This document provides an introduction to measuring development and aid program effectiveness. It discusses common indicators used to measure development levels, such as GDP per capita, the Human Development Index, and poverty measures. It also examines debates around the impact of foreign aid and approaches to measuring the effectiveness of aid programs, including randomized controlled trials.

1. 1. Introduction to Development
Ryan Herzog, Ph.D.

2. Introduction to Development
• Measuring Development
– Measures of income per capita
– Human Development Index (HDI)
– Poverty Gaps
• Aid Programs and Development
– Humanitarian Aid vs. Development Aid
• Measuring Program Effectiveness
– Randomized Controlled Trials (RCTs)

3. MEASURING DEVELOPMENT
Section 1

4. Measuring development
• Gross domestic product (GDP)
– Measures the total value for final use of output
produced by an economy, by both residents and
nonresidents.
• Gross national income (GNI)
– Total domestic and foreign value added claimed by
a country’s residents (without making deductions
for depreciation of the domestic capital stock).

5. Figure 1.1: GDP per capita, 2017
http://www.imf.org/external/datamapper/PPPPC@WEO/THA

6. Defining the developing world
• World Bank ranks countries on GNI/capita
– LIC, LMC, UMC (see Table 1.1—next slide)
• LIC – Low income countries
• LMC – Lower-middle income countries
• UMC – Upper-middle income countries

7. Classification
of economics
http://www.un.org/en/development/desa/policy/wesp/wesp_current/2014wesp_country_classification.pdf

8. GDP per capita and population
Huge disparity between “rich” (developed) and “poor” (developing) countries.
1. Why?
2. What can be done about it?

9. Purchasing power parity (PPP)
• Official foreign exchange rates (used to convert a country’s
GNI and GDP into US$ for cross-country comparison) fail to
measure the relative domestic purchasing power of
different currencies; we often use PPP instead.
• Intuitive definition of PPP: the number of units of a foreign
country’s currency required to purchase the identical
quantity of goods and services in the local market as $1
would buy in the U.S.
• You’ll notice in the previous graph, the data were in terms
of PPP.

10. What other indicators can be
used to measure development?
• Health
• Life expectancy
• Education/literacy
• Human development index (HDI)
– encompasses many of these measures into one
index

11. Human development index
(HDI)
𝐻𝐷𝐼 = (𝐿𝑖𝑓𝑒 𝑒𝑥𝑝𝑒𝑐𝑡𝑎𝑛𝑐𝑦 𝑖𝑛𝑑𝑒𝑥)
1
3 (𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛 𝑖𝑛𝑑𝑒𝑥)
1
3(𝐼𝑛𝑐𝑜𝑚𝑒 𝑖𝑛𝑑𝑒𝑥)
1
3
𝐻𝐷𝐼 =
3
𝐿𝑖𝑓𝑒 𝑒𝑥𝑝𝑒𝑐𝑡𝑎𝑛𝑐𝑦 𝑖𝑛𝑑𝑒𝑥 𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛 𝑖𝑛𝑑𝑒𝑥 𝐼𝑛𝑐𝑜𝑚𝑒 𝑖𝑛𝑑𝑒𝑥
Equivalently…

12. Human development index
(HDI)
• Each sub-index is calculated as follows:
• Sub−index =
𝑎𝑐𝑡𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 −𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑣𝑎𝑙𝑢𝑒
𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑣𝑎𝑙𝑢𝑒 −𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑣𝑎𝑙𝑢𝑒
• For example, life expectancy index:
• Life Expectancy index =
80−20
83.2 −20
= 0.95

13. Human development index
(HDI)
• The education sub-index is calculated as follows:
• Education sub−index =
• =
𝑀𝑒𝑎𝑛 𝑠𝑐ℎ𝑜𝑜𝑙𝑖𝑛𝑔 𝑖𝑛𝑑𝑒𝑥 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑠𝑐ℎ𝑜𝑜𝑙𝑖𝑛𝑔 𝑖𝑛𝑑𝑒𝑥 −𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑣𝑎𝑙𝑢𝑒
𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑣𝑎𝑙𝑢𝑒−𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑣𝑎𝑙𝑢𝑒
• The income sub-index is calculated as follows:
• Income sub−index =
𝑙𝑛 𝑜𝑏𝑠𝑒𝑟𝑣𝑒𝑑 𝑣𝑎𝑙𝑢𝑒 −𝑙𝑛 𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑣𝑎𝑙𝑢𝑒
𝑙𝑛 𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑣𝑎𝑙𝑢𝑒 −𝑙𝑛 𝑚𝑖𝑛𝑖𝑚𝑢𝑚 𝑣𝑎𝑙𝑢𝑒

14. Human development index
(HDI)
• Maximums and minimums used for calculation:

16. Income Inequality: ‘Favelas’ of Brazil

17. Measuring income inequality
• Size distributions of income
(by quintiles or deciles)
• Lorenz curves
• Gini coefficients

18. Measuring income inequality
5%
8.9%
14%
19.8%
27%
36%
49%
71.5%
100%

19. Measuring income inequality

20. Relative inequality

21. Gini coefficient

22. Measuring poverty
• Headcount Index = H/N
– Total headcount (H) – the number of people
whose income fall below the absolute poverty
line.
– Total population (N)
– Absolute poverty line (Yp) – standardized level
intended to capture “absolute human misery”
such that a person’s health is in jeopardy
(approximately $1PPP/day).

