See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/269035512

Aid Effectiveness, Development Theories and Their Influence on the Structure

and Practices in Development Aid to 3rd World Countries

Article · December 2012

CITATIONS READS

0 1,592

1 author:

Carren Pindiriri
University of Zimbabwe
8 PUBLICATIONS 14 CITATIONS

SEE PROFILE

Some of the authors of this publication are also working on these related projects:

University of Zimbabwe Project View project

All content following this page was uploaded by Carren Pindiriri on 19 July 2016.

The user has requested enhancement of the downloaded file.

 Aid Effectiveness, Development Theories and Their Influence on
the Structure and Practices in Development Aid to 3rd World
Countries

CARREN PINDIRIRI
Department of Economics, University of Zimbabwe

Abstract
This article applies desk research to assess the impact of aid on economic growth, and to
examine the link between development theories and aid providers’ preferences in terms of
sector targeting. The study findings show an insignificantly small probability that
development aid positively influences economic growth in developing countries and further
provides evidence of development aid practices that are divorced from development theories.
Unlike previous studies which found poor policy environment as the main cause of the
ineffectiveness of development aid in accelerating growth, this study establishes that the
structure and practices in development aid have not been linked to theories of economic
development. Aid providers target consumptive social sectors while ignoring the driving
sectors of economic development such as the industrial sector. More recently, they have been
targeting industrial emissions control and climate change education in poor countries. This
discourages potential industrialisation in developing countries, which is the cornerstone of
economic development. The main implication of the study findings is that aid has not been
effective because of the existence of the misalignment in development aid practices and
development theories. Hence its failure to cover the investment-savings gap in developing
countries. In this respect, the study recommends a re-alignment of development aid practices
with development theories. In addition, the study also recommends aid providers to re-align
aid conditionalities with development theories.

Introduction
The effectiveness of development aid has continued to be a subject of debate over the past
decade. A number of studies on the role played by foreign aid have been carried out in
developing countries; producing diverging results. The diverging results indicate the
likelihood of model misspecification by different researchers. Some of the studies have
established a non-existent relationship or negative relationship between economic growth and
foreign aid (Bauer, 1971; Knack, 2001; Jensen and Paldam, 2003; Brautigam and Knack,
2004; Easterly et al., 2004; Djankov et al., 2005; Whitaker, 2006; Bourguignon and
Sundberg, 2007; Doucouliagos and Paldam, 2009). Other studies, however, have established
a positive relationship between foreign aid and economic growth (Dollar and Pritchett, 1998;
Burnside and Dollar, 2000, 2004; Harnsen and Tarp, 2001; O’Brien and Ryan, 2001; Najam,
1995; Gomanee et al., 2005; Dalgaard et al., 2004; Rajan and Sabramanian, 2005; Karras,
2006). Most of the studies which established a positive relationship between aid and
economic growth argue that the effectiveness of aid is dependent upon good policy
environment. For example, Burnside and Dollar (2004) argue that aid only contributes
positively to economic growth and development in countries with good policy environments.
But the question is: Has aid been effective in promoting economic growth for Third World
1
Countries? Empirical evidence shows that this question has so far not been satisfactorily
answered. The findings regarding this question are so far inconclusive, hence the need to
continue re-examining the problem. The uncertainty of model specification hinders consensus
on whether aid is a key factor of economic growth. The diverging views indicate a serious
problem of model misspecification. There is therefore a need to make use of different
approaches in examining the impact of development aid on economic growth. This helps us
to evaluate the importance of development aid to Third World Countries. In countries such as
Zimbabwe where a significant proportion of the national budget is financed through foreign
aid, such studies contribute vital information to the country regarding the implications of aid-
dependence.
The general consensus among studies which found no relationship between aid and
economic growth is that the receiving country’s policies and governance cause the failure of
aid in accelerating economic growth and development. In totality these studies assessed the
final product of development aid while ignoring its initial entrance into the economy, that is,
the sectors targeted by aid providers. Different economic sectors have diverse impacts on
economic growth and development, that is, economic growth and development can be more
responsive to changes in some sectors than others. The variations in aid effectiveness among
countries might be explained by variations in sector targeting. There is therefore need to
examine whether or not sector targeting explains the failure of development aid in
accelerating growth in Third World countries. In addition to re-examining the aid-growth
relationship, the article seeks to answer the following questions; (a) does the choice of
sectors matter for aid effectiveness? (b) which sectors have been mainly targeted by aid
providers? and (c) have aid practices such as conditionalities been related to
development theories?
Kanbur (2003, p.4 contends that development aid’s aim was first defined by the
President of the USA (Truman) in 1949 when he affirmed the objective of “making the
benefits of American scientific advance and industrial process available for the improvement
and growth of underdeveloped areas”. Following this, the USA enacted the International
Development Policy (IDP) whose objective was to aid underdeveloped areas in developing
their own resources and fight poverty. The extension of aid to developing countries by rich
countries was based on growth and gap models. These models suggest that aid provides a
boost to domestic capital formation and income, and hence can improve domestic savings in
the firm and household sectors. But has the structure and practices in development aid been
influenced by development theories? The application of economic development and growth
theories has produced expected results for the now developed countries. Hence it is important
for developing countries to link their policies to these theories. The international dependence
school which became prominent in the 1970s and emanating from developing countries
argues that foreign aid represses economic growth and development for poor countries
through the suppression of innovations in these countries. It is therefore paramount for poor
countries to trace where the aid is directed to vis-a-vis the importance of the receiving sectors
in development theories. In this regard, the study provides useful information to aid-receivers
on whether aid targets value chain sectors which propel economic growth and development
as defined in economic development theories.
Whereas previous studies on the effectiveness of development aid have not
considered sector targeting as one of the determinants of the failure of development aid, this
study considers sector targeting as the initial point of examining the effectiveness of
development aid. This article therefore provides an alternative explanation to the causes of
the ineffectiveness of development aid. Specifically, it re-examines the effect of aid on
growth using a different estimation technique making use of the various estimations done
2
in this area, and assesses the current practices in development aid vis-à-vis their linkage to
economic development theories.

