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FOREIGN AID AND DEVELOPMENT edited by Finn Tarp with assistance
from Peter Hjertholm
CONTENTS | PREFACE | SUMMARY AND SYNTHESIS
PART I: Major themes
PART II: Aid instruments
PART III: Economic perspectives on aid design
PART IV: Broader issues
This book is concerned with the role and effectiveness of foreign aid in development. It is part of a widespread and ongoing process of evaluations of past experience with foreign aid in the aid community, including recipient countries, researchers, and aid agencies. Much of the recent work reviewing the role of aid has been critical. While there is much to criticise, the papers in this volume approach aid from a variety of perspectives and try to come to grips in a constructive manner with the complexity of the aid-development nexus in both the short and long run. World War II marked a point of major change in the evolution of the world economy, and the post-war experience with foreign aid should be seen in the context of the emergence of a large number of new nation states and the breakdown of the earlier colonial system. In the 50 years since World War II much has been learned, and much has changed in the world: economic and political systems, motivating ideologies, and the degree of integration of the world economy. The motivation for aid has evolved during this period and the turn of the century is an appropriate time to take stock:
The past four to five decades have witnessed a massive outpouring of studies on foreign aid, and this flow has intensified during the last few years. There are many reasons for this, including:
The existing literature is of widely varying quality and accessibility and has often responded to specific institutional interests and needs. This book tries to provide a broad-minded and systematic overview. Moreover, the contributors to this volume can be characterised as a group of independent scholars and aid practitioners. They are mainly economists, but the group also includes political scientists. Some have extensive background in development economics and policy analysis, and have participated in the aid process for many years. Others have entered this field more recently, bringing with them fresh perspectives and technical skills. The group of authors does not subscribe to a common set of economic policy recommendations, and the reader will find differences in emphasis and interpretation from chapter to chapter. The reader will also note a shared and deep-felt concern with how to improve the plight of the more than one billion poor people in the world who do not have acceptable standards of living. Foreign aid is mainly approached from the perspective of donor countries and institutions, but the fundamental goals of economic development are kept in mind throughout. In addition to providing overviews of the evolution of development doctrine and the role of aid, this volume provides new empirical evidence on the effectiveness of aid. This evidence challenges key elements of the existing conventional wisdom, leading to more balanced policy conclusions. Fresh insights into the use of the various aid modalities, which are in a complex process of reform, are also offered. Taking stock and reflecting on how aid should be designed in the future to promote economic development (with a focus on growth, poverty alleviation, and social justice) are core themes. To this come reviews of the past, present, and future of aid as it emerges from analyses by political scientists. Finally, while much of what is said refers to a variety of poor countries in different regions of the world, particular attention is paid to the development challenges of Africa. The original outline of the book was drafted in early 1997. During a one-day brainstorming meeting held at the Institute of Economics at the University of Copenhagen in October 1997, ideas were thrashed out in more detail, and a set of broad guidelines was agreed upon. An advisory editorial board was also established. The members include:
These three experienced professionals have supported me throughout, and I would like to express my most sincere gratitude for the time and effort they put into this task. E-mail has made it easy to communicate in writing, but Sherman Robinson's several visits to Copenhagen over the past two years have facilitated deeper interaction and played a fundamental role in moving this project along. During a second authors' meeting in Copenhagen in October 1998, draft papers were presented and discussed, and subsequently we have gone through a refereeing process of all papers. In this process, many valuable comments and suggestions have come up, and I would like to express my appreciation to those, who took it upon themselves to serve in this function. This book would never have come about without the organisational talent and editorial skills of Peter Hjertholm. He helped conceive the project, put in long hours of hard and dedicated work in reviewing and revising the individual chapters, kept track of all the files, and in the final