Wiley Aid and Poverty Reduction

Aid, Poverty Reduction and the 'New Conditionality' Author(s): Paul Mosley, John Hudson and Arjan Verschoor
Source: The Economic Journal, Vol. 114, No. 496, Features (Jun., 2004), pp. F217-F243 Published by: Wiley on behalf of the Royal Economic Society Stable URL: http://www.jstor.org/stable/3590061 . Accessed: 14/10/2013 15:49
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp
.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.
Wiley and Royal Economic Society are collaborating with JSTOR to digitize, preserve and extend access to The Economic Journal.
http://www.jstor.org
This content downloaded from 188.26.134.49 on Mon, 14 Oct 2013 15:49:05 PM All use subject to JSTOR Terms and Conditions
The Economic Journal, 114 (June), F217-F243. ? Royal Economic Society 2004. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Maiden, MA 02148, USA.
AID, POVERTY REDUCTION AND THE 'NEW CONDITIONALITY'*

Paul Mosley, John Hudson and Arjan Verschoor
The paper examines the effect of aid on poverty, rather than on economic growth. We devise a 'pro-poor (public) expenditure index', and present evidence that, together with inequality and corruption, this is a key determinant of the aid's poverty leverage. After presenting empirical evidence which suggests a positive leverage of aid donors on pro-poor expenditure, we argue for the development of conditionality in a new form, which gives greater flexibility to donors in punishing slippage on previous commitments, and keys aid disbursements to performance in respect of policy variables which governments can influence in a pro-poor direction.
In two fundamental ways, the landscape of aid policy has changed in the last halfdozen years. At the level of ends, the basic objective of development (usually interpreted as GDP growth) in the recipient country has been replaced by the objective of poverty reduction (World Bank, 2000), so that for most donors growth in the developing world is only valuable if it can be construed as pro-poor. At the level of means, policy conditionality, until very recently seen as the main instrument for increasing the effectiveness of aid, has been dramatically thrown overboard and replaced with a concept of selectivity, in which aid agreements are only concluded with those countries whose policies are in some sense already acceptable.' For those many who support the first of these developments, it is important to know whether the second points a reliable route to achieving it. To discover whether it does is the principal objective of this paper. The proposition that conditionality should be abandoned in favour of selectivity derives principally from the well-known finding of Burnside and Dollar (2000) that aid is only effective where policies are good, yet has no ability to
* This work was carried out under a DFID research programme (R 7617) on 'Maximising the poverty leverage of aid'. The research assistance of Jennifer Mbabazi and especially Karuna Gomanee was vital, and many thanks are due to them for help with computation and data collection. Thanks are due to Adriaan Kalwijfor helpful comments. 1 The World Bank's recent WorldDevelopment Report2000/01 explains, in a section of Chapter 11 entitled 'Making aid more effective in reducing poverty' how selectivity emerges from the failings of conditionality: Studies in the 1990s (presumably Burnside and Dollar, 2000) showed little systematic relationship between conditionality and policy changes, though case studies do find positive effects under some conditions, especially where conditionality supports the hand of reforming groups. The dynamics between aid donors and recipients explain why conditionality fails. Recipients do not see the conditions as binding, and most donors are reluctant to stop giving aid when conditions are not met. As a result, compliance with conditions tends to be low, while the release rate of loan tranches remains high. Thus aid has often continued to flow despite the continuation of bad policies. For aid to be most effective at reducing poverty, it must be well targeted. If all aid money were Selectivity: allocated on the basis of high poverty rates and reasonably effective policies and institutions, a recent study (Collier and Dollar, 1999) estimates, even today's small aid flows could lift 19 million people out of poverty each year - almost twice the estimated 10 million now being helped...In addition to targeting poverty, donors should allocate aid on the basis of the policy environment. Aid has been shown to be effective in promoting growth and poverty reduction in poor countries with sound economic policies and sound institutions - ineffective where these are lacking. (World Bank, 2000, pp. 193-6).
[ F217 ]
F218
THE ECONOMIC JOURNAL
[JUNE
influence those policies. However, there are two important reasons to hesitate before accepting this conclusion. Firstly, Burnside and Dollar's findings have been challenged on econometric grounds, most sharply by Hansen and Tarp (2001) and most recently by Easterly et al. (2003), who argue that aid effectiveness is invariant with respect to the Burnside and Dollar indicator of good policy. Secondly, whatever one's judgement may be of the balance of the econometric evidence on the relationship between aid and the Burnside and Dollar indicator, the indicator itself hardly convinces in its ability to capture comprehensively the quality of a country's policies and institutions for promoting growth (let alone pro-poor growth). It comprises only two macro-economic variables, at least two of which (inflation and budget deficit) are more readily interpreted as correlates of the growth process rather than independent causes of growth. Collier and Dollar in this symposium express very similar doubts about the reliability of the Burnside and Dollar indicator, for which reason they now work with a much more comprehensive World Bank measure of good policies and institutions. What remains to be tested is whether aid is able, through policy conditionality, to influence this measure - or those components of it which are particularly conducive to poverty reduction. The World Bank's current official position is nonetheless sceptical of what 'ultimatum' conditionality may achieve.2 Collier and Dollar (2001, 2002) take that position to its logical extreme: they derive a poverty-efficient allocation of aid that assumes that donors have no influence whatsoever over recipients' policies, in the process (presumably for ease of computation) adding the further simplifying assumption that the growth elasticity of poverty reduction is a universal constant, thereby in effect advocating aid's impact on growth as the only channel through which it impacts on poverty. Taken at face value, their specific adaptation of the World Bank's current official position implies that, in order to achieve maximum poverty reduction impact, donors need do no more than allocate aid on the twin criteria of recipients' existing economic policies and levels of poverty. It is important to realise that the Collier-Dollar approach to selectivity redefines good policy as a relative concept: the marginal aid dollar should flow to where its effectiveness is highest, under the joint influence of existing policies and levels of poverty, not necessarily to where it is high. In practice, particularly in Africa, where the majority of poor countries are to be found but there are still not many governments who yet practise 'good policies' in the World Bank sense, this principle leads to the selection of countries for unconditional aid with policies that donors are reluctant to let fester. Donor aid administrations wishing to practise selectivity feel forced to choose between underspending their budget (and thus losing influence both within their developing-country partners and within their own governments) and giving aid to bad-policy countries. The emergence of this donor's dilemma has already forced a number of donors into
2 Collier (1997) traces the origin of conditionality failure to donors being insufficiently motivated to punish recipients for non-compliance. ? Royal Economic Society 2004
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F219
reconsidering conditionality in a new form, usually under a new and euphemistic name such as 'engagement with poor performance'.3 The principal features of this third way, we shall argue, are: * multiple levels of commitment and withdrawal, rather than a simple yes/no decision on whether to give aid or not. Thus a 'very good' aid recipient will receive programme aid for policy reform, accelerated debt relief under the HIPC (Highly Indebted Poor Countries) initiative, and social-sector aid (education, health, and rural infrastructure); a 'moderate to poor' recipient only the last of these; and only a ' hopeless' recipient nothing at all.4 * the active design of alternatives to government-to-government provision, especially NGOs but also in some cases the private sector, which provides an alternative to leverage on government;5 * the exercise of pressure which operates through social and political, as well as economic, channels. It is now widely believed that aid money invested in conflict prevention, promoting democracy and equal citizenship and fighting corruption will help build social capital and thus and otherwise, further the economic objectives of growth and poverty reduction (Whiteley, 2000; Knack, 1999; Knack and Keefer, 1997), through a more long-term and indirect route. Any aid donor objective may thus be sought through three alternative methods: selectivity; traditional 'ultimatum' conditionality; or new conditionality as above described. A range of options for the specific donor objective of reducing poverty has been proposed over the last thirty years, which may be represented as combinations of one of these aid modalities and an attempt to reduce poverty in one of two ways: either by increasing the growth rate, or by enhancing poor people's participation in growth (Table 1).
3 A DFID workshop on conditionality with this title was held at IDS, University of Sussex, on 4 July 2000, and a further one-day conference on 'Dealing with Poor Performance' was held at the Royal Institute for International Affairs, London, on 29 November 2000. Two outstanding examples of the use of 'new conditionality' in practice are Uganda, where donors persisted with generous aid funding in the late 1980s and early 1990s in spite of President Museveni's strong initial opposition to the two cardinal World Bank principles of exchange rate flexibility and avoidance of export taxation, and Ethiopia, where donors indulged what was virtually a command economy until the early 1990s and were rewarded when, between 1994-6, President Zenawi embarked on a set of widespread price and expenditure reforms. For more detail see Mosley and Hudson (2002), Morrissey and Verschoor (2002) and Rock
4 More formally one could link future aid disbursements to previous performance in implementing agreed policy reform through a linear or non-linear decision or punishment rule. Poor performance would be penalised, releasing more aid money for those countries who have performed better. Provided this decision rule is known, it should induce a greater implementation of agreed policy reform, yet few countries will be totally excluded from aid and the policy dialogue process. The key factor is that the rule is known and that the donor adheres strictly to the rule. However, it is possible that initially there may need to be a process of 'trust building' during which the donor tolerates some slippage but after a certain amount of time the full rigor of the rule will need to be implemented. 5 In Kenya, Zambia and Bangladesh (to take three examples of 'moderate to poor' aid recipients) NGOs have long been involved in the provision of primary health, basic education and adult literacy, agricultural extension, small-business finance, and a number of traditional government functions; aid donors, aware of the government's weakness as a service provider, have happily used these NGOs as a supplementary channel for aid flows. ? Royal Economic Society 2004
(2003).
F220
[JUNE
Table 1 Optionsfor Increasing the PovertyLeverage of Aid

