This document discusses factors that influence the effectiveness of aid in promoting growth, reducing poverty, and increasing private investment. It finds that aid works best in countries with good economic management policies. Countries with stable macroeconomic policies and strong institutions see aid increase growth by 0.5% of GDP and private investment by 1.9% of GDP. However, aid has little impact in countries with poor economic management and weak institutions. The document also notes that bilateral aid allocation is often influenced by political interests rather than economic conditions, while multilateral aid focuses more on countries with good policies. For aid to be most effective, it recommends targeting the "high impact countries" that have both high poverty and good economic policies.

1. ASSESING AID
What Works, What Doesn't, and Why
A World Bank Policy Research report, Nov.1998,
Chapter 1
Sharkhuu Munkhbat
ODA Policies in Global
Development Strategy
Nov 8, 2012
MONEY MATTERS - IN A GOOD
POLICY ENVIRONMENT

2. I. Introduction
II. Different Countries, Different Fortunes
III.Importance of good Economic Management
IV.Aid impacts:
Growth
Poverty
Private investment
V. Bilateral and Multilateral Aid
VI. Focused Aid
VII. Conclusions
2
Table of Contents

3. • Has aid reduced poverty, increased per capita
income and promoted private investment?
• In the reality, this does not happen. Some
countries benefit more than others.
• The reason: Aid effectiveness largely depends on
the institutions and policy frameworks in recipient
countries.
• Good economic management: Aid leads to
higher private investment, rapid growth and a
faster decline in poverty.
• Poor economic management: Aid has little effect
on development.
3
I. Introduction

4. 4
The economic and social
development in the developing
countries has been very different.
Some countries did very well and
achieved high growth and less
poverty. Some countries didn't
Three categories: fast growers,
slow growers and no growers.
II. Different Countries,
Different Fortunes

5. 5
Good institutions such
as the strength of
private property rights,
the rule of law and
quality of civil society
affect long term growth.
A stable macro-
economic climate such
as good fiscal,
monetary and trade
policies are crucial for
investment and growth.
Good economic management provides a
fertile environment for growth.
III. Importance of good
Economic Management

6. 6
Countries with good
economic management
can grow faster

7. 7
Lower-middle income countries
grow faster than middle income
countries. Good management
attracts a lot of FDI, technology
transfer from advanced
economies and investment with
high return to capital and that
leads to high growth.
Such countries grow slowly at all
income level. Poor countries
have the potential for rapid
growth if they put good policies.
Good management group
Poor management group

8. IV. Aid impacts: Growth
8
Weak relationship
between aid and per
capita growth in
developing countries.
IV. Aid impacts: Growth

9. 9
It would be mistake to interpret this as evidence that aid
reduces growth. Two problems:
1. Other factors that
affect growth should be
considered.
2. In some cases aid may
be given to countries that
are growing slowly.
Some countries received a lot of assistance and grow
slowly, while other countries received little aid and
grow faster.
IV. Aid impacts: Growth

10. IV. Aid impacts: Growth
10
Aid has a positive effect on
growth in countries with
good economic management.
With poor economic
management, aid decreases
growth by 0.3 percent.
With good economic
management, an additional
1 percent of GDP in aid
increases growth by 0.5
percent.
IV. Aid impacts: Growth

11. IV. Aid impacts: Poverty
11
Empirical study shows that
every country with increasing
per capita income has a
decline in poverty.
In the expanding economies,
per capita income grew 4
percent, and poverty declined
5 percent.
In countries with good
economic management the
expected effect of aid on
poverty reduction can be high.
IV. Aid impacts: Poverty

12. IV. Aid impacts: Private Investment
12
One percent of GDP in
assistance increases private
investment an extra 1.9
percent of GDP in good
economic management
countries.
The combination of good
economic management and
foreign aid can promote
private investment.
IV. Aid impacts: Private Investment

13. V. Bilateral and Multilateral Ai
13
Bilateral aid has a weak,
negative relationship. A
doubling of per capita income
leads to a 33 percent reduction
in aid.
Multilateral aid or World
Bank’s International Develop-
ment Association (IDA)
facility has stronger relation-
ship than bilateral aid. For
IDA, a doubling of per capita
income leads to a 90 percent
reduction in aid.
V. Bilateral and Multilateral Aid

14. 14
2. Aid allocation often
depends on the political
or strategic interest of
donor (Bilateral aid).
- U.S. aid in the Middle
East or European aid to
former colonies.
1. Aid discrimination
against large countries.
- Large countries receive
less aid per capita (China
and India).
Two factors which undermine this
relationship:
V. Bilateral and Multilateral Aid

15. V. Bilateral and Multilateral Aid
15
Good and poor manag-
ement countries have
received roughly the
same average assistance.
Strong influenced by
political interests. Being
a former colony of a
major donor is more
valuable in attracting
bilateral assistance than
having good management.
V. Bilateral and Multilateral Aid

16. 16.
The allocation of
multilateral aid has
depended on good
management.
Political and strategic
considerations were not
significant.
Lower-middle income
countries with good
management received 30
percent more aid than the
poor management country.
V. Bilateral and Multilateral Aid

17. VI. Focused Aid
17
VI. Focused Aid
There is more focused approach to make aid more
effective.
Aid is most effective in reducing poverty in those
countries that have both mass poverty and a good
policy.
113 developing countries are classified based on their
incidence of poverty and the quality of their policies.

18. 18
High
impact
quadrant
There are millions of poor
people in need of help, but
the policy environments
are not good enough for
aid to have much effect.
In the remaining two bottom
quadrants aid is less effective. There
are fewer poor people to help.
An extra $10 million increase
in aid would lift 7 million
people out of poverty, while a
targeted increase in aid to the
high impact quadrant could
lift 25 million out of poverty.

19. VII. Conclusions
• Aid can increase growth, reduce poverty and promote
private investment.
• Its effectiveness depends largely on recipient country’s
economic management and institutional quality.
• Countries with good economic management can benefit
more from aid than others.
• Since most official development assistance is bilateral, the
allocation of all aid together (multilateral and bilateral)
shows little relationship with the quality of country
economic management.
• Being more focused on High Impact countries–good
policy and high poverty-can increase the aid effectiveness.
• To improve the economic management and institutional
quality in poor countries, the priority of development
assistance is to contribute to policy reform. 19
VII. Conclusions

20. 20
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