Opening the black box: tracing causal links between aid and growth.

 
FREE EXCERPT

23 October 2012

Improving health and increasing investment are the main channels through which foreign aid increases growth.

The causal links between aid and development have for a long time been seen as a 'black box'. Whereas there is increasing evidence that aid has a positive effect on aggregate economic growth, we still do not understand the mechanisms through which this happens. For example, donors are currently directing large amounts of aid towards the Millennium Development Goals which target improvements in poverty reduction, primary education, and health. However, we do not fully understand how these goals contribute to broader aims of aid--namely, spurring growth and development. In the WIDER working paper 'Aid Effectiveness: Opening the Black Box' Channing Arndt, Sam Jones and Finn Tarp (AJT) aim address this gap in our understanding.

The causal links between aid and development have for a long time been seen as a 'black box'. Whereas there is increasing evidence that aid has a positive effect on aggregate economic growth, we still do not understand the mechanisms through which this happens. For example, donors are currently directing large amounts of aid towards the Millennium Development Goals which target improvements in poverty reduction, primary education and health. However, we do not fully understand how these goals contribute to broader aims of aid--namely, spurring growth and development. In the WIDER working paper 'Aid Effectiveness: Opening the Black Box' Channing Arndt, Sam Jones and Finn Tarp (AJT) aim address this gap in our understanding. Their approach consists of three steps. First, they specify a statistical model which allows them to estimate the result of aid on a range of long-term outcomes such as growth, poverty, and inequality. Second, they apply that same model to a number of intermediate outcomes including investment, consumption and a variety of social indicators. Third, they quantify a simplified form of the model which allows them to focus on whether aid impacts on growth through three possible channels; investment, health, and education.

The effect of aid on final and intermediate outcomes development outcomes

The first step AJT take is to estimate the effect aid has on some of the final, longer-term outcomes that donors often seek to achieve. In a previous paper, 'Aid and Growth: Have We Come Full Circle' AJT established that in the long term, on average, aid has had a positive effect on economic...

To continue reading

FREE SIGN UP