Objective Instrument Selectivity (reallocation between recipient governments) Conditionality (pressure to reform policies of recipient governments): Old 'ultimatum' variety 'New' Leverage of aid on growth World Bank programming models of 1960s and 1970s; more recently Burnside and Dollar (2000) and Collier and Dollar(2001, 2002) Leverage of aid on the growth elasticity of poverty reduction World Bank (2000, ch.11)
Traditional 'structural adjustment' approach Bilateral donors in Uganda 1992-94
World Bank 1991-3 Bilateral donors especially in Uganda, Tanzania, Ethiopia, Mozambique 1994-2000
The World Bank's current official position, as we have already emphasised, is sceptical of what 'ultimatum' conditionality may achieve. Reflecting this Collier and Dollar (2001, 2002) derive a poverty-efficient allocation of aid that assumes that donors have no influence whatsoever over recipients' policies. This has always seemed unlikely as to an extent selectivity is no more than ex-post conditionality.6 Thus they argue, although this position is slightly modified in the paper in this symposium that, in order to achieve maximum poverty reduction impact, donors need do no more than allocate aid on the twin criteria of recipients' existing economic policies and levels of poverty. To their credit, in this symposium Collier and Dollar show great awareness of the limitations of their 'benchmark allocation': donors' local knowledge, special circumstances (terms-of-trade shocks) and recipient characteristics not included in their original analysis (inequality, corruption, the composition of government expenditure) all represent legitimate reasons for deviations from the 'efficient' allocation of aid proposed in their previous papers. Moreover, they cite studies of cases in which a careful sequencing of aid finance, together with characteristics of donors' 'style of relationship' with recipients, has induced policy reform - a recognition of the reality of new conditionality. We very much welcome these qualifications of their initial position but argue in this paper that their combined force, when analysed properly and with a view to their effect not on growth but on poverty, amounts not so much to cosmetic changes of their benchmark allocation but rather to a radically altered approach to aid allocation. First of all, growth regressions, and a fortioriaid-growth regressions, are in their infancy and face, among other challenges, the gigantic one of endogenising the evolution of institutions (Easterly, 2002). Dalgaard et al. in this symposium make pioneering forays in that direction but the variable that in their analysis proxies for
6
That is selectivity provides an incentive to follow good policies prior to receiving aid.
@ Royal Economic Society 2004
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F221
institutions (the tropics) is too broad to provide specific guidance for aid allocation. For that reason, we propose not only that particular variables raise aid effectiveness in the sense of reducing poverty, but also that some of these can be and have been influenced by donors using a conditionality approach. Among the variables that Collier and Dollar suggest as representing potentially fruitful extensions of their analysis, we find in Section 1 that the composition of public spending, inequality and corruption are especially relevant for increasing the poverty leverage of aid. Moreover, we find in Section 2 that donors through a new conditionality approach are capable of influencing the orientation of public expenditures towards poverty reduction. As we have noted, Collier and Dollar show themselves aware in this symposium of donor influence on recipient policy. However, they warn that it 'should not become a dominant consideration in aid allocation', as the likely quantitative impact would be small in their opinion. In that largely unsubstantiated phrase lies the crux of what remains of our disagreement with them. In Section 3 we use the estimation results presented in Sections 1 and 2 to compare the impact on poverty reduction of new conditionality and selectivity through simulating a number of plausible scenarios and find evidence that our approach would render aid some 12% more effective than the Collier and Dollar approach - which is itself more effective than the current allocation. Section 4 highlights the implications for policy.
1. Channels of Aid Impact on Poverty