Literature review
Development Aid and Economic Growth
The aid-economic growth relationship has been well researched into but the question of
whether aid influences growth in poor countries remains unanswered. Several studies
applying different econometric methods have been carried out in developing countries, but
producing fragile results. The role played by development aid in economic growth and
development has therefore remained a subject for debate. In a meta-analysis study by
Doucouliagos and Paldam (2009) covering 68 studies with over 540 estimates, it was
established that estimates on the impact of development aid on economic growth are
substantially scattered and add up to an insignificant small positive. Some estimates are
positive but insignificant (Jensen and Paldam, 2003) while others are negative (Brautigam
and Knack, 2004). At the same time other studies (Hansen and Tarp, 2000; Burnside and
Dollar, 2000) found a significant positive relationship between development aid and
economic growth.
Many of these studies argue that development aid fails to stimulate economic growth
because of the poor policy environment in the aid-receiving countries. This means that
policies in developing countries have been identified as problematic. However, none of these
studies has attempted to examine the influence of sector targeting on the effectiveness of
development aid. Literature in this area is heavily biased towards problems of aid-receiving
countries at the expense of the aid providers’ power. Many questions remain unanswered, for
instance, are aid providers not influential in making development aid ineffective? Is there any
relationship between development aid practices and economic development theories? This
area has not been addressed by previous studies on aid-growth relationship. The theoretical
framework of this study is given in figure 1 below.

Development Channel A Investment: Output:

aid and Productive Economic growth
sector targeting sectors and development

Policy Environment
in aid-receiving
country
Informed by economic
growth and
development theories
Consultation

Consumption

Channel B
Source: Author
Figure 1: Development Aid Channels
3
The rest of the studies done on the effect of aid on economic growth and development have
tended to consider aid as following only one channel, that is, channel A in Figure 1. These
studies have always assumed that aid providers’ decisions are always informed by economic
growth and development theories. The main implication of these studies is that aid always
targets productive sectors (channel A), and the only barrier to its effectiveness in stimulating
economic development is the policy environment in the receiving country.
This study deviates from the previous studies by considering the possibility of the
existence of another aid channel, that is, channel B in Figure 1. If such a channel exists then
development aid cannot promote economic growth and development. It is in this respect that
this article scrutinises whether such a channel exists. The central hypothesis is that the failure
of development aid is a result of poor sector targeting and the misalignment between aid
practises and economic development theories.