phase played a central role in getting the complete manuscript together. I am deeply thankful to Peter for productive partnership and friendship. Excellent research assistance was provided by Steen Asmussen, and Henning Tarp Jensen, and Vibeke Kovsted has in her quiet and well organised manner kept track of a wide range of administrative work and problems. They deserve in each in their way major credit, and I am greatly indebted to them. I am also grateful to Henrik Hansen, Rasmus Heltberg, Jens Kovsted, and Uffe Nielsen. They are on the authors' list as is Peter Hjertholm. They have, however, also contributed to the book through our many daily interactions from which I have derived a lot of inspiration. Moreover, they have never failed in making our common working environment both professionally stimulating and enjoyable. During this project we have had excellent offices and meeting rooms, and the access to other facilities (such as computers) has been superb. I am therefore grateful to the Institute of Economics of the University of Copenhagen for providing this infrastructure. I also wish to acknowledge the financial support received from the Danish Development Research Council and the North/South Priority Research Initiative of the University of Copenhagen. The North/South Initiative is headed by Professor Holger Bernt Hansen, who encouraged the project from start to end. Finally, I would like to express my most sincere appreciation to the group of authors. It has been both a pleasure and a great privilege to collaborate with such a distinguished and knowledgeable group. Finn Tarp
Sherman Robinson and Finn Tarp Introduction and background The evolution of the world economy over the past decades has been complex. There have been interrelated changes in resource accumulation, population growth, growth in knowledge, and improvements in production technology, all operating in an environment, characterised by frequent and dramatic transformations in politics and institutions. In this overview we touch briefly on a number of these themes and their relationship to the ongoing debate about the role and effectiveness of foreign aid. The discussion draws on the chapters in this volume, which go into much more detail on particular issues. Historical performance Economic development after World War II has been spectacular. The developed world recovered rapidly from the ravages of war and went on growing on an unprecedented scale. The developing countries have also performed well on average. The World Bank in its 1997 World Development Report lists data for 133 economies. It classifies 49 of them as low-income, 41 as lower-middle income, 17 as upper-middle income and 26 as high-income. There has been much movement in relative rankings and many of the current middle- and some of the high-income countries started out very poor in the post-war period. However, at the two ends of the spectrum there has been less change. The rich have stayed relatively rich and many of the poorest countries have not escaped poverty. Of the 49 low-income countries, most are African, a few are Asian, and very few are Latin-American. While there are many examples of development successes, there is also evidence of a widening gap between the most and least successful; and the lagging economies are mostly African. Moreover, the numbers of poor and malnourished people have grown over the past decades, and more than one billion of the world's population have an income of less than a dollar a day. While most of the poor countries are African, most of the poor people are Asian. To the extent that aid is concerned with reducing poverty, there is a clear justification for focussing on Africa and Asia. Yet, the two regions are very different — it appears that the underlying problems and impediments to growth are more intractable in Africa. Even a cursory review of the data on economic performance also indicates that development in the last half century has been a complex and variegated process. In searching for lessons from this experience, one should be aware of the dangers of over-simplification. Single-cause theories have not fared well and simple policy recommendations are often inappropriate in a complex world. In economics, and particularly in development economics, it is very important to define the domain of applicability of a theory and related policy conclusions. The issue is not whether aid "works", but how and under what circumstances and economic policy environments. Generally, the papers in this book do not question if aid works, but most find that different modalities are more or less appropriate and effective at different stages of development and economic circumstances. In addition, justifications for aid have evolved over the past 50 years, reflecting changes in both development theory and politics. How well aid works and should be allocated must be judged with reference to underlying goals. Justifications for aid in the past A number of alternative, but not mutually exclusive, justifications for aid have been articulated over the years.
