3.2 — Foreign Aid II: How Effective Is/Was Aid? — Class Content

Tuesday, October 5, 2021 and Thursday October 7

We will have a discussion Thursday, October 7 on the required readings.


This week we consider a controversial topic, the role of foreign aid in promoting economic development (growth) in developing countries. I don’t want to lecture too much, as our reading can provide much better insight, as Easterly was a central participant in this debate.

Today I will start with a technical overview of empirical research in economic development. I will then give you an overview of the history of foreign aid and its major stages/programs (structural adjustment lending, etc.), the theoretical arguments for aid’s necessity (Harrod-Domar model, financing gap/poverty trap, etc) and a next class will be an empirical assessment of its effectiveness (and our discussion).


Required Reading

  • Chapters 2,6 in Easterly, 2002, The Elusive Quest for Growth

Questions to Read For

  • Advocates for foreign aid, such as Sachs, cite the very real successes in health outcomes in the Developing world (e.g. infant mortality rates, malaria and tuberculosis rates, etc). Is this about economic growth or something else?

  • Read Easterly (2015)’s short book review in the Wall Street Journal. What does Easterly say aid has been successful for?

  • Perhaps we just need better, more targetted, smarter (in whatever metric chosen) foreign aid?

  • What can foreign aid do well? See Skarbek and Leeson (2009) for more.

  • Some papers (e.g. Burnside and Dollar, 2000) find that receiving aid can boost growth under the right conditions (good institutions, good policies, good governance, etc).

  • We specifically focused on foreign aid intended to improve economic development (GDP per capita growth) in low-income countries. What do you think about the role of other types of foreign aid for other purposes? Does it accomplish those purposes? Is this related to economic development as well?

  • What, specifically, went wrong with structural adjustment lending?

  • Look at the list of recommendations that comprise the “Washington Consensus” (slide 9, or see Rodrik 2006). Which of these do you agree or disagree with? If you agree with some or all, what’s wrong with these?

  • Easterly’s common refrain is that these (and other policies) are not compatible with the phrase “people respond to incentives.” What does he mean, specifically? Do you agree?

  • What are the incentives of the governments of donor countries and their constituents? What are the incentives of the governments of recipient countries’?

  • What do you make of Easterly’s proposed “Scrooge” development agency?

  • Take financing gap/poverty trap argument. Do you agree with its premises (growth requires investment, investment requires savings, low-income people/countries can’t save)? If you do, doesn’t the conclusion seem inevitable?

  • If developing countries are supposed to grow with foreign aid, pr are unable to grow without it, how did the countries that are wealthy today get rich? From “foreign aid?”

  • Foreign aid for growth is a transfer between government and government (a wealthy donor country’s government gives to a poor country’s government). Regardless of how you feel about the arguments for/against foreign aid for growth, what would be different if at least one side (donor/recipient) were not a government? Income, investment, and finance coming from other countries can come from sources other than governments, and be given to recipients other than governments. What about the private sector, civil society, non-profits, family remittances, etc? ## Slides

Below, you can find the slides in two formats. Clicking the image will bring you to the html version of the slides in a new tab. Note while in going through the slides, you can type h to see a special list of viewing options, and type o for an outline view of all the slides.

The lower button will allow you to download a PDF version of the slides. I suggest printing the slides beforehand and using them to take additional notes in class (not everything is in the slides)!


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