A Review of Economic Development Theories

Theories on modernisation and economic development originate from the classical evolution
of social change (Giddens, 1991; Smith, 2003). The industrial revolution during the 18th and
19th centuries prompted the pioneers of development economics (Karl Max, Max Weber and
Emile Durkheim) to develop theories that attempt to explain the social and economic
transformations initiated by this revolution. Two major ideas embraced in traditional
modernisation theories were economic development and frequent social change. However,
these traditional ideas continue to influence modern development theories. After World War
II, four major schools of thought, namely, the linear-stages-growth model, theories and
patterns of structural change, the international-dependence revolution and the neoclassical,
free market counter-revolution dominated literature on economic development.
Rostow’s five-stage model of development and Harrod-Domar’s growth model
dominate the linear-stages-growth approach. Rostow (1960) argues that there exist sequential
steps of development or modernisation in any society. These development steps are linear and
are identified in an ascending order as follows: the traditional society, pre-conditions for take-
off, take-off, drive to maturity and high mass consumption. During the first stage of
development known as the traditional society phase in the Rostow model, the economy is
dominated by agriculture with traditional production systems and is therefore stationary.
Traditional societies were a characteristic of the Newtonian era, and most economies have
since passed this phase of economic development. In the second stage of Rostow’s model,
that is, during pre-conditions for take-off phase, traditional agriculture is transformed into
modern agricultural practices. Rates of investment start rising, thereby initiating dynamic
economic development and making the primary sector redundant. The bulk of Africa is still
in the pre-conditions for take-off phase and therefore the current study will concentrate more
on this phase.
In order for economies to be able to take-off, some conditions have to be satisfied.
These pre-conditions include education, capital mobilisation, financial sector development,
entrepreneurial-skill development and manufacturing growth. The question is why African
countries are failing to take-off. Most developing countries such as Zimbabwe have satisfied
the education condition but are still struggling to mobilise capital, improve creativity in
entrepreneurial activities and develop the manufacturing sector. The agriculture sector in
Zimbabwe lacks modern infrastructure and the country still relies on the primary sector (a
common characteristic of a traditional society). The country is failing to take off, yet it has a
very high literacy level of 92% (Ministry of Education, Sports, Arts and Culture, 2013).
The third and fourth stages of the Rostow model are the take-off and drive to
maturity. In the take-off stage, sector-led growth becomes dominant and societies are driven
4
less by traditions than economic processes. Economic growth becomes self-sustained in the
take-off phase. During the drive to maturity stage, investments continue to rise and
diversification becomes more common. Economic development cannot continue infinitely but
it reaches a maximum, the age of high mass consumption in the Rostow model. Most
Western economies have reached this phase of development where the bulky of the society
lives in prosperity with profusion and diversity of consumption choices.
Like the Rostow model, investment plays a major role in accelerating output in the
Harrod-Domar model of economic growth. Output growth is a linear function of savings and
the ratio of capital to output. The theory implies that foreign aid can only influence economic
growth through investment. Therefore, aid effectiveness in accelerating growth depends on
sector targeting. However, linear-growth models have been criticised for not accounting for
institutional, political and social impediments to economic development. These models also
offer limited insights into the practical problems facing poor countries because of their failure
to account for dualism (Ranis, 2004).
Prompted by the weaknesses of linear models, the notion of dualism enticed
substantial attention in development economics. Other economic development theories such
as the Schumpeterian theory also support investment as the driving force of economic
development. Schumpeter (1959) argues that economic development concerns the destruction
of the static circular flow by introducing new combinations which include new methods of
production, new supply sources, new products, new markets, and new organisational forms.
So in the Schumpeterian theory, the innovative entrepreneur is at the centre of economic
dynamics, and economic development is therefore viewed as endogenous, spontaneous and
discontinuous. In this theory of economic development, innovations and credit are regarded
as the most essential aspects of economic dynamics. In order for entrepreneurs to be
innovative, they require finance, hence bank credit is considered to be the pre-requisite of
innovations. In the Schumpeterian view, foreign aid can accelerate growth if it is used as
credit for the pioneering entrepreneurs, private investors, and research and development
activities. But are foreign aid providers targeting these economic aspects?
The structural change theory argues that the process of development must be
concerned about policies focusing on transforming economic structures of developing
countries from subsistence agricultural practices to more modernised, industrialised and
diversified manufacturing economies. Rosenstein-Rodan (1943), Mandelbaum (1945),
Nurkse (1953) and Lewis (1954) argue that there exists surplus labour in the traditional
agricultural sector which can be reallocated to higher productivity quests in the urbanised
industrial sector to fuel economic development. By incorporating foreign aid in the Lewis
model, it can be deduced that aid can effectively accelerate economic growth in developing
countries only if it is directed to the urbanised industrial sector. In such a way it will stimulate
dynamics in the urbanised sector, thereby absorbing the excess labour from the traditional
sector. The main weaknesses with the structural change theory are that they emphasise urban
development at the expense of rural development, and the notion of surplus labour has been
rejected by a number of empirical studies (Schultz, 1964).
The neoclassical theory which advocates for free markets unrestrained by too much
government intrusion also became prominent after World War II. This approach has three
main variants, namely, free market approach, the public choice theory, and the market
friendly approach. The first two variants argue that economic development takes place where
markets are totally free, left to regulate themselves without government intervention while
the later recognises the potential presence of market imperfections. Market imperfections
require some form of government intervention to effectively fix them. The World Bank has
been advocating for the free market approach in Africa, for example, in 1992, the World
5
Bank funded the Economic Structural Adjustment Programme (ESAP) in Zimbabwe which
was based on free market principles. Such programmes were carried out in a number of
African countries but still failed to accelerate economic development in the continent. The
largest bank of the world provided aid to many African countries during the 1990s for
economic structural adjustment programmes with a condition that these countries liberalise
their economies. But which sectors were targeted by the World Bank? Were they economic
growth driving sectors? It is important to note that decisions made by the World Bank are an
offspring of the powerful developed countries who have more control over the Bank.
During the 1970s a new school of thought in development economics, the
international dependence theory, became more prominent. While other development theories
have their origins in the developed world, international dependence theories originate from
developing countries. These theories view impediments to economic development in
developing countries as an external creation. Developing countries are regarded as being
politically and economically dependent on rich/developed countries which have an interest in
maintaining their dominance position.
The general consensus among the theories of development discussed in this section is
that industrialisation is the pillar of economic development. However, the industrialisation
process is associated with environmental pollution (Boulding, 1966; Peng and Bao, 2006; and
Zhang, Bi and Ge, 2008). The Kuznets curve depicts a positive relationship between pollution
and industrialisation. Take-off in developing countries fails because of their inability to
satisfy the pre-conditions for take-off such as capital mobilisation, research and development,
innovations, and bank credit. Savings shortfall is the major cause of take-off failure in
developing countries. Hence, foreign aid should close the savings-investment gap in these
countries. Development aid should therefore be used as a source of credit for the
manufacturing sector, agricultural modernisation and research activities in developing
countries. Financing non-productive social sectors might make aid ineffective in accelerating
economic development in developing countries, irrespective of a good policy environment. In
situations where aid providers have no ulterior motive we expect foreign aid to target
industrialisation, but if the providers have a concealed motive of dominance over poor
countries then we expect aid to target non-productive social sectors. We argue that aid should
be directed through channel A in Figure 1 if linked to development theories.