The standard approach to estimating the effectiveness of aid (Mosley et al. 1987; Boone, 1996; Burnside and Dollar, 2000) has been to construct a model in which the aid-recipient government, constrained by resource scarcity, uses aid as an instrument in the pursuit of its own objectives; and then to use the reduced form of that model as an estimating equation for aid effectiveness. Recent controversy has centred on the economic and statistical significance of the coefficients on aid and on aid interacted with policy in a growth equation (Burnside and Dollar (2000) versus Hansen and Tarp (2001) and most recently Easterly et al. (2003)). Our own view, as described in Hudson and Mosley (2001), is that aid effectiveness, in the sense of raising growth rates, has experienced an upward step-jump since the 1980s but that the role of policy in increasing it remains ambiguous. In this paper we enter the controversy on aid effectiveness from a different angle, focussing on aid's ability to reduce poverty - which in recent years has been the principal target variable for aid donors and many recipient countries (World Bank, 2000). Analytically we may distinguish the total impact of aid (A) on poverty (P) as a combination of its direct effect, its effect on growth or GNP per capita (y) plus its effect on policy (the vector 2): dP OP ? OP ?yO2?O OP OP = (1) -+ QAJ + OA A+ 0 A y _F2y dA (A d W 2
and whereas most of the debate (as exemplified by the two other papers in this symposium) has focussed on the terms between square brackets, we focus on most
? RoyalEconomicSociety2004
F222
[JUNE
of the remaining terms.7 At a superficial glance, there are two problems to resolve at the empirical level (Table 2). The first is that, even if aid policies were to succeed in increasing growth, they would not necessarily on their own be able to reduce poverty (particularly in Africa and eastern Europe, it appears) and need to be supplemented by policies which will increase the (absolute value of) the poverty elasticity (in reality this is more accurately referred to as the income elasticity: alnP/alnY).The second is that relating aid to poverty reduction currently reveals little correlation, which leaves the burden of proof on those who wish to argue that this overall pattern hides cases in which aid has been able to influence policies
(a/aA
? 0) that influence
poverty (aP/jla
< 0).
There are two steps in the argument. First we need to identify the terms in the 'policy vector' which are capable of influencing poverty through aid, which is the main business of this Section, and next we need to define more precisely how that influence will be exercised, which will be considered in Sections 2 and 3. In the aid/growth regressions of Burnside and Dollar (2000) there are just three policy variables - budget deficit, inflation and openness - a number which in the analysis of Collier and Dollar (2001, 2002) has grown to twenty, summarised in a single index: the World Bank Country Policy and Institutional Assessment (CPIA) score. CPIA scores capture the quality of institutions and policies for promoting broadbased growth as perceived by country experts, and are confidential to the World Bank (although occasionally tantalising hints are given in the form of CPIA-based country grades). They are regarded with some suspicion by commentators who question country experts' ability to evaluate the quality of policies separately from
Table 2
Aid, Growth and Poverty Reduction by Region
(1) Poverty reduction 1990-99* (percentage points/year) -1.02 1.05 0.23 0.23 -0.68 2.50 0.92 (2) Growth GDP pc 1990-99t (percentage points/year) 0.47 7.18 0.66 1.23 0.13 3.33 3.81 (3) (1)/(2) = Poverty reduction per unit of growth -2.17 0.15 0.35 0.19 -5.23 0.75 0.24
Regions Sub-Sah. Africa E. Asia and Pacific M. East/N. Africa L. America/Car. E. Europe/C. Asia S. Asia Developing World
(4) ODA/GNP (%), 1992t 6.92 0.34 1.23 0.30 2.17 0.66 1.45
(5) - (1)/(4) Poverty reduction per unit of aid -0.15 3.09 0.19 0.77 -0.31 3.77 0.63
Note-Calculations are based on annualised reductions in country poverty headcount percentages (using as the poverty line either $1/day or a national one, depending on data availability) using population shares as weights. Data sources: *World Bank Poverty Monitoring Database, t World Development Indicators (data arrays used here are presented in Table A2). 7 aP/aA represents aid that circumvents the government ('working around government' in Collier and Dollar's contribution to this symposium). We do not consider this term in this paper as our focus is on 'working with government'. ? Royal Economic Society 2004
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F223
a country's actual performance. For that reason, any analysis that relates country performance to the CPIA score may suffer from a circularity problem. We cannot examine this satisfactorily, for the required data are not in the public domain (see Dalgaard et al. in this symposium, for an extensive discussion of the CPIA index and its problems). Considering that policy variables emerging from aid-growth regressions are highly controversial, and recalling that, by consensus, aid's effectiveness is now primarily judged in terms of its poverty-reducing impact, there is a clear, urgent and practical need for the identification of comparatively simple policy instruments that are capable of reducing poverty at any given level of growth. The one that we particularly wish to put under the microscope is the composition of public expenditure, which is arguably easier to manipulate in the interests of the poor than most alternative policy variables. By contrast with other instruments of government economic policy, it is quick-acting, wide-ranging and selective: by contrast with direct taxation, it impacts on the livelihoods of the majority of people and can be changed relatively quickly; and by contrast with exchange-rate policy, it can be relatively easily adjusted to the requirements of particular potential beneficiary groups (Van de Walle and Nead, 1995). Serious practical difficulties nevertheless arise when attempting to assess the orientation towards poverty reduction of any given composition of public expenditure: individual sectors differ in the balance of their direct and indirect effects on poverty reduction as well as in their overall impact (Ferroni and Kanbur, 1991). Because of these difficulties, previous research efforts have not yielded comprehensive estimates of the pro-poor content of public spending - only partial studies which indicate that certain components are pro-poor, (Gupta et al., 1999) for primary education and health spending, or anti-poor (Knight et al., 1996) for military spending. Two of the present authors, with others, have developed a range of methodologies for devising one overall measure of pro-poor (public) expenditure, called the PPE index (Gomanee et al., 2003). The general procedure consists of two stages. First, sectors are identified that, from the literature (on basic needs, on benefit incidence, and so forth) and among development practitioners, have a reputation of being pro-poor: basic health care, primary education, water and sanitation, rural roads and agricultural extension services. Next, sector-specific poverty elasticities are estimated and a composite policy indicator is constructed that weighs sectoral outlays accordingly. Appendix A describes in some detail the construction of the PPE index used in the present analysis. From the discussion there it emerges that whereas poverty elasticities of public spending on other sectors confirm an a priori expectation irrespective of which poverty measure is used for estimation, the impact of public spending on health crucially depends on the choice of performance indicator; we therefore below analyse the impact of health spending separately. In addition to the PPE index, in our estimations we consider two additional 'handles' - inequality and corruption - which influence the poverty leverage of aid, although the ability of donors to grasp and manipulate these handles in the way that they appear to be able to control the PPE index (see Section 2) is much more open to debate. A well-established result in the literature is that inequality
? Royal Economic Society 2004
F224
[JUNE
exercises downward pressure on the extent to which growth benefits the poor (Hanmer and Naschold (2000) and references therein), as well as on growth itself. It operates through four channels in particular: by reducing levels of social capital and trust, by increasing the likelihood of civil conflict, by depressing demand for (and hence production of) goods and services at the bottom end of the income scale, and by reducing investment (Nafziger and Auvinen, 2002; Alesina and Perotti, 1996). Corruption likewise exercises a downward influence on investment and productivity, mediated in part through an increase in the cost of doing business and in part through a depletion of social capital (World Bank, 1997). Most importantly for our purposes, corruption is likely to affect the share of public spending, even on allegedly 'pro-poor' sectors, that reaches the poor: it affects what is commonly called the benefit incidence of spending (Van de Walle, 1998; Castro-Leal et al., 1999; Sahn and Younger, 2000). Noting the strong possibility that poverty, aid and PPE are simultaneously determined (e.g. aid may be related negatively to poverty in the impact equation but positively in the allocation equation; and so forth), we specify the following system, consisting of poverty, policy and aid equations, the structural parameters of which are to be estimated using a GMM 3SLS estimator.
Pit = f ( Yit,Xit, nit) + elit Ait = f2(Nit, Yit Vit) + 82it
f =Yi =
(2) (3) (4)
f3(Yit, Ait,kit) + Eg3it.
The specification of the equations is standard and largely drawn from the literature. The poverty equations (2) are estimated both using a poverty headcount ratio and alternatively infant mortality as the dependent variable (two of the well-publicised OECD Millennium Development Goals), and regressed on income per capita (Yi,) and a range of other variables denoted by the vector X, which comprises inequality, corruption and a combination of public spending indicators.8 Analogous to Burnside and Dollar's (2000, p. 851) method of constructing a composite policy indicator, the PPE (Dit) index is determined using values of coefficients on individual spending indicators in a version of (2) defined in Appendix A. The aid equation (3) relates the share of Overseas Development Aid (ODA) in GNP to the well-documented small-country bias in aid allocation through the inclusion of population size N, and includes a vector V of other relevant variables (infant mortality representing a perceived financing need, colonialisation9 and Islam dummy variables representing donors' strategic interest in or affinity with a recipient country, and so forth). It also includes various good policy variables to allow for the possibility that good policy attracts aid. The policy equation (4) examines the extent to which aid alters the struc8 The exact combination will depend upon whether the dependent variable is the poverty headcount index or infant mortality. 9 The potential influence of colonialisation on developing countries' performance has been noted by several authors, e.g. Acemoglu et al. (2001) and Bertocchi and Canova (2002). In our analysis this role is focused on the greater potential for aid to flow to ex-colonies.
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F225
ture of public expenditures in a pro-poor direction, reflects the possibility that PPE and health spending increase with income per capita (in other words, are 'luxury goods'), and includes a vector k of control variables.10 The exact structure of the system is evident from Table 3. As a first step we estimated equations individually, using OLS. Crucial coefficients, notably on PPE and health spending in the headcount poverty and infant mortality equation, respectively, and on aid in the PPE equation, have the expected sign and are significant." Table 3 presents the results of estimating equations simultaneously, using a GMM 3SLS estimator. Columns 1 to 5 report coefficients on all pertinent variables apart from corruption; because of the limited overlap between headcount poverty and corruption data points, which would have resulted in a substantial loss of degrees of freedom, we report in columns 6 to 8 a smaller system of equations that includes (absence of) corruption as an independent variable. We discuss the poverty and aid equations here; the results obtained for the policy equations form part of the discussion of the next Section. Most importantly, we find that the PPE index is comfortably significant (with the correct sign) as a determinant of headcount poverty, whereas health spending comes into its own as a determinant of infant mortality. Inequality and corruption also appear with the expected signs and are strongly significant. When inequality and public spending priorities are included in the poverty equation, the growth elasticity of headcount poverty reduction becomes 0.48 and that of infant mortality 0.46. This result casts doubt on Collier and Dollar's (2001, 2002 and in this symposium) confident assumption that this elasticity is a universal constant of 2. Their assumption amounts to saying that 1% extra growth always reduces poverty by an extra 2%, whereas our findings suggest that, on average and controlling for other variables, 2% growth reduces poverty by less than 1%.12 Not only the magnitude of this poverty elasticity, but also the assumption that it is constant requires modification. To allow for the possibility that inequality as proxied by the GINI coefficient impacts both directly on poverty and indirectly by limiting the impact of growth and PPE on poverty,'3 we estimated the following poverty equation within the full system estimation framework.
In the event only population, in the health expenditure equation, entered the final equation structure. This was to reflect the possibility that there might be economies of scale in public service provision. 11 The same is true for most other coefficients, with the exception of the trend term in the infant mortality equation, the macro-policy variable in the aid equation and the trend and aid terms in the health spending equation. 12 Although it is important to bear in mind that we speak here of a partial elasticity. Taking account of the impact that growth has on poverty reduction through raising PPE yields a full growth elasticity of poverty reduction of 0.92; still considerably lower than 2. The limitations of cross-section analysis must also be borne in mind. Our data set, described in Gomanee et al. (2003), is a pooled sample of 34 countries for the period 1980-2000: identification is therefore only partly based on within-country changes over time and for the remaining part on cross-section variation. 13 Intuitively it is apparent that the impact of growth on poverty, e.g. in shifting the income distribution to the right, will depend upon the proportion of people in the neighbourhood immediately to the left of the critical level of income defining poverty. This in turn will be linked to the distribution of income. ? Royal Economic Society 2004
10
?
0i 0
Table 3 Aid, Pro-poorExpenditureand Poverty (3SLS)

In Poverty headcount ($1/day) t Constant 5.496*** (4.19) In Infant mortalityt 8.089*** (16.91) (6.57) -0.223*** (5.34) In Aid (ODA/GNP)T 12.146*** (6.43) In Pro-poor expenditure (PPE)? -4.446*** (2.80) (3.19)
S,
0 0t
In Health spending (% of GNP -6.539** (2.49) (2.61)
InGNPpc
Pro-poor expenditure (PPE)? Public health spending (% of GNP)
Gini?
-0.479**
(2.62) -0.740** ( (2.31)
0.046***
-0.457***
0.602***
0.809*
Absence of corruption Ln (aid) tlow-incoment Ln(population) Colony11 Islam?? Macro-policyttt Openttt In (infant mortality)t Trend R2 N
(3.26) 0.420** (2.18)
-0.946*** (7.45) 0.395 0.807* (1.89) 0.096** (2.69) -0.517 (1.65) 1.257*** -0.011 (0.96) 0.77 67
0.191 (1.434) -0.126*** (3.51)
(1.15)
(3.80)
0.52 67 0.47 67
0.30 67
0.040** (2.57) 0.20 67
t-statisticsin parentheses. * significant at 10%, ** at 5%, and *** at 1%. Notes and data sources: data set is a pooled for details see Gomanee et al. (2003); tWorld Bank Poverty Monitoring Database; I World Development Indicators World Report(various issues), construction described in Appendix A; ? WIDER inequality database; t Development for GDP pc < 1,422; ?? Colony = 1 for ex-colonies of Britain and France; ?? Islam = 1 for Islamic countries; t in (1995) indicator of openness of the economy.
2004] LPOVi= (5.849 (1.59)
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F227
- 0.867LGDDPCi - 2.690PPE + 0.251GINIi) x (1 - 0.0112GINIi). (5) (2.70) (4.34) (1.70) (1.64)
The significance of coefficients on the variables in the other equations is unaffected. In the poverty equation, coefficients on income per capita and PPE retain their previous significance, whilst the inequality term is significant at the 1% level. It follows that the growth elasticity of poverty reduction is not constant but an inverse function of inequality - that is, the greater the degree of inequality, the lower will be the poverty elasticity coefficient (cc):
ci = 0.867 0.0112GINIi (6a)
and also the partial derivative of poverty with respect to PPE:

- 0.0112 GINI)PPEi Si= (2.690 (6b)
Our estimates imply that for high inequality countries in the definition of Hanmer and Naschold (2000), that is countries with a GINI coefficient of 43% or higher, the partial growth elasticity of poverty reduction is 0.45 or lower - a value very similar to the one they obtain for this group of countries (0.34).14 We make use of the result that crucial poverty elasticities are affected by inequality in our aid-allocation simulations in Section 3. The aid equation itself, reported on in column 3, behaves largely as expected. We find strong evidence for a small-country bias and also find that aid is targeted towards a perceived need (as proxied with infant mortality). Although outside our main focus, an intriguing finding is that when we deconstruct the Burnside and Dollar indicator of good policy, we find that good domestic policies attract aid whereas openness does not. To summarise the evidence presented so far, we find that a combination of growth, public spending priorities, inequality and corruption determine poverty in our model - all of which represent channels for aid to impact on poverty once donors have found a technique to influence those. Here of course lies the main difficulty: donors may not yet - given the present state of research - be in a position to exercise much influence on growth, inequality and corruption.15 We will demonstrate in the next Section that their prospects may be much better in the area of attempting to influence public spending priorities. In particular, we must justify the controversial statement that in this area 'conditionality can work'. Collier and Dollar, in this symposium, have by contrast argued that 'donors (should in most circumstances assume) that they have no influence on policy at all' - an approach which, as we saw, has now extended into the rhetoric of the
14 These elasticity estimates are, of course, based on cross section regression results and thus, as is
always the case with cross section results, care needs to be taken before accepting too readily that they are an accurate reflection of the elasticity in any given country over time. This is, as we have said, a limitation which is implicit in many cross section analyses. In this case data limitations are substantial and effectively prevent more substantial time series analyses. In any case, the latter themselves face the problem that the elasticity may itself be changing over time. 15 The impact of corruption is to significantly increase infant mortality for a given level of health expenditure and other variables and to reduce PPE expenditure.
F228
THE ECONOMIC
JOURNAL
[JUNE
entire World Bank (footnote 2 above).16 On what basis can we claim that this proposition is incorrect?
2. The Influence of Aid on Pro-poor Policy

