail]).
RP2005/18 Ralitza Dimova, Ira N. Gang and John Landon-Lane:
The Informal Sector During Crisis and Transition
Research and Training Centres and
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University www.unu.edu
RP2005/19 Jeffrey B. Nugent and Shailender Swaminathan: Voluntary
Contributions to Informal Activities Producing Public Goods: Can these
be Induced by Government and other Formal Sector Agents? Some
Evidence from Indonesian Posyandus
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Watercourse Law, and Common Pool Resources: A Case Study of the
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