|From Finance and Development
2006, Volume 43, Number 4
Making Aid Work
Mark Sundberg and Alan Gelb
The end of the cold war and progress toward a new aid
architecture should make aid more effective
Too much of the $300 million in aid to Africa since
1980 has vanished into a sinkhole of fraud, malfeasance and waste.
— Sharon LaFraniere,
New York Times, July 2005
. . . Reality is broadly the opposite of current
popular beliefs. Aid has not been wasted: it has kept African
economies afloat through disturbed times.
— Paul Collier,
"What Can We Expect from
More Aid to Africa?" May 2006
Since 1960 nearly $650 billion in aid (in 2004 prices) has been
provided to sub-Saharan African (SSA) countries by the OECD
Development Assistance Committee (DAC) countries. And this number
would be even higher if contributions from emerging non-DAC donors,
such as China, India, and some of the Gulf states, were added to the
total. Has all this aid been gainfully used to promote sustainable
growth and development? This is difficult to answer because the
links between foreign aid and countries' development are complex.
However, the likely answer is, on the whole, "No."
Historically, most aid has not been used very well. Much of it was
never intended for development to begin with, and a large share went
to war-torn and politically unstable countries where development
gains have subsequently been lost. However, there is good reason to
believe that substantive changes are taking place and that
"more and better aid" is now going to finance development
The changing aid picture
Total aid to Africa (defined as sub-Saharan Africa in this
article) from rich countries represents the bulk of reported net
financial flows to the continent, accounting for between 40 percent
and 90 percent in any given year since 1970. While equity and
foreign direct investments have grown significantly since the
mid-1990s, they are highly concentrated in a small number of
countries. For most countries, official development assistance (ODA)
is still the largest single source of capital inflows, contributing
nearly half of all net capital flows (see Chart 1). Following a
major decline in the mid-1990s that coincided with the end of the
cold war, aid has begun to increase again, although it is still
below earlier levels. Per capita aid flows are particularly
striking. They declined to $24 per capita in 1999 (nearly half the
level seen in the late 1980s) but have since increased to about $37
per capita (see Chart 2).
People typically think of aid as financing for development. But a
large amount of aid is not intended for this purpose. OECD countries
count a wide range of financing items as ODA, including such
special-purpose items as costs linked to program administration,
emergency and food assistance, technical cooperation, and debt
relief. What remain are "non-special-purpose grants" that
constitute what taxpayers typically consider foreign aid: financing
for education, infrastructure, and health projects, as well as
budget support for general financing needs. Over time, this share of
aid going to project and program support has fallen. In per
capita terms, the decline in project and program aid during the
1990s was significant, and it has not yet recovered.
Many factors have contributed to reducing the share of aid that
finances development projects. The decline by more than one-third in
the share of program and project aid in total ODA—from 63 percent
to 41 percent—has coincided with increases in the share of
administrative costs, debt relief, and emergency aid (see Chart 3). Technical
cooperation, much of it spent on foreign advisors, has
historically been the second largest component of aid—even though
finance for training programs, analytic reports, and expert advice
may never actually cross the borders of the donor country. Its share
has declined but is still about one-fifth of total ODA, valued at
$4.5 billion to Africa in 2004.
Administrative costs on bilateral aid have increased from
an average of 5 percent to nearly 8 percent of assistance, in part
because of the proliferation of agencies and countries involved in
delivering aid—whereas 2 agencies and 10 countries provided aid to
Africa in 1960, these numbers had increased to 16 agencies and 31
countries reporting to the DAC by 2004. Measures of donors'
administrative costs do not take into account the enormous
administrative burden placed on the countries that receive aid. One
informal estimate based on a survey of high-level policymakers
suggested that as much as half of senior bureaucrats' time in
African countries is taken up in dealing with requirements of the
aid system and visiting bilateral and multilateral delegations
(World Bank, 2000).
Debt relief has increased fivefold since the late 1980s
and today makes up 20 percent of all ODA. It is recorded as a
special-purpose grant in the OECD-DAC system, which reflects the
intent to make most debt relief additional to new ODA
commitments. Valuing debt relief is quite difficult and warrants
further work to improve measurement. But relief on liabilities that
are not being (and often cannot be) serviced does not provide a new
flow of resources for development, although it does reduce debt
overhang. That said, relief for debt that is being serviced and
clearly constitutes a claim on future resources may provide a future
dollar-for-dollar cash-flow equivalent.