Lessons from Industrialised Countries

According to Chang (2002), with the exception of the Netherlands and Switzerland, all of
today’s rich countries used protectionism before and after World War I. Britain, the United
States of America, France, and German, among others vigorously used the infant industry
protection and Japan only applied the use of tariff protection after 1911 because of the
unequal treaties it signed in 1853. The protection of infant industries in a developing country
promotes growth of domestic industries which makes the backbone of industrialisation
process. Chang (Ibid) argues that developing countries can only develop if they protect their
infant industries from external competition. This argument implies that investment in the
manufacturing sector is key to economic growth and development in poor countries. While
all rich countries used protectionism in their development processes, aid providers through
the World Bank and International Monetary Fund (IMF) have been advocating for trade
liberalisation in poor countries. Trade liberalisation was one of the conditions attached to the
World Bank’s economic structural adjustment programmes carried out in Africa during the
1980s and 1990s (Rattso and Torvik, 1998).
In terms of Foreign Direct Investment (FDI), many developed countries controlled it
when they were at the receiving end (Chang and Green, 2003). For example, the USA
6
regulated FDI in the financial sector, extractive sector, logging and shipping. During the 19th
Century only American citizens were allowed to become directors in a national bank while
foreign shareholders were not allowed to vote in AGMs. Until the 1980s, Japan, Korea and
Taiwan banned FDI and in Finland companies with an excess of 20% foreign ownership were
categorised as dangerous between the 1930s and 1980s (Chang, 2007). Indigenisation played
an important role in the development of Western countries; the main reason being that unlike
foreign investors who can withdraw their investments at any time, investments done by
domestic citizens would stay for life. So Chang (2007) argues that keeping foreign companies
out may be good for developing countries in the long run.
Between 1965 and 1990, East Asia remarkably recorded higher levels of economic
growth and development compared to other regions of the world. This achievement was
mainly attributable to the Asian Tigers (Hong Kong, Singapore, the Republic of Korea and
Taiwan) including Japan. Page (1994) describes the East Asian Tigers’ growth “miracle” as
an output of high capital accumulation, productivity change and export orientation. The
success of East Asia was mainly caused by a simultaneous increase in domestic investment
and human capital. The main lesson that we derive from the East Asian experience is that the
take-off stage of economic development requires a simultaneous application of the pre-
conditions for take-off. In this regard, aid must act as a source of finance for domestic firms
and human capital development in order to accelerate economic growth and development.

Methodology
This article had three methodological questions to be answered and these were based on: (a)
how to evaluate the impact of development aid on growth; (b) how to assess the impact of
sector targeting and aid conditionalities on economic growth; (c) how to deduce the extent of
the misalignment between development aid practices and the tested development theories.
Generally, the methodology applied in this article is a desk study research based on
secondary data. The three methodological questions were answered through the collection
and use of secondary data which included archived data. The main advantages of a desk study
are that it is less costly and therefore one can have access to bulky data because of wide
coverage. It has, however, a major disadvantage in the accuracy of the data since most of the
data is transcribed.
Concerning the question on whether aid influences economic growth, we applied the
Bayesian Coefficient Averaging (BCA). The Bayesian approach has been commonly used in
model specification or model averaging. However, in this study we applied it in coefficient
averaging. The existence of potentially many different coefficients of foreign aid in growth
models each with some probability of being the true coefficient requires a way of averaging
these coefficients. The general growth regression given different aid coefficients is therefore
given by:
y = q i AID + lZ + e (1),
where y is a vector of economic growth rates, and Z is a vector of growth determinants
excluding aid but including those proposed in classical growth models. The coefficient of aid
is subscripted by i indicating that it has not been the same for the previous studies, that is,
the i th study has its own different coefficient. Regression model (1) has been estimated since
the 1960s; as a result this study makes use of the findings from these existing studies to
generate the probability of the effectiveness of aid. At least 30 coefficients established in
low-income countries from the 1970s to 2009 were averaged, that is, the first coefficient was
Bauer’s 1971 and the last being Doucouliagos and Paldam’s 2009 coefficient.