Of the various ways in which governments may seek to influence poverty, we focus in this Section on the PPE (pro-poor expenditure) index, on the grounds that it is relatively easy for resource-constrained governments to influence - easier than other public instruments of redistribution such as tax progressivity, and certainly easier than corruption17 and inequality, which are the other catalytic variables revealed as significant by Table 3. The question now to be tackled is whether aid donors can in turn influence those governments. The PPE equations in Table 3 suggest that financial aid has influenced public spending in a pro-poor direction, but only in countries with a GDP per capita below a critical threshold.'s We return to this result below, towards the end of this Section, but first look at recent case study evidence and examine our data set in more detail, so as to be able to understand the forces behind this crucial finding. Recent case studies suggest that for aid to bring about increased pro-poor spending, policy dialogue has to come into its own: donors must negotiate skilfully, co-ordinate their demands, and be in it for the long haul. The process leading from reluctance through a cautious to a whole-hearted embrace on the part of recipient country governments of donors' advice on budgetary priorities has been documented for Ethiopia (Rock, 2003), Mozambique (Mosley, 2002), Tanzania (Morrissey, 2001) and Uganda (Morrissey and Verschoor, 2002). In those cases, the sequence was from a building up of trust between donor and recipient through 'constructive agreement to disagree', to the donor being invited to provide technical and financial support in implementation of a poverty action plan whose spirit had been agreed within government, to an eventual upward shift in PPE - very different from old conditionality. There are some remarkable similarities between the cases mentioned: (i) Debt cancellation in return for pro-poor expenditure changes. The four countries mentioned were among the earliest and largest beneficiaries from HIPC debt cancellations (Mozambique is the largest of all); (ii) New instruments of budgetary control. Examples include spending targets, volume targets and required matching of counterpart funds spending by
16 We emphasise the World Bank. The International Monetary Fund has been practising ex ante policy conditionality since the origin of the Bretton Woods system in 1945 and shows no sign of it. abandoning 17 Knack (2000) argues that aid has historically tended to encourage corruption. See also the paper Collier and Dollar in this symposium. by18 The 'switch point' of recipient income (determined inductively) at which aid ceases to have influence on the pro-poor content of public expenditure is $1,422. The coefficients on the remaining terms in the PPE and health spending regressions are largely as expected: a higher income per capita tends to promote a larger share in the economy of pro-poor sectors (they are indeed 'luxury goods'), and the absence of corruption, which may proxy for a government that 'cares for its people', is associated with more spending on behalf of the poorest.
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F229
government, all of which made recurrent expenditure conditionalities easier to monitor; Social funds (White, 2002) under which donors made funds available for (iii) labour-intensive public works projects in priority sectors - a very effective device for increasing the PPE index; (iv) New conditionality. Not only have the instruments of aid policy been changing, but so has its style. The transition from 'old' to 'new' loose-rein conditionality, documented in the introduction, has reduced the likelihood of a retreat by both parties to ultimatum positions from which there is little scope for a donor to influence a recipient's policy stance. In these four cases, donors tended to initially tolerate short-term deviations from targets as trust was built up but later increased pressure on recipients to meet increasingly jointly agreed-upon targets. This tendency was often combined with invitations to recipients to frame their own definition of pro-poor expenditure within the general context of Poverty Reduction Strategy Papers (PRSPs).19 (v) Parallel to this development, a new politics appears to have taken root, in which governments find it expedient to use aid money to pursue goals with broad-based political appeal - which are consonant with poverty reduction (the achievement of universal primary education in Uganda is a classic example) - rather than to placate a more narrow group of powerful rentholders, as in Zimbabwe and (until recently?) Kenya.20 In all of these cases a virtuous circle operated that contradicts the Collier-Dollar proposition of donors having no influence and, as a consequence, there have been more opportunities to turn potential into actual aid leverage. Needless to say, this process did not always run smoothly and exactly how this process has occurred, in the places it has, is not alwayscompletely clear but one key element in it appears to be that, in those places, aid donors made themselves a political as well as a financial asset to recipients - in part through a negotiating style characteristic of a new cluster of donor influence, which we have termed 'new conditionality'. The combined impact of cases such as these appears to be strong enough for an overall relationship to register within our system estimation between aid and PPE (Table 3), at least in low-income countries. But if, on this evidence, 'conditionality works', why does it only work in lowincome countries? Figure 1 provides a scatter of the aid-PPE relationship, from which we may observe the experience of some other countries for which we have data about changes over time (but no case study evidence) where a virtuous circle of the kind documented above may be operating: Ghana, Kenya (sic) and Nepal. A tight relationship between aid and PPE in the sense of episodes of changing aid coinciding with a changing PPE index is indeed confined to the subset of lowincome countries, ii, following the World Bank (2000) definition. By contrast, even
19 The definition adopted by the Uganda Ministry of Finance in 1994 is in many ways more sophisticated than our PPE index. For a general discussion of the PRSP process, see Stewart (2003). o0In an election on December 27, 2002 the former president Daniel Arap Moi stood down and KANU, which had governed the country for forty years since independence, was defeated by the newlyformed Rainbow Coalition under the leadership of the former finance minister Mwai Kibaki. @ Royal Economic Society 2004
F230
THE ECONOMIC
JOURNAL
[JUNE
Hun90
Hun92
Hun917
Bu192
B0
a87Les91 wa92A19*0
V0
*B Bra8l
8 * CsBr ols. PPE = 3.728 - 0.006 In (ODA/GNP) 0* (t) (26.611)(-0.083) ?
Ve n3
9 000
(
*o0
Eth88 s
93
j
Zim8 Cos850500 .
Eth88 0
Gha9m86 Nep93 Nic93.-Ken93 0
* o o 0.
O
* ? .o o.
oo o "en8 o"Bo .... ??O?? Gha81
?
Mad91
ols : PPE=1 648+03671n(ODA/GNP)
Nep8sO
Mad9
-4
-3
-2
-1
*,
,
1 2
,
3
-1
In(ODA/GNP) Fig. 1. Aid and PPE
though values of the PPE index are considerably higher in middle-income, mi, countries than in low-income countries (manifestly evident in Figure 1 where closed dots denote middle-income and open dots low-income countries), changes in aid do not appear to have much effect on changes in PPE scores: PPE scores appear to respond in low-income countries but not in middle-income countries to increases or decreases in aid inflows. We suggest that there are two factors at work. First, in poorer countries, the scope for fungibility is less, for the simple reason that where aid is paying for most of the public sector's investment budget, recipients have very limited ability to switch into types of spending not desired by aid donors. Second, we have seen that donors have been using new instruments of conditionality, and it is in low-income countries that the share of aid in the economy, and for that reason its potential leverage, is greatest. For illustrative purposes, we have estimated the link from aid to PPE in OLS regressions separately for both groups of countries, so as to be able to add best-fit lines to the data in the Figure. These lines illustrate the point made properly within our system estimation (Table 3) that for countries with a per capita income below a threshold of about $1,450 does aid significantly influence recipient governments' spending priorities. On the basis of both case study evidence and econometric analysis, we contend therefore that, whatever conditionality may or may not have achieved in relation to other policy variables, it is achieving something in relation to spending priorities of governments in low-income countries. The relationship between aid and pro-poor expenditures, illustrated in Figure 1, is established econometrically in Table 3 and validated by case study evidence. It should therefore not be seen as merely a
? RoyalEconomicSociety2004
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F231
statistical artefact but as constituting a genuine process of influence, even if the process is not universal, nor completely understood. It is plausible that neglect of those possibilities for 'new conditionality' that do exist, as proposed by Collier and Dollar, leaves a reservoir of poverty-reducing opportunities untapped. In the next Section we quantify the unrealised potential of an aid allocation rule that rejects conditionality and exclusively practices selectivity. It is also important to stress that our empirical analysis only covers a limited form of new conditionality and as it has been in evidence in the past. The more rigorous form we propose which explicitly links aid receipts to good policies along several dimensions, which also have in built flexibility to suit the specific realities of the country may be expected to change behaviour and induce greater adherence to good policies than in the past. Moreover there is no reason to expect that the success of such policies should be limited specifically to low per capita income countries as identified above.
3. Selectivity versus Conditionality

