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The effectiveness of aid: The record and the lessons

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1986
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Robert Cassen

Aid is a vast and varied terrain. With flows amounting to $35 billion a year, no one can pretend to familiarity with more than a fraction of it. Our study (see box) looked at official aid, mainly from Western bilateral and multilateral sources, in a sample of seven countries—Bangladesh, Colombia, India, Kenya, the Republic of Korea, Malawi, and Mali—and reviewed a considerable range of evaluation and other materials. It found that the bulk of aid has been effective in attaining its developmental objectives, though a substantial proportion has not. There is much that aid can take credit for, and much that needs improvement.

Much of what needs to be put right can be done by individual agencies. But there is a critical lack of collaboration among agencies, either in sharing the lessons of experience or in promoting the coordination of aid. While each agency watches over its own activities, to greater or lesser effect, little attention is given to how they interact with other aid efforts, or to the combined results of aid. And unfortunately—though perhaps not surprisingly—the record of almost all aid is least satisfactory where good performance is most urgently needed: in the poorest countries, particularly in sub-Saharan Africa.

Aid, growth, and poverty

The relationship between aid and economic growth has most commonly been studied in international cross-section statistical investigations. This literature is inconclusive; the results of the individual studies depend on the countries and periods chosen, and problems of measurement and interpretation abound. Aid receipts were once thought to be associated with reduced domestic savings, but some recent research which distinguished aid for consumption from that used for investment—as most other studies failed to do—found that countries with higher investment-aid receipts did achieve relatively high domestic savings rates. The main conclusion from international statistical analysis is that one is better off looking at individual countries.

The country case studies conducted for our study proved more interesting. That for India found that aid receipts, though small in proportion to GNP, had been important in some periods by supplementing foreign exchange and the resources from domestic savings. Aid’s contributions to transforming India’s food output had major macroeconomic effects: before the Green Revolution the whole Indian economy slowed down whenever there was a bad harvest, and large foreign exchange expenditures were required for food imports. In Bangladesh, reconstruction assistance after 1971 had important effects on subsequent growth, as is true of more recent aid to Bangladesh and other countries studied where aid finances a large share of investment and imports.

The proportion of people in poverty seemed to be declining in several developing countries in the 1970s, but progress has probably been halted by the global recession. Direct attempts to improve living standards through aid have had some success. Aid for basic services (health, nutrition, family planning, education, housing) is an area where donors have acted on the lessons of experience: while aid in the past financed metropolitan hospitals used by urban middle classes, or not-so-low-cost housing that the poor could not afford, it is more likely today to be used for rural health clinics and paramedical workers, or “sites-and-services” schemes which do benefit poor people. Similarly in nutrition, family planning, and education, methods of reaching the poor with effective services are now known and being put into practice.

Efforts to improve the productivity, income, and assets of poor people are harder to assess. Only a fraction of aid goes into schemes that are directly poverty-oriented, and one must therefore look at the effects on the poor of a whole range of aid endeavors. To a large extent, the success of aid in reaching the poor is bound up with the success of aid for rural development. The record of aid for rural development, like that of rural development in general, is much better in South Asia than in Africa. In Africa only a small proportion of aid—much of it rather unsuccessful—has gone into small-scale agriculture or livestock investment, and aid for research on food crops has been relatively neglected, compared with cash crops.

Even with the progress achieved, donors may be criticized on a number of grounds: they usually fail to consider the probable distribution of benefits in projects that are not directly poverty-oriented; they make little use of the opportunities afforded by coordination meetings to take up poverty issues with recipients; their collective efforts rarely make a coherent contribution to the relief of poverty; and their activities have harmed the poor on occasion—through displacing labor with the machinery supplied under some rural credit and other projects, through some large hydroelectric or irrigation schemes when insufficient care is taken to resettle displaced populations, and in some structural adjustment programs where retrenchment has fallen unnecessarily heavily on the poor.

While donors could do more and better work to address poverty directly, they also need to continue with infrastructural and other long-term investments whose immediate impact on poverty may be modest. And they have to engage in program lending associated with policy reform. By raising income levels, these efforts may ultimately achieve more against poverty, per dollar transferred, than directly poverty-oriented aid.

