Easterly, William, and Tobias Pfutze (2008), “Where Does the Money Go?

Best and Worst

Practices in Foreign Aid.” Journal of Economic Perspectives 22 (2): 29-52, DOI:
10.1257/jep.22.2.29.

0. Where Does the Money Go? Best and Worst Practices in Foreign Aid
1. What Would An Ideal Aid Agency Look Like?
Table 1 List of Aid Agencies
2. Aid Agencies and Transparency
Table 2 Transparency Indices for Bilateral and Multilateral Agencies
3. Aid Practices
3a. Specialization/fragmentation
Figure 1 So Few Dollars, So Many Agencies
3b. Selectivity: Aid Going to Corrupt or Autocratic Countries versus Aid Going to Poor
Countries
Table 3 Aid Shares of Different Categories of Recipients in 2004
3c. Ineffective Aid Channels
3d. Overhead Costs
Table 4 Overhead Cost Indicators Bilateral Donors
4. Differences among Aid Agencies in Performance
Table 5 Ranking of Donor Agencies on Best Practices in Aid
Table 6 Correlation of Aid Practices Across Agencies
5. Conclusion

Summary paragraphs:

This paper begins with discussion of best practices for an ideal agency, and the
difficulties that agencies face. It then ranks agencies by five indicators, which are transparency,
specialization, selectivity, ineffective aid channels, and overhead costs. Transparency is ranked in
table 2. Specialization or fragmentation measures the degree to which aid is not fragmented
among too many donors, countries, and sectors for each donor (see figure 1). The next indicator
is selectivity, which measures if aid avoids corrupt autocrats and goes to the poorest countries
(table 3). The fourth is ineffective aid channels, which measures how much aid is tied to political
objectives or given as tied food aid or technical assistance. Lastly, overhead cost measures an
agency’s administrative costs relative to the amount of aid it gives.

1
 After combining these five indicators, foreign aid agencies are ranked in table 5. In the
table, we notice that some data for multilateral aid agencies are missing, creating a serious flaw
in the comparison. From these missing and flawed data, it is hard to conclude where the money
goes. But one thing that is obvious is a lot of aid still goes to corrupt and autocratic countries and
to countries other than those with the lowest incomes. If many countries are still corrupt in
foriegn aid, the study of where the money goes will be ambiguous and the aid will not be in full
capacity.