To recapitulate, the major differences between our approach and that of CollierDollar are: (i) we leave open the possibility of using a new conditionality approach to direct the allocation of aid rather than only a selectivity approach, given that aid is able to influence the expenditure mix; (ii) we work with estimated poverty impacts (of PPE and of income per capita) that vary as a function of recipient countries' characteristics. The findings presented in Sections 1 and 2 obviously have a bearing on the optimal distribution of international aid. In this Section we obtain an order of magnitude of the difference that new conditionality can make by deriving an aid allocation formula with key elasticities based on our estimation results, and by working through a number of scenarios. Collier and Dollar (2001) (CD from now on) approach the problem of aid optimisation by holding constant the elasticity of poverty reduction with respect to income, and assuming that aid has no impact on policy. We approach the problem by allowing poverty elasticities to vary as a function of corruption and inequality, by including the leverage of public expenditures as an argument in the poverty reduction function and by treating the structure of public expenditures as a discontinuous function of aid. We set up the basic problem in the same way that CD set up theirs, modifying terms where appropriate given our different assumptions. Formally, the optimisation problem facing donors who aim to maximise the poverty reduction impact of their collective overseas aid budget (given a small-country bias in aid allocation) can be represented as Max subject to
A SAiyiNiGioihiNiNi-#
ihiNiNi-#
(7)
F232
[JUNE
where the right hand side of the constraint relates to a fixed aid budget, G denotes growth, a the growth elasticity of poverty reduction (with respect to GDP per capita), h the poverty headcount ratio, N population size, / the small-country bias in aid allocation, 92 PPE, y = ah/APPE, A aid, y per capita income, and i a country superscript (for ease of comparison, we adopt CD's notation in this Section). Solving the Lagrangean yields
(G ?ihyi) a + a Y, )Nifl. derivative with
hi y
(8)
respect to aid, and 2 the shadow Subscript a denotes the partial value of aid (with the understanding that poverty reduction is in effect valued more in countries with a smaller population; for a precise explanation, see CD, p. 1792). In order to be able to isolate the effects due to tracking a route for aid via the structure of public expenditures and to specifying elasticities of poverty reduction as a function of corruption and income inequality; and to be able to compare these effects fairly with CD's calculations, we work with their Ga function for the response of growth to aid (for a critique, see Dalgaard et al.'s contribution to this symposium):
G=
0.185Pi
- 0.072A1
(9)
Pi denotes a country's CPIA score, which, as will be recalled, is based on World Bank country experts' assessment of the quality of institutions and policies for promoting broad-based growth. Inserting (9) into (8) and solving for aid gives the country-by-country aid allocation that maximises donors' objective function (7):
A = 2.6P 0.07
Ni 007a
(10)
The first two terms on the right-hand-side of (10) capture in a nutshell the case for being selective in aid allocation as made by CD: CPIA scores, poverty and population (with the growth elasticity of poverty reduction held constant), determine jointly where the marginal benefit of aid is highest and thence where the marginal aid dollar should go. The third term represents part of our addition. It represents an aspect of new conditionality: the higher the poverty leverage of aid,21 the greater the extent to which donors will be rewarded for attempting to persuade recipients to re-orient public spending towards poverty reduction. Scenario1 (selectivity)22
0.07al \ Z
ci
=.
'Vi.
Vi-
This is selectivity CD-style, ignoring in the aid-allocation rule, variation in the growth elasticity of poverty reduction.
21 To be precise, aid's impact on PPE times PPE's impact on poverty relative to the growth elasticity of reduction. poverty 22 In all scenarios the formula the optimal aid allocation is assumed to have a lower bound of zero. ? Royal Economic Society 2004
2004]
AID, POVERTY AND 'NEW CONDITIONALITY'
F233
Scenario2 (proper new conditionality, with y allowed to vary with respect to PPE)
A = 2.6Pz Na A-0.07i-?p
' 0.07-ai
Qi = f(yAi) i = fj(ni, Fi) where I denotes corruption. In this scenario the aid-allocation rule is optimal: selectivity and new conditionality jointly realise donors' objectives, with the former noting that inequality F lowers the growth elasticity of poverty reduction, and the latter noting that corruption and inequality worsen the benefit incidence of public expenditure items that have the potential of being poverty-reducing. This is, of course the ideal, but lack of full information on corruption limits the subsequent analysis to linking y to inequality. In the results which follow we (i) calculate the optimal allocation of aid under the two different scenarios and (ii) hence calculate the impact on poverty reduction in relative terms. We do not, as others have, present specific estimates of poverty reduction. We feel this is likely to be misleading given the number of assumptions that have been made and in any case also depends upon the dynamics of poverty incidence following, semi-endogenous, demographic and policy changes and also the differential ability of economies to absorb substantial changes in aid allocations, an analysis of which is beyond the scope of this paper. In calculating optimal aid allocations we need information on the CPIA index. This we do not have, but we do have (CD) qualitative information. We assume that very poor, poor, moderate, good and very good equate to 1.95. 2.5, 3.5, 4.0 and 4.5 respectively.23We also fail to have information on PPE for all the countries in the sample and where this is not available we use predicted values based on the regression reported in Table 3. In the Appendix (Table A3) we present, for all countries included in CD's analysis the distribution of aid in 1996 that results from the respective aidallocation algorithms. In this algorithm total aid is constrained to be equal to the actual aid expenditure budget by adjustment of 2. Scenario 1 is our approximation of the CD rule. The results we obtain are very similar to theirs (CD, pp. 1795-6). The correlation is 91%. In scenario 2, we take into account both inequality and PPE in determining the optimal aid allocation. Several qualifying comments are required for a proper assessment of these figures, and before any aid donor jumps to conclusions. In the first place, recipient governments' anticorruption stance has not been taken into account in any of the scenarios presented. A country such as the Congo Republic, which in scenario 2 receives almost double the amount it receives in scenario 1, would see its share of the
23 These give reasonably close approximations to the regional values reported in CD. The practice is of course not ideal, it would be better to use the actual values, but as these are not currently in the public domain that is not possible.
F234
[JUNE
Table 4
Parameters Used in the Aid-allocation Simulations
Parameter P CPIA score Meaning Computed using: Values determined inductively so as to obtain as close an approximation as possible to the regional averages reported by CD. CPIA-based grade: Very good = 4.5, Good = 4.0, Moderate = 3.5, Poor = 2.5, Very poor = 1.95 Computation described in Appendix 1 (missing values replaced with predicted value) Table 3 above (but set at zero in the allocation rule in 1 for all countries and in 2 for middle-income countries) ai = 0.48Vi in the allocation rule in 1; ai = f(T) (6a) in the allocation rule in 2 = f(F,H) (6b) in the allocation rule in 2 yi Determined endogenously in order to equate simulated and actual aid
K2
PPE score
fa
Partial derivative of PPE w.r.t. aid Growth elasticity of poverty reduction PPE elasticity of poverty reduction Shadow price of aid
a Y
total aid budget plummet again when note is taken of its very poor record of fighting corruption. In the second place, and as noted previously, any conclusions which are drawn critically depend on assumptions about poverty elasticities. In the simulations presented, these are assumed to be stable functions of inequality. In common with Dalgaard et al. in this symposium, who argue that excessively high rates of growth in foreign assistance may render it ineffective, we would surmise that in the event of the very large inter-country allocations of aid proposed in these simulations, such functions may well collapse, because of absorptive capacity problems (the difficulty experienced by Ethiopia in spending an increase in aid of less than $100 million of Live Aid money in the famine of 1984-5 will be recalled). Supposing that an immediate step-jump increase in aid to Ethiopia of 5.5 percentage points of GDP (or $330 million) as proposed by CD, or 8.4 percentage points of GDP as in scenario 2 could be secured, it seems extremely unlikely that poverty could be made to respond to such an aid boost with the elasticities computed in this paper, at least in the short run, let alone with the even more optimistic one assumed by CD. In the third place, any allocation method based on parameters obtained in cross-country regressions is bound to make mistakes in individual cases, because local knowledge is ignored (which corresponds with the variation left unexplained by the regressions). In the fourth place, as noted towards the end of Section 2, middle-income countries may suffer unduly in our approach because those future opportunities for new conditionality that may exist also in richer developing countries can by definition not be observed in statistical patterns in data about the past. The combined force of these qualifying comments is such that the figures in Table A3, still less the amount of poverty reduction that can be computed from them, cannot be taken at face value. But since they weigh equally heavily on
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F235
scenario 1 and 2, and since our purpose in this Section was never more than to obtain an order of magnitude of the difference new conditionality can make to the CD allocation rule, the differences between the scenarios should be revealing. The countries that benefit most from a move towards scenario 2 are low-income, lowinequality countries such as Mozambique: where CD propose a reduction in aid compared to the actual allocation, scenario 2 virtually restores aid to its actual level, implying that the actual allocation is in fact more or less the correct one. By the same token, the countries that suffer most are middle-income, high-inequality countries such as Honduras, which receives approximately half the aid under scenario 2 it would receive under scenario 1. Overall, we estimate that the amount of poverty reduction that our point estimates of PPE and growth elasticities imply is 12% higher under scenario 2 than under scenario 1. Although this estimate of the size of the reservoir of poverty-reducing opportunities that the CD allocation rule leaves untapped is the best available to us, it should be interpreted with some caution. Because of data limitations we have worked with imputed CPIA values and (in some cases) PPE scores. New conditionality may perform better in reality than we have been able to simulate here because of the possibilities we have noted for extending the approach to more countries and more areas of pro-poor policy; and selectivity may perform better than simulated because, in a form of reversal of the Lucas critique, recipient countries, once aware of the selection criteria inherent in the aid-allocation rule, are given an incentive to make themselves eligible for aid by improving their policy environment (or at least those aspects of it on the basis of which they know donors allocate aid). In reality this 12%, although not an inconsiderable benefit especially when it is 12% per annum, is likely to be a considerable underestimate as to what can be achieved by targeting aid. The form of new conditionality we have included in this paper is focused on the impact of aid induced policy reform within a narrow area. In practice and in future there need be no such limitations.
4. Conclusions and Policy Implications