Emergency and food aid has also increased significantly,
nearly doubling from 7 percent to 13 percent of total ODA since
1980. This type of aid is helpful in a crisis but does not generally
contribute to financing long-term development.
Finally, a further practice that reduces the value of official
aid is the tying of aid to donor country exports or firms. Tied aid
is estimated to be 11–30 percent less valuable than untied aid
because of price differentials between what donor country firms
charge and what would be available in the market (UN, 2005).
Throughout the 1980s, more than half of all aid was tied in this
way. There are indications that the share of tied aid is declining,
but several donors no longer report how much of their aid is tied,
making this difficult to confirm. However, based on what data are
available, the UN estimates that tied aid reduced the value of
bilateral aid sent to Africa by $1.6–2.3 billion (out of a total
of $17 billion) in 2003.
In sum, less than one-fourth of bilateral aid and 38 percent of
total aid is provided as financing that can be directly used for
projects and programs to build infrastructure, educate children, or
reduce the spread of infectious disease. This excludes debt relief,
a portion of which provides additional resources. In other words,
development finance in the traditional sense is far less than what
is reported as aid.
Where has the aid gone?
Aid has often been criticized for flowing to dictators and
corrupt regimes with little interest in national development. And
there is evidence that, during the cold war, aid was often provided
for geopolitical reasons and sometimes even favored regimes with
weak civil liberties and political rights (Gelb, Sundberg, and
Fitzpatrick, forthcoming). Colonial ties have also historically been
a determinant of aid allocation (Amprou, Guillaumont, and
Guillaumont-Jeanneney, 2005). On the basis of measures developed by
the University of Maryland to rate the concentration of power in the
executive, known as "Polity IV," about half of total aid
during 1960–90 went to countries that had "unlimited
executive authority." Only 10 percent went to more democratic
countries with "substantial restrictions on the executive"
(see Chart 4).
The fact that aid was often used to achieve geopolitical aims
rather than foster development is corroborated by evidence about the
principles that have guided aid allocation in the past—as measured
by the extent to which countries and multilateral organizations
based their decisions to give aid on need (poverty) and good
management and governance (policy). Chart 5 shows aid selectivity
trends since 1977. Both bilateral and multilateral aid demonstrate
weak policy selectivity through 1991: aid was allocated with little
weight placed on management and governance capacity. Poverty
selectivity was also very low and even perverse for bilateral
donors—that is to say, higher levels of poverty did not drive
larger aid allocations. For multilateral donors, this was also true
in the late 1970s, but selectivity improved in the 1980s.
A great deal of aid was also allocated to countries that became
politically unstable or endured civil conflict—in fact, 28
countries in Africa have experienced a total of 100 military coups
or coup attempts since 1975, and 22 countries have experienced
conflict during the past 30 years. From 1980 to 2002, one-fourth of
all aid to Africa went to countries experiencing conflict. Nearly
one-fifth of total aid went to countries later torn by conflicts
that eroded prior development gains.
Many of the countries that have endured autocratic governments,
civil conflict, and military coups have also seen high levels of
unrecorded capital flight. In 25 countries in Africa, capital flight
between 1970 and 1996 was estimated to total $193 billion compared
with $178 billion in external debt, suggesting that several
countries in Africa are, ironically, net creditors to rich countries
(Boyce and Ndikumana, 2001). This is not to say that aid was the
source of capital flight, but much of it was provided to countries
from which capital flight was rampant.
Some encouraging trends
The good news is that in several respects these trends are
changing significantly, which portends well for better-quality and
more effective aid in the future. Several developments help to
underscore this. First, aid is now going to governments with
better civil liberties and political rights. This is due
both to greater aid selectivity and to the spread of democratic
institutions and multiparty elections in Africa. Aid to countries
with unlimited executive authority has fallen from nearly half to 18
percent, and the share of aid to countries with more democratic
systems and checks and balances that place restrictions on the
executive has nearly tripled.