Does Aid Work? Report to an Inter-governmental Task Force, by Robert Cassen and Associates, will be published by Oxford University Press in Spring 1986. The study was undertaken by a group of independent consultants and financed by contributions from some of the governments represented on the Task Force.

Aid is only a part—often a small part—of what is needed to reduce poverty. If aid measures are not to be just a movement against the tide, the recipient must be committed to reducing poverty. Policies must be supportive, in both donor and recipient countries, as must be the political and social processes in recipient countries. And it is easier to reduce poverty where there is growth and when trends in the world economy are favorable. Many aid agencies have the relief of poverty as a key objective in their charters. Faith in achieving this objective is also an important element in public support for aid. But it would be better for all concerned if the scope and limitations of what aid by itself can do were more subtly appreciated.

A question arising with increasing frequency concerns the use of non-governmental or private voluntary organizations as channels for official development assistance. The best of them have considerable advantages in reaching target groups and encouraging participatory development. But not all are as good as the best. Many questions arise about their capacity to absorb large additional funds without damage to their integrity and independence. These organizations already channel significant amounts of bilateral and multilateral aid, but their work has not been evaluated over a wide enough range of activities to permit a final judgment on their effectiveness; assessment of the issues surrounding their work will be an important part of inquiries about aid in future.

Policy dialogue

The new wave of policy-based lending in the 1980s must be seen as a positive and promising departure. Such lending will undoubtedly contribute to development and enhance the effectiveness of aid, given that some, at least, of aid’s failures can be attributed to the policy environment in which aid operates. By the end of 1984, for example, some 15 African countries had acted to raise producer prices for farmers and adopt more competitive exchange rates under externally financed adjustment programs, and by now the number has risen.

Yet there are questions. Experience with the policy dialogue accompanying this type of lending ranges from the reasonably successful to the conspicuously unsuccessful. And it seems that it is easier to identify common faulty policies—overvalued currencies and damaging trade controls, excessive tolerance of inflation, unsatisfactory price structures (especially for farmers), overburdened public sectors, or inefficient government agencies—than to design a strategy that is appropriate to each country’s capacities and likely to succeed in contemporary conditions.

There is cause for concern about the lack of adequate harmonization, in some cases, between adjustment programs and the requirements for future development; improved collaboration between the World Bank and the IMF will be part of the remedy. Current conditions call for sophistication in trade policy and a carefully designed sequencing of trade liberalization measures, recognizing that the poorest countries in particular may need donor support for a longer lead time for adjustment than others more fortunately placed. In some cases, exchange rate changes need to be better supported by measures to ensure those changes are effective. Moreover, while better prices for farmers may be a necessary condition for raising agricultural production, efforts will also be needed to supply farmers with a range of essential inputs—credit, fertilizer, water, appropriate plant varieties—and reliable transport for marketable surpluses. Those planning policy changes must also consider the effects on poor people, who are of course particularly vulnerable to increases in food prices, at least in the short run (in the longer run, as production increases, supply curves may shift and food availability and employment are likely to improve).

The success of policy-based lending depends to a large extent on the state of institutional development in the recipient country. Experience also shows that it is vital for the recipient to be politically committed to the measures embodied in an adjustment program. If the recipient does not have adequate negotiating strength and analytical capacity, there is a considerable risk that reform programs will be seen as outside impositions whose effectiveness may lapse when aid flows cease. Technical cooperation may be needed before some recipients can play their full part in elaborating a program; “dialogue” should not become “monologue plus money.”

Aid performance

Much of the evidence about aid performance comes from the evaluation of completed projects. Eight agencies have surveyed large samples of recently completed projects and reached broadly similar conclusions. Most aid projects for which data exist seem, considered in themselves, to have been worthwhile. A good deal of project aid—in particular, the “new style” projects designed for the agricultural and for the urban marginal sectors during the 1970s—appears to have had a substantial direct effect on poverty, through the transfer of productive assets or knowledge to the poor. Very little of aid, however, has been directed at or had any effect (positive or negative) on the very poorest people, though these people appear to have gained indirectly from aid projects that reduced their food costs (grains throughout the developing world, potatoes in Andean South America, and fish in Southeast Asia). A significant finding of the World Bank’s evaluators is that when projects do aim to assist the poor directly, their rates of return are comparable with those of other projects: there is no necessary trade-off between poverty orientation and efficiency.