Fifteen years ago, in its comprehensive review Twenty-FiveYears of Development Co-operation, the OECD's Development Assistance Committee (DAC) concluded that 'the most troubling shortcoming of development aid has been its limited measurable contribution to the reduction - as distinguished from the relief - of extreme poverty, especially in rural areas' (World Bank, 1990, p. 127). Partly in response to this shortcoming, the OECD in 1996 announced a range of International Development Targets, the centrepiece of which is a halving of the proportion of the population in extreme poverty by 2015, which constitute a focus for the strategies of most of the main donors. Our objective here has been to try and understand what they can do through aid, which of course is only one of the policy instruments available to them (de Haan, 2003), to increase their impact on poverty. In common with Collier and Dollar, we feel that inter-country reallocations of aid could increase such poverty impact. Among the criteria that could form the
F236
THE ECONOMIC
JOURNAL
[JUNE
basis for such reallocations, we find corruption, inequality and the composition of public expenditure to be particularly strongly associated with aid effectiveness. But whereas they reject the conditionality approach in favour of 'selectivity', we maintain that conditionality - especially in what we define as its 'new' form represents an important channel by which aid can reduce poverty. Taking some caveats into account, our work suggests that aid allocations which take account of good micro and macro policies as well as income distribution and GDP per capita are more effective than ones which tend to ignore income distribution and the potential for impacting upon microeconomic policies. We believe that the better performance of new conditionality that we simulate above derives from a real phenomenon, which we have sought to illustrate through the analysis of this paper. That reality is that the possibilities for conditionality, in that majority of LDCs where economic policy is not ideal, continue to be significant and utilised by aid donors, albeit nowadays in a more subtle form than the 'ultimatum' form favoured in the 1980s and the very early 1990s; in particular donors can take advantage, through Poverty Reduction Strategy Papers and otherwise, of the possibilities opened up by the adoption of a more pro-poor public expenditure mix. Thus, this puts us somewhat in between the Collier and Dollar view of the world and that of Dalgaard, Hansen and Tarp. We find the latter's emphasis on geography to be interesting and potentially important. It is particularly important if it implies that perceptions of good policy and, hence, aid allocation rules, need to be conditioned by factors such as geography. But equally, we feel that this is unlikely to undermine completely the freedom of governments to pursue good/bad policies and also the ability of aid to impact upon such policies, via new form conditionality or the ex-post effects of selectivity. We are also sympathetic to the Dalgaard, Hansen and Tarp conclusion that too high growth rates of aid may render it ineffective and this needs to be taken into account when considering shifts from current aid allocations to statically optimal ones. However, we also acknowledge the contribution of Collier, Dollar and associates in focusing on the potentially differential impact aid might have dependent upon the recipient country's characteristics. But we feel that their usage of good policy, first in focusing on macro-polices and subsequently by a simple agglomeration of differing, and possibly conflicating, policies is unsatisfactory. What further differentiates our paper from both the other contributions is our focus directly on poverty, while assuming an effect of aid on economic growth; whilst other papers have focused on the impact of aid on growth while taking the impact of growth on poverty as given and automatic. For credibility it is important that new conditionality be keyed to policy variables which have a demonstrable ability to reduce poverty. We focus in particular on what we call the pro-poor expenditure index, which several LDC governments have found relatively easy to manipulate and which aid, in its turn, has shown its ability to influence. Further research in defining this link more precisely (for example, in illustrating the positive role played by specific types of agricultural expenditure, and the negative role played by arms expenditure) is required before we can be exact about the form which poverty-conscious restructuring of public expenditure
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F237
should take. In the interim, the PPE index represents one rule of thumb which can be used as a basis for new conditionality. Universityof Sheffield Universityof Bath Universityof Sheffield
Appendix A: Constructing the 'Pro-poor Expenditure (PPE) Index'

The data set we use includes spending on those sectors that in the basic needs literature and among development practitioners have the reputation of being pro-poor: education (especially primary education), health care (especially basic health care), water and sanitation, agricultural research and extension, and rural roads (Verschoor, 2002). Not all these spending data are available on a sufficiently comprehensive scale: the more disaggregated the expenditure item, the less readily information about it can be obtained. Spending data for education (including primary) and health care (including basic) are recorded in UNESCO statistical yearbooks, and IMF GovernmentFinance Statistics (GFS) yearbooks, respectively. For spending on other pro-poor sectors, we have had had to use proxies: water and sanitation is included in the World Development Report's'social services', but this is a very broad category; agricultural research and extension, and rural roads, we have had to proxy with the sector agriculture as a whole (IMF GFS). We believe that the inter-sectoral mix of public expenditures may reduce poverty through at least three channels: (a) some expenditures are more intensive in the labour of the poor and hence generate greater labour-market benefits; (b) some expenditures provide more services for low-income consumers (and in some cases generate externalities for them as well); (c) some expenditures are better at generating social networks which are economically beneficial ('social capital'). Through all of these channels it is possible to reduce inequality by altering the expenditure mix, and thereby very possibly to use it as a conflict prevention device in the manner described by Collier and Dollar (in this symposium). The idea of designing a 'poverty sensitive' pattern of public expenditures has been often articulated (notably by Ferroni and Kanbur (1991)), but to our knowledge such a pattern has not been empirically documented. No approach is likely to be perfect because of the range of poverty impacts which are conceivable but the following 'quick and dirty' methods can be visualised. The first two cover only one channel of impact (and we only have data for a few countries), whereas the last two are more general: 1. A labour-intensity approach - covering effect (a) - the definition of 'pro-poor expenditure' as those expenditure sectors which are most labour-intensive. We know of no statistical exercises which measure the propensity of different public expenditure sectors to take on low-income labour. However, the governments of the two most effective exercises in poverty reduction within low-income countries - Uganda and Ethiopia prioritised the same expenditure sectors, explicitly on the grounds that they are labourintensive (Morrissey and Verschoor, 2002; Rock, 2003). These are: primary health and education, agricultural research and extension, rural water and sanitation. 2. A benefit incidence approach (covering effect (b)) - the definition of 'pro-poor expenditure' as those sectors whose output, on the evidence of household budget surveys, is consumed by the poor. Sahn and Younger (2000), drawing on household budget surveys in eight low-income African countries, have assessed the extent to
F238
[JUNE
which different public expenditures fall on low-income groups. They conclude that expenditures on primary and secondary education (but not university education), and all types of healthcare, can be considered progressive and do reduce inequality. Nonetheless, they warn (p. 344), 'expectations that social sector spending has a substantial redistributive impact are misplaced' and 'African governments would do well to consider how to better target their expenditures'. 3. A CGE approach - which can hope to trace comprehensively the effects of expenditure on poverty through multiple channels of effect. For Uganda only, Chant et al., (2003) have conducted simulations which examine the impact of different expenditures on poverty through all market channels, not just the two examined above. For education, health and 'social sector' expenditures, only, they find that the impact of increasing the share of public spending dedicated to those expenditure sectors is poverty-reducing. 4. A regression approach - the definition of 'pro-poor expenditure' as those sectors where expenditure exhibits correlation with poverty reduction (Gomanee et al., 2003). We estimate the following poverty equation in which spending indicators for which we have an a priori preference, as indicated above, are candidate explanatory variables.
OLS povertyequation (R2 = 0.660, N= 67). Dependent:log ($1/day povertyheadcountratio)

(Constant) Log (GDP per capita) Log (education expenditure/GDP) Log (housing and amenities* expenditure/GDP) Log (agriculture expenditure/GDP) *Includes water and sanitation and social security.
t 12.4 -1.05 -1.86 3.46 -2.33 -2.43
Log (health expenditure/GDP)
1.84
-0.96 -0.43
3.17
3.21 2.17
We may classify as follows (Table Al) the findings of each of these four methods in relation to the sectors in which expansion of expenditures is likely to be poverty-reducing: Table Al 'Poverty Elasticity' of Components of Public Expenditure: Summary of Findings
Methodologies 'Single-channel' methodologies 'Comprehensive' methodologies Regression + (+)
+
Benefit
Components of expenditure Educational expenditure Health expenditure Agricultural expenditure 'Social' expenditure Military expenditure incidence
+
(Ethiopia and Uganda) + +

+
Labourintensity
CGE(Uganda only) + + + +
Notation:+, sector indicated has a significant poverty-reducing effect through the methodology stated; (+) sector indicated has a non-significant positive effect on poverty through the methodology stated; - sector indicated has a significant poverty-increasing effect through the methodology stated. From Table Al it is very clear that educational and 'social' (in the old World Bank's classification, 'housing and amenities') expenditure belong in any pro-poor expenditure index. Health and agricultural expenditure are ambiguous. Health very strongly 'refuses to @ Royal Economic Society 2004
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F239
behave' in our poverty regression, in spite of Sahn and Younger's weakly positive results on benefit incidence, and in the last cut we decided to omit it and consider spending on health separately in an infant mortality equation in the body of the paper. Agriculture has the right sign but is insignificant in the regressions; we include it in the light of strong case-study evidence, in particular from Uganda and Ethiopia (Morrissey and Verschoor, 2002; Rock, 2003), that the prioritisation of agricultural spending made a very important difference to poverty reduction from the early 1990s onwards. Thus our PPE index includes indicators of spending on the following individual sectors: agriculture, housing, education, water and sanitation, and social security. It is computed as follows (with weights on individual spending indicators obtained from the poverty regression reported above): PPE = 0.431 (log of agriculture as %GDP) + 0.964(log housing, water, sanitation and social security as %GDP) + 1.866(log education as % GDP) This is the 'pro-poor expenditure index' used in the analysis of Table 3 and Fig. 1.
Appendix B: Aid, Growth and Poverty Reduction in the 1990s