Second, policy and poverty selectivity have improved
significantly. The trend is most marked for multilateral
donors, but bilateral donors are also placing much more importance
on the quality of governance and overall policies in their aid
decisions. These considerations have been made explicit in the
performance-based allocation systems used by the multilateral
development banks and by several bilateral donors.
Third, there is a clear recognition of the need to improve
aid quality by reducing the number of agencies involved in
disbursing aid, harmonizing aid procedures to reduce compliance
costs for the recipients, eliminating tied aid, and aligning aid
priorities with the countries' own policy priorities. The OECD's
2005 Paris Declaration on Aid Effectiveness is a key step in this
direction. The Global Monitoring Report 2006 (World Bank and
IMF, 2006), which covers the performance of donors, developing
countries, and the international financial institutions and their
key responsibilities under the Monterrey Accord, is a further step
toward mutual accountability.
Fourth, governance indicators suggest that many countries
have improved public resource management by strengthening fiduciary
oversight. The public financial management indicators that
are being tracked for countries receiving debt relief under the
enhanced Heavily Indebted Poor Countries Initiative show that many
countries have improved their public expenditure management since
1999, and more indicators are being developed to track performance
in other governance areas.
Finally, there is evidence of a reversal in the high level
of capital flight from Africa, which has removed enormous
amounts of much-needed financing for development. As political
instability subsides and more countries turn to multiparty
elections, and as growth picks up and income levels improve,
domestic residents repatriate more assets (Collier, Hoeffler, and
In summary, aid in the past was often guided by geopolitical
considerations linked to the interests of donor countries rather
than by development objectives. Not surprisingly, much of it was
used to finance governments that did not have development as their
first priority. Furthermore, much aid was not in a form that could
be used to finance development (emergency relief and technical
assistance are two examples). But changes since the mid-1990s hold
clear promise for improving aid quality and effectiveness. The
harmonization and alignment of aid under the 2005 Paris Declaration
on Aid Effectiveness, as well as the trend toward improved aid
allocation selectivity on the basis of need and policy quality,
provide evidence of this. This "new aid architecture" can
be simply described as aligning aid with country-owned poverty
reduction strategies to finance priority social and infrastructural
investments, conditional on delivering measurable results. New non-DAC
donors and emerging donors, such as China and India, should also
learn from DAC donor experience and improve aid alignment in order
to enhance the impact of their aid.
Amprou, Jacky, Patrick Guillaumont, and Sylviane
Guillaumont-Jeanneney, 2005, Aid Selectivity According
to Augmented Criteria (Clermont-Ferrand, France: Centre
d'Etudes et de Recherches sur le Développement
Boyce, James, and Léonce Ndikumana, 2001, "Is
Africa a Net Creditor? New Estimates of Capital Flight from
Severely Indebted Sub-Saharan African Countries,
1970–1996," Journal of Development Studies,
Vol. 38 (December), pp. 27–56.
Collier, Paul, Anke Hoeffler, and Catherine Pattillo,
2004, "Africa's Exodus: Capital Flight and the Brain
Drain as Portfolio Decisions," Journal of African
Economies, Vol. 13, AERC Supplement 2, pp. ii15-ii54.
Dollar, David, and Victoria Levin, 2004, "The
Increasing Selectivity of Foreign Aid, 1984–2002,"
Policy Research Working Paper No. 3299 (World Bank:
Gelb, Alan, Mark Sundberg, and Brendan Fitzpatrick,
forthcoming, "Aid to Sub-Saharan Africa: Whither $650
Billion?" Development Economics Department (World Bank:
Organization for Economic Cooperation and Development,
2005, Making Poverty Reduction Work: OECD's Role in
Development Partnership (Paris: OECD-DAC).
———, Paris Declaration on Aid Effectiveness; http://www.oecd.org/document/18/0,2340,en_2649_
United Nations, 2005, Human Development Report:
International Cooperation at a Crossroads: Aid, Trade and
Security in an Unequal World (New York).
World Bank, 2000, Can Africa Claim the 21st
——— and International Monetary Fund, 2006, Global
Monitoring Report 2006: Strengthening Mutual
Accountability—Aid, Trade and Governance (Washington).
Sundberg is a Lead Economist, and Alan Gelb is
Director of Development Policy, at the World Bank.