On these criteria, the post-War experience with development has been remarkable. Income growth has been dramatic, although poverty remains a stubborn problem. The Cold War is over. It also appears that many of the goals linked to economic development are increasingly being achieved. There are many encouraging cases of transitions from right and left wing authoritarian regimes to democratic systems. Social development is taking place, and markets are opening (including a greater role for foreign trade and investment). There is now much support for the earlier controversial argument that economic development would provide an enabling environment for such social and political progress. The economic development argument for aid requires an underlying theory of the process of development and how aid can help foster that process. In Part I, Erik Thorbecke and Irma Adelman (Chapters 1 and 2) explore the evolution of economic development theory over the past five decades and views on the role of government in both historic and post-war perspectives. Thorbecke describes how the term "economic development" has incorporated many different concerns, reflecting changes in theory, existing data systems, and the world economic environment. His road map clarifies the interrelationships among development goals, development theories, strategies and policies, and the potential roles of aid. He starts with GNP growth, and then traces the gradual addition of issues over time, including balance of payments, employment, income distribution, poverty, stabilisation and structural adjustment, sustainability, and world financial management. As development concerns have broadened, aid in this schema has changed focus from a simple concern with resource mobilisation to a much more multi-dimensional role. Part II of this volume in which alternative modalities of aid are reviewed illustrates this evolution. Most aid is channelled from government-to-government. Adelman outlines how the role of government in industrialisation has changed in the 19th and 20th centuries. She also discusses ideological perspectives and the appropriate role of government in modern developing countries, and makes the argument that the government has a critical, and positive, role to play in the development process. In so far as aid supports government activities and policies, the two are closely related. This theme is picked up in many chapters in Parts III and IV, addressing the appropriate design of aid and broader issues, including conditionality. Changing economic and political environment Throughout the history of aid there has been interplay between the volume and character of economic aid, on the one hand, and the changing nature of the challenges facing recipient countries, on the other. In the immediate post-war period, the problem in Europe was lack of capital. The response was the Marshall Plan, which in part gave rise to many elements of the existing system for aid delivery. Peter Hjertholm and Howard White (Chapter 3) discuss institutional developments and provide historical data on aid flows, and Raymond Hopkins (Chapter 19) provides a political economy perspective on these issues. After the success of the Marshall Plan, attention turned to developing countries. Aid flows grew in real terms until the early nineties and represented a relatively constant share of the growing GNP of the donor community during the period 1970-90. After 1990, aid flows have fallen both absolutely and as a share of donor GNP. To this come changes in the relative importance of multilateral versus bilateral aid, the increasing importance of European aid, the changing role of commercial lending versus aid, the substantial increase in foreign direct investment, the mind-boggling growth of short-term foreign exchange transactions relative to foreign investment and foreign aid, and the increasing role of trade versus aid. The decline in aggregate aid flows can be attributed to a number of causes:
These perceptions represent a serious challenge to the economic development rationale for aid, leaving only the humanitarian aid motive intact. This book focusses on economic development issues in the aid debate, challenges some of the negative perceptions, draws lessons from past experience, and discusses the requirements for successful aid programmes in the future. While often critical of aid in the past, the contributors to this volume are in broad agreement that there remains a valid economic development rationale for aid in the future and delineate its components. Aid from a macro perspective The earliest work in the 1950s on economic development focussed on aggregate growth and resource mobilisation. The underlying analytical framework was the Harrod-Domar growth model, linking growth to aggregate investment. This framework was extended in the 1960s to add a foreign exchange constraint in the Chenery-Strout two-gap model. The Harrod-Domar growth model provides the core of the underlying economic paradigm for analysing aid effectiveness at the macro level. Recent work on "new growth theory", which attempts to endogenise productivity growth, has extended the paradigm and provides the analytical basis for a few recent empirical cross-country studies. These models and their influence are discussed by Erik Thorbecke (Chapter 1), Henrik Hansen and Finn Tarp (Chapter 4), Marion Eeckhout and Paul Mosley (Chapter 5), and Peter Hjertholm, Jytte Laursen, and Howard White (Chapter 15). There have been many cross-country studies of aid effectiveness based on the simple macro growth models. The underlying causal chain runs from aid to savings to investment to growth. In the "new growth theory" approach, the investment variable and productivity are assumed to depend on policy and institutional variables. The "conventional wisdom" based on this work can be summarised as follows. Results on the impact of aid on aggregate growth are mixed. Some studies find statistically significant links, some do not. The conclusion has been that there is no robust relationship between aid and aggregate growth. The "micro-macro paradox" builds on this result and makes the stronger statement that while many studies conclude that aid is effective at the project level, no macro impact can be found. An influential recent study by Burnside and Dollar (1997) "resolves" the paradox by concluding that aid is effective, but only when the macro policy environment is "right" — a conclusion which supports the "Washington Consensus" view of appropriate development policy. Hansen and Tarp (Chapter 4) provide an encyclopaedic review of the cross-country literature. They conclude that the conventional wisdom needs to be qualified:
There has been continuing debate on using aid effectiveness measures as criteria for the allocation of aid across countries. The Washington Consensus view is that more aid should go to countries with good policy environments. Earlier debates were phrased in terms of allocating aid to countries where its "marginal productivity" was the highest. It has long been recognised that mechanistic use of such criteria would lead to directing most aid to countries which need it the least. Conversely, aid is probably needed most in countries in which it is least effective. Maximising the marginal productivity of aid with respect to aggregate growth is not the only relevant criteria for aid allocation. There is certainly merit in more sophisticated versions of arguments for selectivity, but they depend on a more complete understanding of the complex links in particular country circumstances between aid, growth, and development objectives such as poverty reduction. For example, it makes little economic sense to do structural adjustment lending, when the macro policy environment is "bad" and there is little possibility for policy reform. On the other hand, it may well be possible to design effective modalities that direct aid to improving the situation of malnourished children even when macro imbalances continue. The same may be true for aid for long term institutional and human capacity building Aid from multi-dimensional perspectives As we move beyond the macro perspective with its focus on resource mobilisation, aggregate indicators, and macro relationships, we shift to different analytical frameworks. This makes it more difficult to generalise. A wider array of goals, instruments, and socio-economic and political variables and institutions appear on the scene, and it becomes necessary to develop more disaggregated data systems to support the analysis as discussed by Thorbecke (Chapter 1). New issues include: poverty alleviation, inequality, employment, basic human needs, gender equity, macro stability, sustainability, environmental protection, and political and social transformation. Moreover, policy analysis and evaluation of the past performance and future potential role of aid become more subtle, since an intricate web of forces and constraints, which will vary from country to country, have to be considered. Analysis of these issues and their links to foreign aid requires the whole tool box of economics and also draws on other social sciences. There are, however, generalisations and lessons to be drawn from past experience, which most of the chapters in Parts II, III, and IV seek to distill, working within this broader framework. Aid modalities There has been a continuing debate in the aid literature on the relative merits of project versus programme aid. In recent years the distinction has become blurred. Eeckhout and Mosley (Chapter 5) document that the project component of aid budgets has declined dramatically from the early seventies. A variety of other instruments have gradually grown in importance, such as policy-conditioned programme aid (e.g. structural adjustment lending), support for the private sector, NGO support, emergency assistance, and technical assistance and cooperation. There is also a move towards "sector programme aid", discussed in detail by Ole Mølgård-Andersen (Chapter 7). This shift represents an appreciation of the need to exploit synergies and externalities across projects within broad sectors. It can also potentially facilitate donor coordination to achieve an appropriate balance within sectors and across sectors within the economy. An understanding of how a collection of donor supported investment activities are linked within a coherent programme should also facilitate more effective policy dialogue and ownership by the aid recipient. Mølgård-Andersen covers the main issues, many of which are regularly missed in the aid debate, including the potential conflict caused by the dual origins of sector programmes, i.e., as a new way of running projects and as the latest incarnation of programme aid. Technical cooperation is addressed explicitly by Channing Arndt (Chapter 6), and this aid modality also forms an important part of the analysis of poverty by John Healey and Tony Killick (Chapter 9) and the review of experiences with public sector reforms by Elliot Berg (Chapter 12). Such programmes have largely, and correctly, been phased out in the more successful developing countries, which have achieved the necessary level of knowledge infrastructure. This is not the case in low-income Africa and Asia, where knowledge transfer and institution building remain critical challenges. The authors discuss the many problems and mixed success of technical assistance programmes in the past. They all argue that while much of this critique is valid, it is crucial to expand the effort and find ways to manage this aid modality more effectively in the future. Based on past experience, they also suggest a number of specific ways to do so, recognising that this is a long run endeavour where there are no quick and easy fixes. Food aid is an important component of aggregate aid flows in many low-income countries, and Bjørg Colding and Per Pinstrup-Andersen (Chapter 8) consider the pros and cons of this modality. Given the economic development focus of this book, they concentrate on programme food aid and argue that it can be an effective element of a food security strategy. Food aid must, however, be managed in such a way that it does not disrupt local agricultural