23. Measuring poverty: TPG
• Total poverty gap – measures the total amount of
income necessary to raise everyone who is below the
poverty line up to that line.
𝑇𝑃𝐺 =
𝑖=1
𝐻
𝑌𝑃 − 𝑌𝑖
– Where Yp is the absolute poverty line
– Yi is income of person i

24. Measuring poverty: TPG

25. Measuring poverty
• Average poverty gap – measure of TPG per capita.
𝐴𝑃𝐺 =
𝑇𝑃𝐺
𝑁
– Where N is the population
– TPG is total poverty gap

26. Measuring Inequality and
Poverty
• Average Income Shortfall – measure of TPG per person
living in poverty.
𝐴𝐼𝑆 =
𝑇𝑃𝐺
𝐻
– Where H is the headcount of people living below poverty
line.
– TPG is total poverty gap

27. AID PROGRAMS AND
DEVELOPMENT
Section 2

28. Foreign Aid
• Humanitarian Aid
– Emergency aid often in response to a natural disaster.
– Examples: Haiti Earthquake, Somali famine
• Development Aid
– Official Development Assistance (ODA)
– Official Assistance (OA)
– Private Voluntary Assistance
• We will focus on Official Development Assistance for this
module.

29. Official Development
Assistance (ODA)
• Measures all flows of official financing for the
purpose of promoting economic development to
developing countries (low and middle income
categorization by the World Bank, see Table 1.1).
– Includes flows from donor governments to developing
governments (bilateral ODA) and flows from
“multilateral institutions” (e.g., World Bank, IMF,
United Nations Development Program).

30. Official Development
Assistance (ODA)
• ODA may include:
– Loans if provided at a discounted interest rate
– Donations in kind
– Debt relief
• ODA does not include:
– Military aid
– Emergency (humanitarian) aid
• Examples: U.S. food aid, UN’s Millennium Development
Goals (MDGs), vaccine campaigns in developing countries.

31. Other Types of Foreign Aid
• Official Assistance (OA)
– Measures all flows of official financing when the
recipient is a developed country.
• Specifically, recipient country’s income above the World
Bank’s “high income” threshold for three consecutive years.
– Example: US aid to Israel
• Private Voluntary Assistance
– Funding from nongovernment organizations (NGOs)
– Examples: Doctors Without Borders, Bill and Melinda
Gates Foundation, TOMs Shoes

32. ODA from OECD-DAC
Countries (2012)
30,687
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
ODAinmillionsofUSdollars
Source: Author’s calculations using data from www.OECD.org/DAC/stats/data.htm

33. 0.19
-
0.20
0.40
0.60
0.80
1.00
1.20
ODAasapercentageofGNIODA for OECD-DAC Countries
(2012)
– Source: Author’s calculations using data from
www.OECD.org/DAC/stats/data.htm
UN target
0.7% GNI

34. The Foreign Aid Debate – two
extremes
• A commitment by the rich world of $195 billion per year between 2005
and 2025 could end extreme poverty.
– Jeffrey Sachs
• Professor of Economics and Director of the Earth Institute at Columbia University
• Author of:
– The End of Poverty: Economic Possibilities for Our Time
– Common Wealth: Economics for a Crowded Planet
• Foreign aid does more harm than good by preventing developing countries
from searching for their own solutions and undermining local institutions.
– William Easterly
• Professor of Economics at New York University
• Author of:
– The Elusive Quest for Growth
– The White Man’s Burden

35. Aid & Income in Sub-Saharan
Africa
300
350
400
450
500
550
600
650
700
750
800
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
GDPpercapita,USDollars(2005constant)
Aid,millionsofUSDollars(2009constant)
Source: Author’s calculations using data from World Development Indicators.

36. Aid & Income in Sub-Saharan
Africa w/out Foreign Aid (W.
Easterly camp)
300
350
400
450
500
550
600
650
700
750
800
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
GDPpercapita,USDollars(2005constant)
Aid,millionsofUSDollars(2009constant)
Source: Author’s calculations using data from World Development Indicators.

37. Aid & Income in Sub-Saharan
Africa w/out Foreign Aid (J.
Sachs camp)
300
350
400
450
500
550
600
650
700
750
800
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
GDPpercapita,USDollars(2005constant)
Aid,millionsofUSDollars(2009constant)
Source: Author’s calculations using data from World Development Indicators.

38. Does Foreign Aid help or hurt?
300
350
400
450
500
550
600
650
700
750
800
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
GDPpercapita,USDollars(2005constant)
Aid,millionsofUSDollars(2009constant)
Source: Author’s calculations using data from World Development Indicators.

39. MEASURING PROGRAM
EFFECTIVENESS
Section 3

40. Measuring Aid Program
Effectiveness
• Antidotal evidence
• Cost/Benefit Analysis
• Measure outcomes based on changes to the
indicators discussed earlier in this module
(e.g., GNI per capita, HDI).
• Randomized Control Trials (RCTs)

41. Randomized Control Trials
(RCTs)
• Similar to the way drug companies test the
efficacy of pharmaceuticals.
• Participants are randomly assigned to either
the treatment group or the control group.
• After the trial period, compare outcomes
between the groups to measure policy impact.
• Poor Economics will discuss RCTs and their
utility in development at length.