Between two thirds and three quarters of aid projects (and somewhat more in the case of the World Bank) are judged satisfactory by rate-of-return or other criteria; a small percentage (less than 10 percent) failed to produce any of the desired results. It is hard to come up with a standard of comparison for such findings. There are no broadly representative data, for example, on the success or failure of private investment even in industrial countries. When one remembers that aid agencies are trying to do difficult and frequently innovative things, often in adverse circumstances, this record may compare reasonably well with that of other complex endeavors.

Some agencies evaluate a relatively small proportion of their projects; only one (the World Bank) systematically evaluates all of its projects. There is no reason to suspect that evaluations are in general complacent or self-serving; indeed there is frequently a negative bias: agencies commonly pick “problem” projects for evaluation, and fault-finding is often the main preoccupation of evaluators.

When faults are found, they form a fairly common list: poor design, wrong technology (often, though by no means always, associated with bilateral donors’ commercial interests), failures of institution building, lack of understanding of the human and social environment, and excessive optimism over completion times. Not only are the faults common, they also recur, suggesting a considerable need for attention to the learning process.

Evaluations range from the excellent to the perfunctory. It is regrettable that certain kinds of questions are rarely asked, not least when undue reliance is placed on the economic rate of return as the principal indicator of a project’s worth.

Sustainability. A subject requiring much more attention than it receives is the life of projects beyond the time of the donors’ involvement. That life may depend on the caliber of the institutions managing projects, on the ability and commitment of recipients to ensure the payment of domestic costs, on the novelty and appropriateness of the technology introduced, or on social and cultural factors. Donors should pay more heed to such factors during project design if they wish to be confident that projects will survive after they withdraw. Perhaps one question above all deserves asking more often about most aid: will this help in the long run to increase the recipient’s self-reliance?

Role of women. Most agencies have now adopted policies to involve women more adequately in development work—perhaps in recognition of the fact that giving proper weight to women’s roles is not only a matter of equity but often a necessary condition for projects’ success. Yet progress in the field is still limited, and donors are far from fulfilling the OECD Development Assistance Committee’s agreed guiding principles, which propose taking “full account of the gender composition of the population at all stages of the [aid] programming cycle.”

Environmental issues. There is clear evidence that some aid has had harmful environmental effects. Donors are increasingly aware of this and are taking steps to assure that effects on the environment are considered at relevant stages of project preparation and implementation. Yet their policies and those of recipients toward environmental matters are often not fully agreed and elaborated upon; and in the field insufficient care for the environmental consequences of aid can still be observed.

Learning from experience. Virtually all agencies have systems to bring the lessons of past projects to bear on the preparation of new ones. Yet these work imperfectly. Sometimes the use of feedback mechanisms varies widely even within a single agency—some departments taking them seriously, others less so. But in virtually all agencies, what the DAC has christened the “fund-chanelling function”—the need to maintain or raise the volume of loans—often conflicts with the quality of lending.

One gap is identified as particularly unfortunate: aid agencies’ failure to share their experience. Only a tiny number of interagency conferences have been held to review or share each other’s knowledge. There is virtually no systematic exchange of information among agencies, even about successes, let alone the more sensitive problem of failures. Thus one donor will confess to lack of success in a particular area of lending where others may be doing well. Interagency collaboration is the province particularly of the DAC, but the World Bank and other large agencies could be far more active in promoting and profiting from it.

Technical cooperation. Technical cooperation amounts to more than one fifth of all aid. Its results are broadly comparable to those of project aid, both as to the proportions of success and failure, and as to the reasons why things go right or wrong, and thus they are not described in detail here.

