Feeling crowded ? : an analysis on foreign aid and the multiplicity of donors

Abstract

Since World War II “developed” countries have been disbursing aid flows to poor countries in an effort to spur development. Five decades after, billions have been transferred from rich to poor countries, but the development gulf between “developed” and “developing” countries has been rising; namely, as some developing countries are able to break into global markets and grow rapidly to a convergence path, others are falling behind. Particularly in Africa, which is the largest aid-­‐recipient, the scenario so far has been, to a vast majority, one of misery, poverty, disease and low growth. Is aid actually working in terms of promoting development? What factors can explain its poor economic performance? For the purpose of this dissertation, we review the main trends in development theory and policy and the main criticisms to current foreign aid’s apparent failure to alleviate poverty and promote recipients’ growth. We give a special focus to the implications of the multiplicity of donors and contribute to literature by supporting our arguments statistically. Building on Easterly and Levine’s (1995) work and their dataset, we reassess their cross-­‐country regressions and include two non-­‐traditional variables: aid flows as a percentage of recipients’ GNI, and the number of donors active in that disbursement. Data is averaged per decade over the period 1960-­‐1989. We find no significant association between aid alone and growth of income per capita, but find that, when the number of donors is accounted for, aid has a positive marginal effect on growth – with diminishing marginal returns on the number of donors over which it is distributed. We test for endogeneity and conclude for the validity of our regressors and results. All the formerly included regressors remain significant; the Africa dummy, however, looses its significance when aid and donors are accounted for. As Africa has been receiving the largest (and an increasing) share of aid as percentage of its GNI over time, and distributed over a larger number of donors, this diminishing marginal returns effect will be more pronounced in Africa. Hence, we contribute significantly to the “unexplained” poor growth performance of Africa relative to other regions over this period.