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Aid for pro-poor growth, not just economic growth

Arjan Verschoor and Adriaan Kalwij


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Recent research suggests that foreign aid has a positive effect on economic growth only if the country receiving aid already has good economic policies in place. These studies do not show whether aid can make indicators of poverty more responsive to economic growth: if aid can benefit a country’s poorest people by promoting not just economic growth but pro-poor growth.

There is some evidence that poorer groups tend to benefit as much from economic growth as the rest of society. This may appear to suggest it is enough to focus on economic growth to reduce poverty. A paper from the University of East Anglia, UK, investigates the ways in which aid can best contribute to poverty reduction. The authors consider if aid effectiveness can be improved if donors extend their criteria for providing aid to include not just the economic policies in place, but also the social spending policies of developing countries.

The most widely available figure for measuring poverty is the percentage of the population living on less than US$1 a day. But two people living on a dollar a day can still have different levels of access to public health care or social support. The authors therefore use changes in the infant mortality rate as well as the monetary poverty measure to better assess whether aid has helped reduce poverty.

Recent studies have shown that aid stimulates social spending, and this reduces poverty and infant mortality. But these studies do not consider if aid can improve the responsiveness of these indicators to economic growth. That is, for a given level of economic soundness (in terms of the policies in place), whether increased aid will have a greater effect on poverty reduction.

If poverty reduction is measured by changes in the infant mortality rate, the authors find that:

  • Aid leads to a reduction in poverty when given to a country with better social policies (that, for example, spends more on social services).
  • If aid is increased, income growth leads to higher poverty reduction.
  • Higher aid tends to increase a country’s spending on pro-poor social services such as education and health care.
When poverty reduction is measured in terms of the number of people living on less than a dollar a day, the effects of increased aid are not as significant.

Summary of research findings. For entire paper, see: ‘Aid, Social Policies and Pro-Poor Growth’, Journal of International Development, Vol.18, No.4, pages 519-532, by Arjan Verschoor and Adriaan Kalwij, 2006

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