Economist Michael Clemens wanted to know if foreign aid prompts economic growth in developing countries. It is a tough question to answer.
Clemens tries to do so here:
Poor countries that receive aid do show economic growth. But is it the aid that causes the growth, or is growth due to other factors? Experts argue in favor of both sides of that equation. Clemens says it remains a chicken-and-egg conundrum.
To try to figure out if it’s a chicken or an egg, he teamed up with fellow economists Steven Radelet, Rhikil Bhavnani and Samuel Bazzito try and find out how aid impacts economic growth. They set aside short-term programs that would not show results for a long time – like women’s empowerment campaigns and vaccine drives – and focused on more tangible projects with more immediate potential impacts. Those included transportation projects, infrastructure investments and agriculture support.
Things still got tricky. They looked at the changes over a five-to-ten year period, but had to control for things that are out of the control of aid projects. For example climate change effects, poor governance and civil conflict.
After all the manipulation what do they find? A rise in economic growth follows in the path of aid. Problem is that it is an average and the growth is quite small. Many countries see growth decline following aid inflows. They also found that increasing aid does not lead to increased growth.
So what is the bottom line? “Foreign aid by itself probably can never be a growth strategy for the economies of the developing,” explains Clemens.
Growth is going to come from other places such as investments, trade and labor mobility.
Still confused? Watch Clemens explain the research in this short video for the Royal Economic Society that includes some handy animations and read the research paper