7
 By defining t as a positive and statistically significant coefficient of the aid variable,
the study computed the subsequent probability of the significance of aid in economic growth
by using Bayes Rule as:
f ( y / t ) P(t )
P(t / y ) = (2),
f ( y)
where f ( y / t ) is the marginal probability of the data and f ( y) is the density function of the
dependent variable, y . In this article it was assumed that the density function of y , f ( y) is
the same as its conditional density function f ( y / t ) since the t coefficients were given and
therefore independent of y . So we estimated the probability of the significance of aid in
economic growth as follows:
t
P (t / y) = P (t ) = (3),
n
where n is the sample size of the selected aid coefficients in growth models. The main
advantage of the BCA is that it accounts for model uncertainty by attaching probabilities to
alternative sets of coefficients. In addition, the method is costless since it makes use of
coefficients obtained from already established findings. However, it has the weakness of
failing to provide the exact coefficient of the variable although it answers the research
question on whether aid influences economic growth in developing countries.
With regards to whether sector targeting matters for aid effectiveness, the study also
used secondary data in comparing growth rates in countries where aid has targeted different
sectors. The magnitude of aid conditionalities explains the extent of sector targeting by aid
providers. Secondary information on conditionalities, aid, and economic growth for Asia and
Sub-Saharan Africa for the period 1960 to 2000 was used to evaluate the effect of sector
targeting/conditionalities on economic growth. In addition, comparison among some African
countries such as North African countries and Sub-Sahara African countries was made in
terms of their growth rates and aid-targeted sectors. This is one of the cheapest ways of
assessing the effect of sector targeting /conditionalities on growth variability in developing
countries.
The initial objective of foreign aid was to fill the gap between investment and savings
in developing countries. The origin of aid is therefore strongly rooted in early growth theories
such as the Rostow, Harrod-Domar and Gap models. It is in this regard that the study
reviewed economic growth and development models and tracked where foreign aid has been
directed to. Lastly, secondary data on sectoral distribution of aid was collected and subjected
to scrutiny and juxtaposed to reviewed development and growth theories. A qualitative
approach was also applied in answering this question. Aid policies were analysed and linked
to contemporary development theories.

Results and discussion

This section presents and discusses empirical evidence on aid effectiveness and the link
between aid practices and development theories. A total of 100 estimates of the coefficient of
aid in empirical growth models were considered in this article. Out of these coefficients, a
random numbers table was then used to select a sample of 30 estimates from low-income
countries. Most of the estimates were statistically insignificant and a number of them were
even negative. Table 1 (Appendix) provides the 30 estimates and their statistical significance.
The findings show that only eight out of the 30 coefficients are positive and statistically
significant. Hence the probability that development aid has a positive impact on economic
growth in low-income countries is very small, at only 27% from the sample. In other words,

8
the aid variable tends to be statistically insignificant in about 73% of the cases in which it
was used as an explanatory variable in economic growth models.
The scattered sample estimates add up to a very small average, 0.024. This finding of
a small positive but statistically insignificant coefficient is similar to the one obtained by
Doucouliagos and Paldam (2009). This article has averaged all previous estimates; a key
process in solving model uncertainty. Despite the inability of coefficient averaging to provide
specific estimates of the aid coefficient, the method provides useful information as to whether
or not aid can stimulate growth. The probability that aid had failed to influence economic
growth in low-income countries is very high. This provides evidence to support the school of
thought which established a non-existent relationship or negative relationship between
economic growth and foreign aid. It is clear that aid has failed to promote growth in low-
income countries but what could be the reason behind this?
Unlike previous studies which established that the failure of aid in promoting growth
in developing countries is a result of poor policy environments, this article found evidence
that aid has been directed to the non-productive consumptive sectors. Most aid to Africa
follows channel B in Figure 1, omitting economic development take-off phases. The
secondary data collected from the World Bank and UNCTAD show that aid in most African
countries has been targeting the consumptive social sector. For example, in 2010 Nigeria
used 66.5% of its aid in debt servicing, 13.8% in health and population and the remainder in
other non-productive sectors while nothing was allocated to the productive sector
(www.aidflows.org). During the same period Ghana which allocated 10.3% of its aid to the
productive sector experienced a better economic growth than Nigeria www.aidflows.org)..
The secondary data further shows that conditionalities on average were higher in Africa than
Asia and in Africa more than 80% of the conditionalities were attached to Sub-Saharan
Africa (SSA) aid. North Africa and Asia were freer than SSA in selecting sectors of their
choice when allocating aid. Between 1997 and 1999, total loosely defined conditionalities in
Africa were 114, in Asia 84, and 78 in Latin America. As a result, although aid to SSA
countries as a percentage of their Gross Domestic Products (GDPs) was on a rising trend
from the 1960s to 1999 (UNCTAD, 2006), no meaningful economic growth was recorded in
these countries.