There is, however, a shortcoming in the intellectual underpinnings of institution building, human development, and associated cooperation, compared with the theoretical and quantitative tools used to plan physical development. Work has been done on manpower planning and the development of individual institutions. But there is little guidance for planning the institutional requirements of whole sectors, for matching institutional needs with evolving economic structures, or for systematically defining intersectoral institutional linkages. The basic objective of technical cooperation—to promote self-reliance—has not been defined in terms that would aid the planning of institutional needs and facilitate national decisions. This subject warrants a major conceptual effort.

Food aid. Food aid has been much criticized: program food aid, for diminishing countries’ incentives to invest adequately in food production and for undermining food prices; project food aid, for general inefficiency, and for constructing physical assets (when it succeeds in doing so) that are not of general utility.

Program food aid can be, and has been, successfully used without deleterious effects. Methods for avoiding market disincentives are known, though still not always used. In theory many of the goals of food aid should be more easily met by channeling it through projects: there should be less of a “disincentive” effect for farmers if the food reaches poor people who would not otherwise consume it; nutritional goals can be pursued by directing foods to groups at nutritional risk, while physical resources can be developed if food is used as wages. In practice, however, complaints about project food aid seem generally well founded, even though there are numerous instances of success, such as the food-for-work schemes in Bangladesh, after years of learning by mistakes. Experience is better when project food aid fits into well designed investment programs than when projects are created ad hoc to absorb it. It is useful to question the cost-effectiveness of food aid: in some cases the recipient may be better off receiving the sums expended in transporting and distributing the food, than with the delivered food itself.

Given that food aid is going to continue (were it to be discontinued, financial aid would not rise enough to fill the gap), the general presumption should be in favor of program, rather than project, food aid. Experience suggests that program food aid should be linked with other aid to given recipients, and should relate to recipient countries’ level of development and balance of payments needs, as well as their agricultural development, supporting national food strategies where they exist. There is a need to plan food aid in programs that cover several years at a time, and for greater donor coordination of aid to given countries.

Program lending. The success of program lending is usually identified with that of the policy dialogue it supports. There are few evaluations of other aspects of program lending, and no settled evaluation methodology.

Donors have still to elaborate a consistent “philosophy” of program lending. In some quarters the current volumes of such lending are regarded as temporary—made necessary by the severity of the recession, which has limited the scope for new project lending and made balance of payments support essential. Our study, on the contrary, argues for greater attention to the long-term future of program lending and its complements (compensatory financing mechanisms, food aid, debt relief). The absence of a facility for medium- to long-term concessional balance of payments support has long been noted in writings on development finance. This and related questions of how to finance local and recurrent costs are all in need of a more comprehensive approach.

Need for coordination

Most evaluations of aid look at individual projects or programs, or occasionally, the involvement of a particular aid agency in a given country. More rarely studied are the systemic effects of the operations of a multiplicity of donors working in a particular country. Examination of these effects points consistently to a need for greater coordination:

• The variety of aid activities may not make a cohesive contribution to a country’s development, but may just be the result of an almost haphazard process of accretion;

• With too many donor agencies operating in a given sector or subsector, project- and equipment-types proliferate (the study cites among examples the 18 makes of pump supplied by aid for Kenya’s rural water supply, each with different requirements for installation, maintenance, parts, and training);

• A multiplicity of donors, the complexity of their separate procedures, and the procedural and data requirements of project implementation and monitoring can put intolerable burdens on the recipient’s administration;

• Most important, the recipient’s budgetary process may be inadequate to cope with the demands of multiple uncoordinated aid activities for domestic resources to complement the external ones supplied by donors.

These problems abound in what the study calls “countries of slender administrative means”—again, particularly in sub-Saharan Africa. More than half of these countries have no central administrative unit even for monitoring the inflow of aid, let alone for negotiating it centrally. Yet the average country receiving aid has some 20–30 official aid agencies operating within it, and possibly double that number of voluntary agencies, all negotiating with individual ministries. Under such circumstances it is no wonder that the whole of aid may turn out to be smaller than the sum of the parts.

