Here’s a new paper that finds no correlation between aid and growth.

Aid and Growth: What Does the Cross-Country Evidence
Really Show?
(forthcoming, Review of Economics and Statistics)
Raghuram G. Rajan and Arvind Subramanian
July 2007

You can find it here — http://www.iie.com/publications/papers/subramanian0707.pdf

The authors note that they saw robust findings on the importance of institutions and policies for growth, but not for aid. Maybe the new approaches that tie aid to improved institutions and policies will have an effect, not through the aid, but through the improved governance! Of course, that will depend on donors getting it right with respect to their demands re governance – the World Bank doesn’t have a good track record in that respect.

Yours is a valid point.

Talking only about resource transfer without emphasising on corruption and how efficient it will be spend is bad economics. Moreover, it is a wastage of resources.

Money and development. I do not know if we can see which is needed first; but both can lead to each other. With development, money will pour in. Also money can used (the degree will vary on the amount of corruption) to finance infrastructure building, which along with good governance can bring about development.

Again, citing corruption as the reason for not transferring funds is not warranted too.

My fundamental problem with Sachs remains the same – aid delivery is subject to far too many contradictions in our imperfect world. Delivery through the public sector is inefficient and can create a massive state (see the example of India). Conversely, “direct” delivery, as Sachs wants, undermines national institutions. Finally, a recent evaluation of the Global Fund projects concludes that projects run through the government underperformed those conducted by NGOs and the private sector. So where is the balance?

As you say, aid can be part of the solution. Your examples are very promising, but in the end there is still no simple answer to the “how”. Aid is not a substitute for the right national institutions, which can be the only primary driver for development. No amount of aid will help a corrupt, badly governed country from growing. And lack of aid will not prevent a well-governed country from improving its prospects.

You and I have common ground — that a) Africa needs massive investments in infrastructure, and b) African governments do not have the means for many of those investments.

The problem, then, is to consider ways and means for providing the needed infrastructure, without harming economic and social systems or individual livelihoods. Aid has got to be part of the solution because market forces won’t take care of it.

I think I see the beginning of signs that those who bring aid to African countries are learning from past mistakes.

One mistake in the past was to set up parallel projects, bypassing local governments, with the result that countries did not build internal capacity.

I see three examples in Tanzania where major aid is being given through the government. One is that 39% of government revenue is provided by countries such as Britain, Denmark, etc. The second is a $60million initiative from USAID to build capacity in the Tanzanian health care system. The third is a multi-country aid program of something like $200mill over several years to build capacity in the management of natural resources, especially water. Some of this aid will go to new software and hardware, and new systems, like databases. And some will go to training.

This looks like effective aid to me.

Another sign of effectiveness is that donor countries are beginning to tie aid to performance benchmarks that encourage better governance. For example, one benchmark for Danish aid to Tanzania was the enactment of new legislation aimed at countering corruption (e.g. protection for whistle blowers). When the government dragged its feet on shaping the new legislation, they forfeited a proportion of the Danish aid budget – about $2.5 million, I think.

So, I suspect that the discussion may be best framed in terms of HOW the aid is delivered, more than whether or not there should be aid.

Regarding Sachs view on resources vs corruption, I believe that he is pointing out that corruption is not the whole story, and may be not even the primary contributing factor. If corruption in an African country is about the same as corruption in other countries that are not poor, then we need to look deeper to understand the causes of the poverty. And I’m not sure he would support the stance ‘donate the aid despite the governance’. I believe that he tries hard to circumvent corruption by putting the aid as directly as possible in the hands of those who need it most.

It is certainly true, as you say, that where governance is better, donors have more confidence in giving. It is also true that economic development is stronger when there is less corruption. Corruption compromises both aid and trade – so in this discussion let’s not tie it only to aid.

More aid will work, more aid is needed. But it must be used more effectively – learning from mistakes made in the past. Even the USD460million that Mali has received is chickenfeed compared with what they need.

Thanks again for discussing this so wisely.