markets, which would adversely affect poor farmers. They also argue that programme food aid be discontinued in cases where it is not additional — it is an expensive form of resource transfer and should be replaced by more cost-effective aid instruments. Issues of how to link relief to development are taken up by Tony Addison (Chapter 17). Poverty, gender, and the environment Three chapters deal specifically with the fundamental goal of poverty alleviation and the increasing importance of understanding gender imbalances and the environmental dimension of development. Issues of poverty, income distribution, and basic needs were in focus already in the development debate in the 1970s. They slipped into the background in the 1980s when attention shifted to stabilisation, international financial flows, and structural adjustment. They re-emerged as important issues in the 1990s when old, but pushed aside concerns were revived. Healey and Killick (Chapter 9) stress that anti-poverty action is difficult to achieve. The problem is complex and location-specific, with deep roots in the social fabric and distribution of economic and political power. It is also argued that it is not evident that donors have a comparative advantage in this area, and it is difficult to imagine any aid programme having a significant short run impact on the overall functional and size distributions of income. There are, however, many opportunities where poverty alleviation objectives can be pursued in practice, focussing on programmes in education, health care, nutrition, social safety nets, sanitation, etc. that help ameliorate excesses of poverty and provide a basis for greater inter-generational income mobility in the long run. In their conclusion, Healey and Killick also link up with issues of selectivity, policy conditionality, and partnership. Given the fungible nature of aid resources in this field, donors can do little without domestic ownership and the active cooperation of aid recipients. Gender as an issue in development economics is related both to the goal of equity between men and women and as an analytical category which is crucial for the understanding of how households operate and allocate resources. As an analytical category, gender analysis should therefore be an integral part of any analysis of how policy interventions — including aid programmes — affect the intra-household distribution of income, food, and leisure. Lisa Richey (Chapter 10) reviews these issues. She traces the different formulations of the "woman question" and their meanings for development aid, discusses how aid programmes can support the goal of gender equity, and warns that the process of "mainstreaming" gender analysis carries with it the danger that such concerns will not receive adequate attention. Four general recommendations on how to promote a gender agenda in practice conclude the paper. They range from strengthening gender commitment and support to attitudinal changes to the need for modified monitoring and evaluation procedures. Environmental concerns entered the development discourse in the 1970s, focussing on issues of global resource depletion and "Malthusian" population growth scenarios. Since then two strands have emerged. The first relates to global externalities such as global warming, reduced biodiversity, and resource degradation. The second relates to local, within-country, externalities such as soil depletion, degradation of water and other natural resources, and air pollution. These issues are discussed by Rasmus Heltberg and Uffe Nielsen (Chapter 11). They argue that the first kind of externality requires a global policy response with environmental transfers that should not be seen as development aid. Local environmental problems involve externalities and incomplete markets in which government intervention is required. Aid has a significant role to play in developing countries which lack knowledge and resources to address such challenges effectively. In the past, developed countries polluted first and cleaned later. In many developing countries, with high population densities and fragile resource bases, it is necessary to deal with externalities sooner rather than later. We also now have knowledge about both the effects of environmental degradation and technology to deal with them that were not available in the early stages of modern industrialisation. Aid can play a positive role in transferring this knowledge. Institutional and systemic reforms, and macro policy The evolution of government and market institutions is an integral part of the development process. Institutional changes can hinder the development process if they do not take place in a flexible manner in response to emerging needs and priorities. Adelman (Chapter 2) discusses the evolution of government institutions in a long historical perspective. In contrast, Berg (Chapter 12) reviews the experience with public sector reform initiatives over the past 15-20 years. He argues that the lack of success in such reforms hinders the development process. In particular, he suggests that public sector reform is a prerequisite for the effective use of aid resources, which largely flow through government agencies. He reviews a number of aid supported public sector reform initiatives, which have by and large failed, and places responsibility for this situation on both donors and aid receiving countries. Institutional development is also important in the private sector. A major theme in the development debate in the past 20 years has been how to encourage greater reliance on market mechanisms. Mads Kragh, Jørgen Birk Mortensen, Henrik Schaumburg-Müller, and Hans Peter Slente(Chapter 13) discuss a range of initiatives, which donors have taken in the past and could pursue in the future, to enhance the productivity and competitiveness of their private business sectors, including support to the development of private market institutions. They review a number of concrete examples in a variety of countries and conclude that there is a beneficial role for such direct private sector development aid to complement