Table A2
Country Cote d'Ivoire Ethiopia Poverty reduction 1990-99* (percentage points/year) 0.76 -0.11 Growth GDP pc 1990-99t (percentage points/year) -0.79943 1.42051 ODA/GNP (%), 1992t 3.91 2.9
Ghana Kenya Lesotho Madagascar Niger Nigeria Tanzania

Uganda Senegal
-2.04 0.27 1.83 0.85 0.38 7.23

-4.78
1.60523 -0.67812 2.18699 -0.98976 -1.671 0.30524

0.78919
2.04 1.91 3.09 2.84 2.97 0.19

4.03
-14.33
-2.12
0.43716
3.29173
4.46
3.34
Zambia
5.28
-0.9 -1.2 -0.16 -0.7 -0.08
-1.99211
-0.00421 8.39801 3.09375 0.70238
7.53
1.45 0.06 0.16 0.36
Zimbabwe China Indonesia Philippines
Thailand
-1.57 -0.55
-0.38 -0.08 -0.89 -0.86 0.82 -1.33
4.13094
-0.21871
0.2
0.22
Algeria
Jordan
0.43167
0.74084 3.30509 0.63319 4.78205 0.92055 2.72118
3.26
0.7 0.29 0.04 0.12 0.1 -0.03
Morocco Tunisia Brazil Chile Colombia Costa Rica
DominicanRep. Ecuador Guatemala

Honduras
-0.65 -0.66 -3.61

-0.6
3.09673 -0.20308 1.32058

0.13381
0.29 0.44 0.51

2.82
Mexico Panama Peru Venezuela Bulgaria Czech Rep.

Estonia
0.53 -1.01 1.3 0.56 0 0

0.69
2.00036 2.977 1.44112 0.25406 -1.73432 0.17993

-0.36676
0.04 0.46 0.37 0.02 0.46 0.11

0.91
F240
[JUNE
Table A2
Continued
Poverty reduction 1990-99* (percentage points/year) 1.75 -4.33 3.2 0.68 0.56 4.18 0.24 -2.95 -2.07 -0.28 Growth GDP pc 1990-99t (percentage points/year) 0.84074 -3.83231 -8.34763 3.58933 -1.76076 -5.06951 3.08564 3.60203 1.48289 3.98201
Country Hungary KyrgyzRep. Moldova Poland Romania Turkmenistan Bangladesh India Pakistan Sri Lanka
ODA/GNP (%), 1992t 0.26 2.45 0.59 0.36 0.21 0.26 1.02 0.13 0.41 1.16
Data sources: *World Bank Poverty Monitoring Database, tWorld Development Indicators.
Appendix C: Selectivity versus Conditionality: Detailed Country-level Data and Simulation Results
Table A3 Efficient Distribution of Aid (% of GDP) - various scenarios
C-D Scenario: Angola Benin Botswana Burkino F Burundi Cameroon Cape Verde C.A.F. Chad Comoros Congo DR Congo Rep Cote d'Ivoire Equat. Guinea Ethiopia Gabon Ghana Guinea Guinea-Bissau Kenya Lesotho Madagascar Malawi Mali Mauritania Mauritius Mozambique Namibia Niger Nigeria Rwanda 1.20 6.59 3.50 6.48 5.72 4.22 5.95 5.11 5.37 5.25 2.60 5.07 5.02 3.75 7.52 0.36 5.23 2.51 5.86 4.15 7.31 5.27 7.00 6.80 5.89 0.00 6.77 1.27 5.46 2.71 5.41 Optimal 0.25 7.75 0.00 8.32 9.07 2.72 5.19 4.45 6.18 4.96 2.44 9.74 4.64 3.44 11.30 0.00 5.16 1.81 5.44 12.22 5.30 5.76 11.14 8.20 5.67 0.00 8.54 0.00 6.64 0.98 5.46 1996 2.45 4.15 0.71 4.11 5.31 1.57 15.49 3.41 5.07 4.49 0.41 8.86 3.91 2.39 2.90 1.51 2.04 2.45 15.67 1.91 3.09 2.84 7.09 6.95 6.15 0.19 9.21 2.27 2.97 0.19 15.75 C-D (2001) 0.60 7.30 4.00 6.90 5.30 4.40 8.60 4.80 6.70 5.10 2.00 4.60 5.50 2.70 8.40 1.10 5.90 4.70 7.10 5.30 8.10 6.30 8.00 7.90 7.20 0.00 8.00 3.70 6.60 3.60 7.00
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F241
Table A3 Continued
C-D Senegal Sierra Leone South Africa Swaziland Tanzania Togo Uganda Zambia Zimbabwe China Fiji Indonesia Korea Laos Malaysia Mongolia Papua N.G. Philippines Solomon Isl. Thailand Vanuatu Vietnam Algeria Egypt Jordan Morocco Tunisia Argentina Belize Brazil Chile Colombia Costa Rica Dominican R. Ecuador El Salvador Guatemala Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru St. Kitts St. Lucia Trinidad Uruguay Venezuala Azerbaijan Belarus Bulgaria Czech Rep. Estonia Hungary 7.07 5.64 0.00 2.24 5.87 5.58 8.51 6.75 2.48 0.00 0.00 0.00 0.00 4.91 0.00 6.96 2.21 0.00 4.53 0.00 4.53 2.93 0.00 0.00 0.00 0.00 0.00 0.00 3.89 0.00 0.00 0.00 0.00 0.00 0.00 2.20 3.39 5.72 4.08 5.65 0.00 0.00 4.91 1.02 0.00 0.00 4.31 5.21 0.00 0.00 0.00 1.37 0.00 0.00 0.00 0.00 0.00 Optimal 9.40 4.95 0.00 0.00 6.60 5.50 15.00 7.37 0.00 0.00 0.00 0.00 0.00 6.20 0.00 7.19 0.10 0.00 4.06 0.00 4.06 2.53 0.00 0.00 0.00 0.00 0.00 0.00 2.94 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 3.94 3.95 2.54 0.00 0.00 3.57 0.00 0.00 0.00 2.82 4.02 0.00 0.00 0.00 1.43 0.00 0.00 0.00 0.00 0.00 1996 4.03 8.11 0.13 0.99 4.46 2.33 3.34 7.53 1.45 0.06 1.33 0.16 -0.02 5.73 -0.20 4.34 2.87 0.36 4.79 0.20 6.36 0.78 0.22 1.31 3.26 0.70 0.29 0.08 1.87 0.04 0.12 0.10 -0.03 0.29 0.44 1.94 0.51 6.96 4.51 2.82 0.66 0.04 10.21 0.46 0.56 0.37 2.19 4.62 0.19 0.20 0.02 0.93 0.16 0.46 0.11 0.91 0.26 C-D (2001) 7.00 6.30 0.00 5.00 6.70 6.00 8.90 8.10 4.30 0.00 2.10 0.00 0.00 6.60 0.00 6.90 3.20 0.00 4.80 0.00 6.30 4.00 0.00 0.00 0.00 0.00 0.00 0.00 5.40 0.00 0.00 0.00 0.00 0.00 0.00 5.70 3.50 7.90 5.50 6.70 0.00 0.00 6.60 0.00 0.00 0.00 6.10 6.00 0.00 0.00 0.00 4.00 0.00 0.00 0.00 2.80 0.00
F242
[JUNE
Table A3 Continued
C-D Kazakhstan KyrgyzRep. Latvia Lithuania Moldova Poland Romania Russia Slovakia Tajikistan Turkmenistan Ukraine Uzbekistan Bangladesh India Maldives Nepal Pakistan Sri Lanka 0.00 6.44 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.33 0.00 0.00 0.00 4.84 0.00 6.24 4.29 0.00 0.00 Optimal 0.00 5.50 0.00 0.00 0.00 0.00 0.00 0.00 0.00 4.27 0.00 0.00 0.00 5.04 0.00 5.23 5.48 0.00 0.00 1996 0.23 2.45 0.86 0.54 0.59 0.36 0.21 0.10 0.35 2.12 0.26 0.33 0.15 1.02 0.13 3.77 1.70 0.41 1.16 C-D (2001) 0.00 7.20 2.10 0.00 3.30 0.00 0.00 0.00 2.00 4.90 0.00 0.00 0.00 6.50 1.00 8.60 5.20 2.00 2.10
References
Acemoglu, D., Johnson, S. and Robinson, J. A. (2001). 'The colonial origins of comparative development: an empirical investigation', AmericanEconomicReview,vol. 91(5), pp. 1369-401. Alesina, A. and Perotti, R. (1996). 'Income distribution, political instability, and investment', European Economic Review,vol. 40, pp. 1203-28. Bertocchi, G. and Canova, F. (2002). 'Did colonialisation matter for growth? An empirical investigation into the historical causes of Africa's underdevelopment', EuropeanEconomicReview,vol. 46(10), pp. 1851-71. Boone, P. (1996). 'Politics and the effectiveness of foreign aid', EuropeanEconomicReview,vol. 40(2), pp. 289-329. Burnside, C. and Dollar, D. (2000). 'Aid, policies and growth', AmericanEconomicReview,vol. 90(4), pp. 847-68. Castro-Leal, F., Dayton, J., Demery, L. and Mehra, K. (1999). 'Public social spending in Africa: do the vol. 14, pp. 49-72. poor benefit?', WorldBank ResearchObserver, Chant, L., McDonald, S. and Morrissey, O. (2003). 'Aid financing of health expenditure: a CGE analysis of the effect on the poor in Uganda', mimeo, DFID Research Programme on Risk, Labour Markets and Pro-Poor Growth. on Aid and Collier, P. (1997). 'The failure of conditionality', in (C. Gwin andJ. Nelson, eds.), Perspectives Development, Washington DC: Overseas Development Council. Collier, P. and Dollar, D. (1999). 'Aid allocation and poverty reduction', World Bank Policy Research Working Paper 2041. Washington DC.: World Bank. Collier, P. and Dollar, D. (2001). 'Can the world cut poverty in half? How policy reform and effective aid vol. 29(11), pp. 1787-802. can meet international development goals', World Development, Collier, P. and Dollar, D. (2002). 'Aid allocation and poverty reduction', EuropeanEconomicReview, vol. 46(8), pp. 1475-500. Collier, P. and Dollar, D. (2004) 'Development effectiveness: what have we learnt?', ECONOMIC JOURNAL, vol. 114, pp. 244-71. Dalgaard, C.J., Hansen, H. and Tarp, F. (2004). 'On the empirics of foreign aid and growth', ECONOMIC vol. 114, pp. 191-216. JOURNAL, De Haan, A. (2003). 'Poverty reduction in north and south: an aid donor's view', in (P. Mosley and E. Dowler, eds.), Povertyand SocialExclusion in North and South,ch. 4, London: Routledge. - Economists' in the Tropics, Adventuresand Misadventures Easterly, W. (2002). TheElusive Questfor Growth Cambridge, MA: The MIT Press. Easterly, W., Levine, R. and Roadman, D. (2003). 'New data, new doubts: revisiting "Aid, policies, and growth"', Center for Global Development, Working Paper No. 26. @ Royal Economic Society 2004
2004]
AID,
POVERTY
AND
'NEW
CONDITIONALITY'
F243
Ferroni, M. and Kanbur, R. (1991). 'Poverty conscious restructuring of public expenditures', in (A. Chibber and S. Fischer, eds.), Economic Reformin Sub-Saharan Africa, pp. 90-105, Washington., DC.: World Bank. Gomanee, K., Morrissey, O., Mosley, P. and Verschoor, A. (2003). 'Aid, pro-poor government spending and welfare', University of Nottingham: CREDIT Research Paper, no.03/03. Gupta, S., Verhoeven, M. and Tiongson, E. (1999). 'Does higher government spending buy better results in education and health care?', Working Paper of the International Monetary Fund, WP/99/21. Hanmer, L. and Naschold, F. (2000). 'Attaining the international development targets: will growth be enough?', Development PolicyReview,vol. 18, pp. 11-36. Hansen, H. and Tarp, F. (2001). 'Aid and growth regressions', Journal of DevelopmentEconomics, vol. 64(2), pp. 547-70. Hudson, J. and Mosley, P. (2001), 'Aid policies and growth: in search of the Holy Grail', Journal of InternationalDevelopment, vol. 13, pp. 1023-38. Knack, S. (1999). 'Social capital, growth and poverty: a survey of cross-country experience', World Bank Social Capital Initiative: Working Paper 7. Knack, S. (2000). 'Aid dependence and the quality of governance: cross-country empirical tests', unpublished paper, Development Research Group, World Bank. Knack, S. and Keefer, P. (1997). 'Does social capital have an economic impact? A cross-country invesvol. 112(4), pp. 1252-88. tigation', Quarterly Journal of Economics, Knight, M., Loayza, N. and Villanueva, D. (1996). 'The peace dividend, military spending cuts and economic growth', IMF Staff Papers,vol. 43(1), pp. 1-37. Morrissey, O. (2001). 'Pro-poor conditionality for aid and debt relief in East Africa', Universities of Nottingham and Sheffield: DFID Pro-Poor Growth Programme occasional paper 3. Morrissey, O. and Verschoor, A. ( 2002). 'Is ownership a meaningful concept in policy reform? Policy learning and the evolution of pro-poor policies in Uganda', mimeo, DFID Research Programme on Risk,Labour Marketsand Pro-PoorGrowth,Sheffield, Nottingham, Cambridgeand Open University. Mosley, P. (2002). 'Economic crisis, "political sustainability" and the international financial architecture', unpublished paper, University of Sheffield. Mosley, P. and Hudson, J. (2002). 'Aid, poverty reduction and the new conditionality', Universities of Nottingham and Sheffield: DFID Pro -Poor Growth Programme occasional paper 5. Mosley, P., Hudson, J. and Horrell, S. (1987). 'Aid, the public sector and the market in developing vol. 97, pp. 616-42. countries', ECONOMIC JOURNAL, Nafziger, E. W. and Auvinen, J. (2002). 'Economic development, inequality, war, and state violence', World vol. 30(2), pp. 153-63. Development, Rock, J. (2003). 'Donors, aid, policy learning and the evolution of pro-poor policies in Ethiopia', mimeo, DFID Research Programme on Risk, Labour Markets and Pro-Poor Growth, Sheffield, Nottingham, Cambridge and Open University. Sachs, J. and Warner, A. (1995). 'Economic reform and the process of global integration', Brookings Activity,no.1, pp. 1-118. Paperson Economic Sahn, D. and Younger, S. (2000). 'Expenditure incidence in Africa: microeconomic evidence', Fiscal Studies,vol. 21, pp. 329-47. Stewart, F. (2003). 'Do PRSPsincrease government ownership of poverty strategy?',paper presented at a conference on The Impact on Globalisation on the Nation-State, Yale University, 25-27 April. Van de Walle, D. (1998), 'Assessing the welfare impacts of public spending', WorldDevelopment, vol. 26(3), pp. 365-79. Van de Walle, D. and Nead, K. (eds.) (1995). Public Spendingand thePoor: Theory and Evidence,Baltimore and London: Johns Hopkins University Press for the World Bank. Verschoor, A. (2002). 'Aid and the poverty-sensitivityof the public sector budget', DFID programme on pro-poor growth: Occasional paper 3. vol. 14, White, H. (ed.) (2002). 'Symposium on social funds', Journal of International Development, pp. 605-66. Whiteley, P. (2000). 'Economic growth and social capital', Political Studies,vol. 48, pp. 443-66. World Bank (1990). World New York: Oxford University Press. Report1990: Poverty, Development New York: Oxford University Press. World Bank (1997). World Report1997: Statesand Markets, Development World Bank (2000). WorldDevelopment Report2000/01: AttackingPoverty,New York: Oxford University Press.

