On the Foreign Aid Landscape

Until I moved to the US for graduate school, I had never given much thought to foreign aid funding. For me, having lived most of my life in India, the questions had always been about which programs produce the best outcomes, which are most cost-effective, and therefore, which policy solutions would serve best. How programs were funded was secondary. While I was familiar with the long-standing, high-level debate over whether aid works at all (recently popularized by the polarized views of the likes of Jeffery Sachs and William Easterly), upon arriving at UT Austin, I was struck by how topical aid was, from speaker events at the LBJ School, where data, transparency, and aid allocation were the buzzwords, to casual conversations with classmates wanting to work in international development, and to whom development was so synonymous with aid. 

But perhaps I ought not have been so surprised – after all, the US is the largest provider of foreign aid. As I set about acquainting myself with the unfamiliar waters of foreign aid (and navigating through the acronyms and the jargon), I found this review of the aid landscape by Nancy Qian, Associate Professor of Economics at Yale University, most interesting. Here are some key facts that caught my attention:

• Aid flows have remained relatively constant from 1960 (since when data was reported annually) to 2013.
  
• Annual aid to the poorest 20% of countries comprises only 1.69% to 5.25% of global aid flows.
  
• While the top donor countries remain largely unchanged, the recipients have changed over time, reflecting the strategic interests of the donor countries.

Top Donors by Decade | Create infographics

Top Recipients by Decade | Create infographics

Furthermore,

• Humanitarian aid, which tends to be the type of foreign aid that is most salient in the minds of the public, represents only a small proportion, ranging from 4% to 6%, of total official development assistance (ODA).
• A significant proportion of aid is spent in the donor countries themselves. This may include scholarships/training in the donor country, debt relief, administrative costs, development awareness, and expenditure on refugees in the donor countries.
  

Annual non-transferred aid by donor, 2006-2012 | Create infographics

Qian also notes how studies that seek to measure the effectiveness of aid can be problematic.  For starters, several of these studies use aggregate ODA. But aggregate ODA, is a bundle of various types of aid, such as cash transfers, debt relief, and food aid. Each component influences different outcomes in the recipient country, and using an aggregate outcome measure, such as growth, can be problematic. Also, the fact that a significant proportion of aid is spent in donor countries complicates the valuation of aid. There are other issues that compound the valuation problem. For instance, food aid is valued according to prices in the donor country, which can be higher than food prices in the recipient country.

Qian’s findings only reiterate the futility of trying to answer the broad-brush question of whether aid works. Instead, as she asserts, these issues point to a need for future studies to assess “the effect of a narrowed definition of aid on a narrowed set of outcomes,” and also to understand how foreign aid can be improved or re-designed.


Swetha Selva is a Master’s candidate in Global Policy Studies at the LBJ School of Public Affairs at The University of Texas at Austin.