government-to-government aid designed to further the establishment of an enabling environment for private sector activity. Following the Asian financial crisis there is renewed attention to the problems of inadequate financial systems in developing countries. Jens Kovsted (Chapter 14) reviews past experience with aid designed to strengthen the financial sector. He considers a number of issues: institutional development, modes of government regulation, and the development of new institutions such as micro-finance. He asserts that the combined presence of macroeconomic and social stability and an effective financial system facilitates efficient resource mobilisation and allocation, and therefore promotes growth. He also notes that increased globalisation of world capital markets puts growing pressure on the financial systems of developing countries to effectively intermediate increased international flows of short and long term capital. Institutional development of the financial sector is an important part of increasing the capacity for domestic resource mobilisation in developing countries. It facilitates the savings side of the savings-investment gap. The trade balance is the second gap, and the government budget deficit has been introduced into the development literature as a third gap in the three-gap model. Hjertholm, Laursen, and White (Chapter 15) consider the role of foreign aid focussing on these three gaps. They also warn of potential macroeconomic problems whereby the link between aid flows, savings, and resource allocation gets distorted. At the macro level they note a potential moral hazard problem where the fiscal response to increased aid is to lower the tax effort and hence increase the government deficit. Secondly, aid may induce an appreciation of the real exchange rate leading to lower exports and higher imports — the Dutch disease. Thirdly, they discuss issues of fungibility whereby aid resources lead to off setting changes in government expenditure, limiting the net effect on real development expenditure patters. Fourthly, they note that aid in the form of concessional loans still represent a net increase in the stock of debt that must eventually be repaid. Finally, the potential role of aid in the future is discussed with reference to how to close, rather than fill, the three resource gaps. Broader issues The chapters in Part IV revisit some of the issues raised in previous chapters, but do so from different perspectives. They also raise additional issues not easily categorised elsewhere, but which are nevertheless important when thinking about the role, effectiveness, and future of foreign aid. Oliver Morrissey (Chapter 16) discusses aid in the context of a more liberalised world trading environment. The world has seen successive rounds of global trade liberalisation since World War II, and the past 20 years have seen dramatic shifts from inward-looking to outward-oriented trade strategies in a large number of developing countries resulting in a greatly increased role for international trade. Trade shares have risen dramatically and the volume of world trade has grown much faster than output. Morrissey notes that not all countries benefit equally from increased trade, and there is evidence that the low-income countries may even loose from further liberalisation. In addition, even if a country gains in the long run, it will experience significant adjustment costs as it restructures its economy in the short to medium-run. Besides global trade liberalisation many developing countries are joining regional trade agreements. Existing empirical evidence supports that this development may be beneficial, especially if a particular agreement incorporates a large, preferably developed country (e.g. NAFTA). Morrissey argues that there are three implications of these trends for aid policy: (i) there is a need to finance adjustment costs, (ii) there is an argument for aid to compensate low-income developing countries that may loose out in the liberalisation process, and (iii) support for the establishment of regional trading blocks may be warranted (e.g. the Southern Africa Development Community). Emergency aid is an important component of aid flows, and there is increasing interest in devising ways in which such aid can be provided in a forward-looking, development-oriented manner. At the same time, the world has seen the emergence of many regional armed conflicts since the end of the Cold War. Addison (Chapter 17) discusses the role of aid before, during, and after armed conflicts break out. During conflicts, aid can play a limited role in humanitarian assistance and assist in the transition from war to peace. There are, however, serious problems in operating in war time environments. Addison notes that aid can complicate conflicts when it falls into the hands of belligerents. After war episodes, aid has a major role to play in very costly reconstruction and rehabilitation efforts. Finally, Addison considers the possibility for using aid to prevent conflict in areas at risk. He argues that we should build foreign policy support to use aid in conflict prevention. Such aid should be focussed on reducing poverty an inequality to dampen social tensions and supporting institutions and processes for conflict resolution. While we have argued that aid efforts should be focussed on the poorest countries, most of which are in Africa, past experiences in this region have been disappointing. Ravi Kanbur (Chapter 19) characterises the current nexus of aid conditionality and debt regimes in Africa as dysfunctional. A major source of this situation is the unhealthy relationships between donors and governments in the region. The end of the Cold War and the beginning of democratic transitions in African countries make Kanbur tentatively optimistic about future possibilities for aid impact. He lists four factors that will be central: (i) donors must be less intrusive and respectful of government prerogatives, (ii) donors must be consistent in defining and enforcing the terms of aid agreements, (iii) debt relief is important, and finally (iv) if such reforms