Aid allocation and poverty reduction

Abstract

The allocation of aid among countries can legitimately refl ect multiple objectives. Aid may be used to rebuild post-confl ict societies, to meet humanitarian emergencies, or to support the strategic or commercial interests of the aidgiver. However, one core objective most commonly cited to support aid programs is poverty reduction. In this chapter, we estimate the allocation of aid that would maximize the reduction in poverty and compare it to actual allocations. Our principal fi nding is that the poverty impact of aid could be roughly doubled if donors made use of recent research fi ndings on the impact of aid in deciding their aid allocation. To the extent that donors are interested in poverty reduction, the estimated ‘poverty-effi cient’ allocation is directly useful for policy-makers. But, even where donors wish to pursue other objectives, this allocation is also useful, because it provides information on the opportunity cost (in terms of poverty reduction) of pursuing other objectives with aid resources. The recent results that donors need to take account of are that: • the impact of aid on growth depends on the quality of economic policies and is subject to diminishing returns (Isham and Kaufmann, 1999; Burnside and Dollar, 2000); • there is a wide range of different evidence that the quantity of aid does not systematically affect the quality of policies – even with ‘conditionality’ (Collier, 1997; Williamson, 1994; Rodrik, 1996; Alesina and Dollar, 2000); and • aid resources are typically fungible, so that it is diffi cult for donors to target them to particular groups or use them to alter the distribution of income (Pack and Pack, 1993; Feyzioglu et al., 1998).