Research: Does it matter who provides aid?
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

The debate over aid effectiveness continues unabated, but the economic literature has so far focused almost exclusively on official bilateral aid. Nongovernmental organizations (NGOs), however, account for a growing share of development assistance, and the proponents of NGO aid argue that it is allocated for the “right” reasons and is distributed directly at the grassroots level. Therefore, NGO aid is considered untainted by the two sins commonly attributed to official bilateral aid—namely, that it is given for political reasons unrelated to development and that recipient governments misuse it.

Abstract

The debate over aid effectiveness continues unabated, but the economic literature has so far focused almost exclusively on official bilateral aid. Nongovernmental organizations (NGOs), however, account for a growing share of development assistance, and the proponents of NGO aid argue that it is allocated for the “right” reasons and is distributed directly at the grassroots level. Therefore, NGO aid is considered untainted by the two sins commonly attributed to official bilateral aid—namely, that it is given for political reasons unrelated to development and that recipient governments misuse it.

The debate over aid effectiveness continues unabated, but the economic literature has so far focused almost exclusively on official bilateral aid. Nongovernmental organizations (NGOs), however, account for a growing share of development assistance, and the proponents of NGO aid argue that it is allocated for the “right” reasons and is distributed directly at the grassroots level. Therefore, NGO aid is considered untainted by the two sins commonly attributed to official bilateral aid—namely, that it is given for political reasons unrelated to development and that recipient governments misuse it.

But are NGOs truly more effective than official bilateral donors? A recent IMF Working Paper by Nadia Masud and Boriana Yontcheva sidesteps the question of whether aid boosts economic growth to take a closer look at aid’s contribution to improving human and social welfare. The research examines the effects of aid on two indicators—infant mortality, for health, and adult illiteracy, for education—to determine whether aid has had a positive effect and whether NGO aid has been more effective than official aid.

To date, the only studies on NGO aid effectiveness have been conducted at the project level. There is a good reason for this—NGOs are private organizations and highly diversified, and there are no data sets covering all aid flows from all international NGOs.

The Working Paper focused on available data from 1990 to 2001 for projects proposed by European NGOs and cofinanced by the European Union. These are imperfect data. The number of countries varied from regression to regression—owing to missing observations for key variables, including female illiteracy, levels of governance and rural development, development as measured by real GDP per capita, poverty headcount, and population growth rate. Nevertheless, they afforded the opportunity for a first effort at measuring the impact of NGO aid at the macroeconomic level.

NGO effectiveness

The Working Paper turned up mixed results, but an overall advantage for NGO-provided aid. The analysis found that a statistically significant improvement in infant mortality was associated with increases in NGO aid but that no such effect was apparent with increased bilateral aid. In the case of adult illiteracy, however, increases in neither NGO nor bilateral aid seem to have brought about an improvement, although the 10-year time period covered by the data may be too short to pick up such an effect.

The analysis also found that neither bilateral nor NGO aid affected the share of government spending on health care.

For official aid, this suggests that recipient governments may use foreign aid to reduce their own health-care efforts. For NGO aid, however, this is good news, as it suggests that NGO aid may actually increase the total resources available for poverty reduction.

A number of factors may be at work in these findings. First, as their proponents claim, NGO aid may be more effective than government actions in reaching the poor. Improving infant mortality through health-care initiatives may, in fact, be more effectively done at the grassroots level. The study also finds that NGO aid per capita is above average for countries with above-average infant mortality and adult illiteracy, while the opposite is true of official bilateral aid. This suggests that while reaching the Millennium Development Goals may today be a declared objective of official aid, aid allocation patterns may not be consistent with it.

Finally, from a policy perspective, if infant mortality is a good flash indicator of the living conditions of the poor, NGO aid does appear to be more effective in reaching vulnerable populations, and donors that channel their aid through NGOs seem to have made the right choice. Remaining for future research is the question of whether NGOs can readily scale up their aid and remain effective.

Copies of “Does Foreign Aid Reduce Poverty? Empirical Evidence from Nongovernmental and Bilateral Aid,” by Nadia Masud and Boriana Yontcheva, are available for $15.00 each from IMF Publication Services. Please see page 332 for ordering details. The full text is also available on the IMF website (www.imf.org).