lead to a fall off in the volume of aid it is less important than redefining the relationship between donors and aid recipients. Finally, Hopkins (Chapter 19) reviews political economy reasons for the declining trend in aid. In addition to the end of the Cold War and poor performance discussed above, he adds (i) dying patron-client ties, (ii) tight budgets in donor countries, (iii) smaller pay-offs for special interest groups in developed countries, and (iv) the ascent of a "neo-liberal" outlook which sees a smaller role for government and seeks reductions in entitlement spending. In exploring the potential sources of support for aid in the future, Hopkins argues that three aid targets can appeal to overlapping domestic and transnational coalitions. These programmes are state strengthening, improved market management, and emergency safety nets. He concludes that in the future a major condition to generate support for aid is a belief in its efficacy. From a political science perspective, however, there are reasons to worry. Many of the potential aid recipients are what he calls "anarchical states", characterised by terms such as "patromonial, shadow, rent seeking, semi-sovereign, mafia-like and corrupt". In this environment "state failure" is the greatest threat to the success of aid. Those countries which need aid the most are precisely those countries where aid may be least effective, in this case for political rather than economic reasons. Conclusion There are many general lessons about appropriate development strategies that have emerged from post-War experience. We have learned from both successes and failures, and the development agenda has expanded considerably. While lots of disagreements remain, important elements of consensus now exist about many of the components of successful development strategies. These include:
Developing countries vary widely in initial conditions, which affects their potential for development. There are also trade offs and substitution possibilities among the elements listed above — there are many roads to success. However, these trade offs are undoubtedly not continuous. There are threshold effects and critical minima. There are also externalities and synergies across the different elements. Determining the appropriate balance among these elements and their sequencing over time defines much of the subject matter of modern development economics. During the past 50 years, foreign aid has been associated with development successes and failures. With hindsight we can see that many of the failures were due to the pursuit of what we now know to have been inappropriate development strategies rather than to any deficiencies in aid modalities and implementation. It is crucial in evaluating the effectiveness of aid programmes to distinguish failures of the aid process from failures of overall development strategy. As an aside, it is worth noting that much of our present knowledge about what works and what does not work in development is based on research sponsored by aid agencies. There are many examples where aid played a significant part in supporting what turned out to be successful development strategies. In that sense aid has worked, and worked well; and the cross country evidence shows that on average successes have outweighed failures. Conversely, there are many examples where for various reasons aid has failed to support elements of a correct strategy. One can distinguish two kinds of aid failure. The first is a failure in aid strategy. In this case, aid is pursued in spite of the fact that we know that it fails to support any of the elements of successful development strategies. Continuing structural adjustment lending to support macro reforms when they are not going to take place in the foreseeable future is an example. Another example is project or programme lending in an environment where the recipient simply diverts fungible aid resources to unproductive or outright harmful uses. The second kind of aid failure relates to aid delivery, including design, modality, or implementation. Examples include transferring inappropriate technology ("white elephants"), and relying on ill-trained technical assistance personnel. Not enforcing conditionality is a failure of implementation — imposing inappropriate conditionality is a strategy failure. A successful aid programme requires matching one or more elements of a desirable development strategy with an appropriate aid strategy, supported by well designed modalities and effective implementation. A good aid strategy must take account of social and political forces in the recipient country that impinge on the possibility to pursue change. Prioritising among elements of the development strategy is not by itself an aid issue, but rather involves judgements about binding constraints on development. Designing an appropriate aid strategy not only takes account of such priorities, but also considers the feasibility of addressing them through the aid mechanism. It is often argued that poor countries with good policies should get more aid than ones with mediocre policies. However, in an environment where it is not feasible to improve, for example, macroeconomic management, it may well be feasible and desirable to use aid to support other elements of a successful development strategy, although perhaps with a longer time horizon in mind. Indeed, in the very poor countries, development priority should be given to long run investments in social and physical infrastructure and institutional development. In these countries one should not expect quick fixes. There is wide agreement that aid should in the future be focussed on the poorest countries, which are mostly in Africa and Asia. In these countries, aid programmes have to be designed in an environment where it is difficult to set priorities and much remains unknown. This makes aid risky. One should expect failures and learn from them. The experience of the past 50 years, however, should lead us to be confident that we will learn and that again successes will predominate.
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