Aid: The Role Of Aid In Developing Countries

During the 1990s, development aid went through an unprecedented crisis of legitimacy, due to various factors.

For much of the last fifty years, it was seen as simultaneously fulfilling two roles: first, the financing of projects in poor countries which lacked access to world capital markets and, secondly, raising the returns to investment through the donor’s role in project selection and design.

Empathy (or altruism) clearly played a role: we could say that the welfare of developing countries was part of the donor's objective function.

As J.W. Gunning (2004) points out, till at least a quarter of century ago there was none or little agonising over the rationale for aid: these arguments alone seemed sufficient justification for aid.

It was

The most influential critique of aid of those years is to be found in the World Bank’s Assessing Aid report (World Bank, 1998). The argument in that report is built around two propositions: first, aid can be effective in raising growth but only in a good policy environment and, secondly, aid cannot buy such an environment.

In this paper, we intend to review the debate on the roles and effectiveness of aid.

The paper is organized as follows. In the next section, we will start analysing the reasons that drive donors to give aid and the objectives they try to achieve by doing so. We will then focus on what prevents or limits development in a specific country. In Section 3, dealing with the main streams in the literature on the argument, we analyse aid effectiveness. Section 4 wants to propose some solutions to the aid effectiveness problem, focusing on what donors should and can do. Section 5 concludes.

2. Why give

The issue is what objective the donor tries to achieve by giving aid.

One can try to distill objectives from policy pronouncements, but this has obvious limitations.

A more convincing approach uses regression analyses to investigate what determines (in a statistical sense) aid allocation of various donors.

Alesina and Dollar (2000) used this approach. In their paper “Who gives foreign aid to whom and why?”, they ask whether the pattern of aid giving in the advanced industrial countries also contributed to its