Donors and recipients have resisted coordination for many reasons. On the recipient side, governments have often preferred to retain an ability to play one donor off against another; they are apprehensive about donors “ganging up” against them if aid coordination becomes more effective. On the donor side, bilateral donors are keen to pursue their commercial and political objectives through aid, objectives that may not be served by concerting their aid with that of other donors. In addition, donors collectively have a concern that they may be unable to agree with one another over significant policy issues. But both donors and recipients are now more and more ready to appreciate that any gains from the past failure to coordinate are small relative to the costs of that failure. Both sides are becoming interested in promoting coordination, with the World Bank taking a more active role than it has in the past. Improved coordination must start with the recipient, helped if necessary with technical assistance, but there is also much for donors to do, both at higher levels such as Consultative Groups and at the sectoral level on the ground.

The private sector

An old complaint about aid, in some quarters at least, has been that it has neglected or even hindered the operation of market forces. The current evidence does not support such a case. Some aid goes to the private sector as final user, for example in rural credit projects or via on-lending through national development banks. Much of aid creates or supports infrastructure without which private enterprise could not operate. Procurement under public aid projects has often fostered the development of private initiative, for example when aid for roadbuilding requires letting of tenders to private construction firms. Much of the policy dialogue today is concerned with expanding the role of market forces, with privatization of public sector agencies, and with the conditions for private investment and liberal trade.

There have been cases in the past of support to governments with policies inimical to the private sector. But this is mostly old history, and in countries whose attitudes to the private sector antedated the donors’ presence. The number of instances in which aid has pressed for greater use of market mechanisms, and had a response, is far greater. There is a delicate path to be steered between encouragement of the use of market forces on efficiency grounds and unwarranted intrusion on a country’s political values. Some donors have not always observed this distinction.

Dispute can be avoided with the recognition that what is sought is an appropriate balance between the private and public sectors—both in the broad division of investment and in the activities within sectors. There is much scope for improving the mix of public and private activities even in areas such as forestry, resettlement schemes, and family planning that are normally thought of as in the public domain. There are many opportunities for aid to strengthen desirable private sector activities and to foster the coming into being of competitive firms and markets where these do not yet exist. But donors should eschew “asymmetrical liberalism”—that is, the use of the aid process to encourage liberal trade policies and domestic market forces in recipient countries, while donors themselves increase their own trade protection, and employ aid conditions (especially tied aid and mixed credits) which distort the competitive process.

Conclusion

While donors and recipients have no cause for complacency, they need not be too defensive about the record of aid. There is much that can be criticized—particularly where error is repeated—but there is much more that is laudable: from aid’s many contributions to raising food production in South Asia to experimental rural education in Africa; from infrastructure investment to self-help rural development schemes; from widespread support for strengthening developing country institutions to population programs in a great variety of countries; and, not least, the new initiatives to promote policy reform, that, one may hope, will enhance the effectiveness of all aid and accelerate development itself.

Our study does not pretend within the time and resources available to have resolved all questions about the effectiveness of aid. The authors will be satisfied if practitioners of aid find it helpful for management purposes, and if it provokes a public debate about aid focused more on the evidence of what aid has or has not done, and less on prejudice, deriving from what one or another person has observed individually or from a particular ideological persuasion.

Protectionism: a famous novelist’s view

Protectionism is a matter of rising concern, again. Economists, politicians, and public officials have pronounced themselves at length, and frequently, about the dangers and drawbacks—and sometimes about the alleged advantages—of protectionist trade measures. The general case against protectionism was put succinctly and elegantly by the French novelist Honoré de Balzac in Le Médecin de Campagne, published in 1833;

The encouragement of trade does not imply protection. The right policy for a country is one that seeks to free it from paying tribute to foreigners, but without the shameful aid of customs tariffs and prohibitions. Industry can only be saved by itself; competition is its life. Protected, it will be lulled to sleep; it will die under monopoly as surely as behind the tariff wall. The country that will make all other countries its dependents is the one that proclaims free trade; it will feel strong enough in its manufacturing to keep its products at prices lower than those of its competitors.

[Translation from the French by the Editor]

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