Aid, Growth, and Other Issues – An Interview with Finn Tarp
11 September 2014
In this interview Finn Tarp, Director of UNU-WIDER, discusses the evidence uncovered in the aid and growth and other themes of the ReCom – Research and Communication on Foreign Aid programme, coordinated by UNU-WIDER 2011-13.
Tarp presents evidence from ReCom, which used a range of methodological approaches to build a composite case that long-term aid, properly applied, has made a positive and statistically significant contribution to growth in developing countries. Using cross-country analysis, Tarp with colleagues Channing Arndt and Sam Jones re-examined the data analysed from a 2008 Rajan and Subramanian study, and found that an inflow of aid at about 10 per cent of GDP per annum has spurred long-run growth of circa 1.3 per cent.
Time series analysis
Using time-series analysis to look in to data on the impact of foreign aid over 37 years, and working together with Katarina Juselius and others, Tarp’s team analysed 36 sub-Saharan African countries. Of these 27 cases showed a statistically significant and positive impact on investment, GDP or both. Seven cases showed a similar picture, but were not statistically significant, while two countries, Tanzania and Ghana initially seemed to be outliers. Significant shifts in policy provide the explanation for differing results on closer scrutiny.
The third approach to evaluating the relationship between aid and growth was meta-analysis. Tseday Mekasha and Tarp have re-worked the 68 studies considered by Doucouliagos and Paldam in 2008. Tarp recounts in the interview how re-estimation of the data using different – and he would argue – more appropriate assumptions, indicates that aid has, on average, had a positive and significant impact on economic growth.
By treating aid as though it were a form of investment, using aggregate analysis, Arndt, Jones and Tarp have analyzed the internal rate of return and reached a figure of 7.3%, which most investors would consider to be very good.
As well as the cumulative evidence of these different methodologies, Tarp observes that practically all studies published since 2008 tell a similar story – of a positive impact of aid on growth. The academic debate continues – both in The Economist and the professional journals.
Finding from the other themes and aid effectiveness
In the remainder of the interview, Tarp covers the wide-ranging ReCom research outcomes from the other themes of the programme - Employment, Governance & Fragility, Environment & Climate Change, Gender Equality, and the Social Sectors:
- Donor bodies and international institutions need to take the aid-employment link more seriously
- There is still much to be done on aid and the social sectors (e.g. health and education) and on gender equality – these are basic rights and a long-term investment in human capital
- ReCom has also worked extensively on aid, governance and fragility – many of the aid-recipient contexts represent challenging policy environments, and continued support is critically needed
- On climate change, international agreement is essential, because aid cannot do it all. Poorer countries will need to use more modern energy sources in order to develop. The international community has to make cleaner, sustainable energy sources viable at a competitive price.
The current 2014-18 work programme of UNU-WIDER on Transformation, Inclusion and Sustainability will continue to drive research forward on many of these issues. The 240 research papers, five summary position papers and many other outputs of the ReCom programme can be accessed via the website, and UNU-WIDER provides open access to the 176 peer reviewed publications in academic journals and scientific book volumes ReCom has produced.
For more interviews, see UNU-WIDER channel on Youtube.
Working Paper | The Long-Run Impact of Foreign Aid in 36 African Countries
Working Paper | Aid and Growth