Table 2 (a): Aid Per Capita (in current US dollars) in Developing Countries, 1965-2004
1965-69 1970-79 1980-89 1990-99 2000-04
Africa 2.6 3.7 4.3 5.0 3.6
North Africa 4.0 6.2 3.2 3.6 0.9
Sub-Saharan Africa 2.2 2.8 4.7 5.5 4.8
Asia 1.5 1.5 1.2 1.0 0.3
America 0.7 0.7 1.0 0.7 0.4
Source: United Nations Conference on Trade and Development (UNCTAD) Report, 2006

Table 2 (b): GNP/GDP Per Capita Growth Rates in Developing Countries, 1960-2000
1960-69 1970-79 1980-89 1990-2000
Sub-Saharan Africa 2.3 1.6 -1.2 -0.2
East Asia and Pacific 4.9 5.7 6.4 6.0
Latin America and Caribbean 2.9 3.2 -0.3 1.7
Southern Europe 5.6 3.2 1.5 -1.8
North Africa 1.1 3.8 -1.1 1.2

9
Sources: The first two columns (1960-79) are Gross National Product (GNP) growth rates from the World Bank
Development Report, 1980; and the last two columns (1980-2000) are Gross Domestic Product (GDP) growth
rates from World Bank Development Report, 2002.

Among all developing regions, Africa is the largest beneficiary of aid since 1960.
Africa’s aid as a share of GDP averaged 3.8% during the period 1965 to 2004 while that of
Asia averaged less than 1.5%. While aid per capita was rising in Africa between 1960 and
1999, it was falling in the Asian countries. Information on aid per capita flowing into
different developing countries is provided in Tables 2 (a) and 2 (b). The information shows
that regions that have been receiving more aid experienced lower levels of economic growth
over the period 1960 to 2000. Africa has been the largest beneficiary of foreign aid but has
recorded the least growth rates compared to other regions. From the 1960s to 1999 aid
flowing into Sub-Saharan Africa was increasing [see Table 2 (a)], but economic growth as
measured by GDP growth rates was declining [Table 2 (b)]. In Asia where aid flow was
declining during the same period, economic growth was significantly rising. So even without
econometric regressions, these simple trends provide enough evidence that aid has been
repressing economic growth in Sub-Saharan Africa and Asia, among other regions. This is,
however, opposite to the North African scenario. In North Africa when aid increased between
1965 and 1979, the region also experienced an increase in economic growth. Over the period
1980 to 1999, aid inflow to the region decreased and economic growth also declined. Why
does aid-growth relationship show these differential impacts among regions? Is aid targeting
similar sectors in different developing countries? The findings from secondary information
show that there were fewer and sometimes no conditionalities attached to North African aid
over the study period. North African countries were in full control of the aid programmes and
were free to allocate foreign aid to any sectors of their choice.
Information provided by the UNCTAD (2006) and UN Report, indicates that the
international donor community has been increasing its attention to poverty indicators. Aid has
been shifted from agricultural development, energy supply and infrastructure to social
sectors. This is in line with previous findings by Hjerholm and White (2000) that donor focus
has been changing since the 1940s, that is, donors focused on: reconstruction in the 1940s;
community development movement in the 1950s; productive sectors and infrastructure in the
1960s; poverty (social sectors) in the 1970s; macroeconomic reforms in the 1980s; poverty,
governance, environment and gender in the 1990s; and poverty reduction with emphasis on
health and education in the 2000s. For example, in 1992 the Japanese Government considered
environmental issues in poor countries critical and declared its intent to increase its aid in
environmental management (World Bank, 2007).
The collected secondary information shows that spending on social sectors as a
proportion of technical cooperation in SSA rose from 50%in the period 1992-96 to 70% in
the period 2000 to 2004. The World Bank and the IMF indicate that 65%of the aid they
released through their Highly-Indebted Poor Countries (HIPC) programme was directed to
social services and only 7%was allocated to infrastructure and other productive sectors
(Killick, 2004). Most aid is directed to non-productive sectors: education, health, emergency
relief and debt relief. The World Bank Indicator of 2010 shows that about 65% of Nigeria’s
Official Development Assistance (ODA) in 2010 was used for debt servicing, 13.8% for
health and population, 5.5% for other social sectors, 6.3% for economic infrastructure, 7.9%
for others and nothing was allocated to the production sector. In South Africa more than half
of its 2010 ODA was allocated to health and population, education and other social sectors
while the production sector received nothing. The largest proportion of aid in most African
countries including Zimbabwe has been used in the social sectors. The Zimbabwe-United