Wiley Aid and Poverty Reduction

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Wiley Aid and Poverty Reduction

Uploaded by

Copyright:

Available Formats

Aid, Poverty Reduction and the 'New Conditionality' Author(s): Paul Mosley, John Hudson and Arjan Verschoor

AID, POVERTY REDUCTION AND THE 'NEW CONDITIONALITY'*

THE ECONOMIC JOURNAL

THE ECONOMIC JOURNAL

Table 1 Optionsfor Increasing the PovertyLeverage of Aid

Traditional 'structural adjustment' approach Bilateral donors in Uganda 1992-94

@ Royal Economic Society 2004

1. Channels of Aid Impact on Poverty

THE ECONOMIC JOURNAL

THE ECONOMIC JOURNAL

(2) (3) (4)

f3(Yit, Ait,kit) + Eg3it.

@ Royal Economic Society 2004

Table 3 Aid, Pro-poorExpenditureand Poverty (3SLS)

In Health spending (% of GNP -6.539** (2.49) (2.61)

(3.26) 0.420** (2.18)

0.191 (1.434) -0.126*** (3.51)

0.040** (2.57) 0.20 67

2004] LPOVi= (5.849 (1.59)

- 0.867LGDDPCi - 2.690PPE + 0.251GINIi) x (1 - 0.0112GINIi). (5) (2.70) (4.34) (1.70) (1.64)

and also the partial derivative of poverty with respect to PPE:

@ Royal Economic Society 2004

2. The Influence of Aid on Pro-poor Policy

? Royal Economic Society 2004

8 * CsBr ols. PPE = 3.728 - 0.006 In (ODA/GNP) 0* (t) (26.611)(-0.083) ?

oo o "en8 o"Bo .... ??O?? Gha81

ols : PPE=1 648+03671n(ODA/GNP)

In(ODA/GNP) Fig. 1. Aid and PPE

3. Selectivity versus Conditionality

? Royal Economic Society 2004

THE ECONOMIC JOURNAL

AID, POVERTY AND 'NEW CONDITIONALITY'

? Royal Economic Society 2004

THE ECONOMIC JOURNAL

4. Conclusions and Policy Implications

Appendix A: Constructing the 'Pro-poor Expenditure (PPE) Index'

THE ECONOMIC JOURNAL

OLS povertyequation (R2 = 0.660, N= 67). Dependent:log ($1/day povertyheadcountratio)

t 12.4 -1.05 -1.86 3.46 -2.33 -2.43

Log (health expenditure/GDP)

(Ethiopia and Uganda) + +

Appendix B: Aid, Growth and Poverty Reduction in the 1990s

Ghana Kenya Lesotho Madagascar Niger Nigeria Tanzania

-2.04 0.27 1.83 0.85 0.38 7.23

1.60523 -0.67812 2.18699 -0.98976 -1.671 0.30524

2.04 1.91 3.09 2.84 2.97 0.19

Zimbabwe China Indonesia Philippines

Morocco Tunisia Brazil Chile Colombia Costa Rica

DominicanRep. Ecuador Guatemala

-0.65 -0.66 -3.61

3.09673 -0.20308 1.32058

0.29 0.44 0.51

Mexico Panama Peru Venezuela Bulgaria Czech Rep.

0.53 -1.01 1.3 0.56 0 0

2.00036 2.977 1.44112 0.25406 -1.73432 0.17993

0.04 0.46 0.37 0.02 0.46 0.11

? Royal Economic Society 2004

THE ECONOMIC JOURNAL

? Royal Economic Society 2004

? Royal Economic Society 2004

THE ECONOMIC JOURNAL

? Royal Economic Society 2004

You might also like