10
Nations Development Assistance Framework (ZUNDAF) for 2012 to 2015 undoubtedly
exposes donor preferences on sector targeting. The 2012-2015 ZUNDAF is a UN strategic
programme framework to aid national development programmes for the 2011-2015 period
and the achievement of the Millennium Development Goals (MDGs) by 2015. Out of the
seven national priorities identified by ZUNDAF, more than half of the total budget of
US$797,142,522 is allocated to social sectors and primary sectors, in particular, the
agricultural sector. Aid has been following channel B in Figure 1.
The World Bank and the IMF have been attaching some conditions to their assistance.
During the 1980s and 1990s, African countries were forced to liberalise their economies in
order to receive aid from the two institutions. In 1992, the World Bank financed the
Economic Structural Adjustment Programme (ESAP) in Zimbabwe which destroyed a
number of local infant industries which could not compete with the well-established foreign
firms. Economic development literature clearly shows that the pioneering entrepreneur is the
engine of growth (Schumpeter, 1959), hence the need to protect infant industries. All
developed countries protected their infant industries during their development process, but
the issue to be addressed is why they are aiding liberalisation in under-developed countries
today. It is possible that aid providers might be targeting repressing growth of the domestic
industry which propels economic development in these poor countries. In 2002 the UNCTAD
reported that what is known, with at least some degree of certainty, is that increasing
conditionalities to aid is counter-productive in most cases, but surprisingly the same
international institutions have been increasing these conditionalities. Santiso (2001) argues
that international institutions and some aid providers have extended aid conditionality from
the economic realm (economic reforms) to the political arena (good governance). Good
governance has recently become the core condition attached to aid in addition to macro-
economic reforms. The IMF reviews its conditionality regularly (IMF, 2013).
Recently, aid targeting environmental management has been on the increase, that is, a
number of aid-supported environmental projects are currently running in Africa. The OECD
(1993) contends that future aid programmes would ensure environmental sustainability and
slow population growth in those many countries where it is too high to permit sustainable
development. The United Nations Environmental Programme (UNEP), in conjunction with
the World Bank and other development partners, provided carbon finance for sustainable
energy in a number of African countries including Cameroon, Mali, Zambia, Mozambique,
and Ghana through what is called Clean Development Mechanism (CDM). According to
UNEP’s annual report of 2007, Spain, Sweden and Finland have been providing funding to
overcome carbon market barriers in SSA. Surprisingly, these organisations have not been
funding investment in clean water which is a major environmental challenge in developing
countries. The Directory of Non-Governmental Organizations (NGOs) in Zimbabwe prepared
by the National Association of NGOs (NANGO) claims that there are over 180 organisations
active in the country, many of which are involved in resource management in the communal
areas. Some of these organisations include the Africa Resources Trust and Zimbabwe
Environmental Law Association (ZELA). In addition to funding environmental activities, rich
countries have been providing environmental education to citizens of developing countries,
for example, there are a number of scholarships on the environmental field given to citizens
of poor countries such as the Canadian scholarships for environmental sciences, Centre for
Environmental Economics and Policy in Africa (CEEPA) funded by developed countries,
DAAD scholarships and the Norwegian Quota and NORAD programmes.
Developed countries have also been funding environmental learning institutions in
Africa. The United Nations University of World Institute for Development Economics
Research (UNUWIDER) is collaborating with the African Economic Research Consortium
11
(AERC) in research and training of climate change courses. Such institutions are preaching
the bad side of industrialisation in developing countries, which could be an attempt to shift
developing countries’ preferences from output growth (industrialisation) to less polluted
environment. NGOs and institutions being funded by aid providers in environmental
activities continue to dance to the tune of these aid providers because the aid is only provided
on the condition that these organisations enhance their masters’ effort in reducing global
emissions.
One of the MDGs of developing countries is to reduce unemployment, whereas one of
the objectives of aid is to help developing countries achieve this MDG. But most aid projects
bring in foreign personnel from developed countries, in particular management personnel. A
number of research projects funded by the donor world are controlled by staff from these aid
providers. The World Bank, IMF and WIDER, among others, have been funding climate
change research in a number of developing countries, but most of the researchers are from the
aid providers. For example, in 2012/13 Arndt, Thurlow and Tarp did a WIDER-funded
research on regional climate change of the greater Zambezi River Basin, but no local
researchers were included in the team. The funds provided as aid are taken back as payments
for technocrats of the same aid providers, so effectively it is the provider who benefits from
the aid.
The review of policies and the collected secondary information provide evidence of a
huge misalignment between development aid practices and contemporary development
theories. Aid skips key phases in economic development processes such as investment in
productive sectors which stimulate economic growth. Since development aid has been
following channel B in Figure 1, it implies that it will have very little effect on output growth
in low-income countries. The main implication of these findings is that the scattered
coefficients of aid established by previous studies might be a result of differential sector
targeting and the non-existent relationship occurs when aid is directed through channel B to
the consumptive sectors.

Conclusion and Policy Directions for Developing Countries

The results support that aid has not been a significant determinant of economic growth in
low-income countries. The averaging of the randomly selected aid coefficients provides a
small positive and statistically insignificant coefficient. The findings show a probability of
over 73% that aid fails to stimulate economic growth in low-income countries. The method
used in this article to generate this probability accounts for model uncertainty, that is, the
problem of the scattered coefficients of aid has been resolved. While previous studies
pointed out policy environment as the major cause of aid failure, this study established that
sector targeting and conditionalities might be more serious than the policy environment in
the ineffectiveness of development aid. The results show that those countries with more
conditionalities and where aid has targeted consumptive sectors experienced lower economic
growth rates than their counterparts.
Aid practices have not been linked to contemporary economic development and
growth theories. Most aid is allocated to social sectors and environmental management but
Africa requires capital accumulation in order to take-off or industrialise. Aid has failed to
serve its unconcealed purpose of being a “big push” for African economies because of the
development stages associated with the aid-targeted sectors. Can aid directed to social sectors
help developing countries achieve economic growth? Such aid is financing the final stage of
economic development in the Rostow model where mass consumption is the main
characteristic, but what happened if donors withdraw? The social sector will collapse, leaving
developing countries worse off. Aid must therefore be used to develop developing countries
12
through the construction of permanent economic structures such as industry. In the
Schumpeterian model, the pioneering entrepreneur is at the centre of economic development,
but if people are well fed from donations then they tend to apply less effort in
developmental issues (Re-word). When people face no problems, they tend to relax, that is,
“necessity is the mother of invention”. Aid targeting social sectors could therefore be a means
of repressing inventions and the construction of permanent economic structures in developing
countries. Since most donors have been targeting social sectors while ignoring the productive
sector, we have evidence to conclude that aid failure to explain economic growth in low-
income countries might be a result of its isolation from development theories.
Most studies on aid-growth relationships in developing countries have been centred
on channel A in Figure 1. However, this study established that most aid in low-income
countries has been directed through channel B in Figure 1. Previous studies mostly centred on
channel A could have been wrongly focused. They could have been studying the effect of
non-productive aid on economic growth. The findings suggest the need to scrutinise the
various types of aid when selecting aid variable in economic growth models. These results
propose an important policy implication pointing to an urgent need for researchers in
developing countries to examine the impact of sector targeting and conditionality on
economic growth and development.
In line with these outcomes, the study recommends a set of measures for decision-
makers in both developing and developed countries. First, researchers in aid-growth
relationships should strictly scrutinise the types of aid they use as possible explanatory
variables. Not all types of aid are a form of investment. So the commonly established non-
existent relationship between aid and growth could be a result of poor selection of what
encompasses the aid variable. If the definition of the aid variable is standardised then the
issue of fragile results might be resolved. It is in this regard that the article recommends
future researchers to properly define and standardise what constitutes the aid variable as a
factor in economic growth and development.
Second, aid policies and practices should be rooted in contemporary economic growth
and development theories. The current development aid practices should be realigned with
development theories. Aid should be directed to the productive sectors and cover the savings-
investment gap in most low-income countries. All development aid should follow channel A
in Figure 1 and avoid channel B if it is provided for the purpose of stimulating development
in low-income countries. Future researches should consider assessing the differential sector-
aid impact on economic growth.
Third, aid providers should allow the recipients to take a greater ownership of aid
programmes. The decision to allocate aid to various sectors must entirely lie in the hands of
the receiving country. Developing countries possess better information and knowledge about
sectors which propel development in their own countries compared to foreign countries.
Therefore, any aid provider should give the mandate of aid allocation to the recipient country
in order to improve its effectiveness. In addition, developing countries must closely scrutinise
any form of aid provided by donors and make sure that it is purified of any conditionalities.
Governments of developing countries should consult each other and jointly call for the
removal of any conditions attached to aid. Aid should not be conditioned on policies set in
Washington for the interests of rich countries; instead developing countries should be free to
consult their poor majorities for sound advice on the best development course, and
formulate their own development programmes.
Forth, developing countries should not allow aid targeting reduction of industrial
emissions without being accompanied by investment in technologies that increase output
growth at the same time. There is need for poor countries to demand?? aid for green
13
innovation from rich countries if the rich are concerned about clean environment. Solving
pollution by reducing industrialisation is not an option for developing countries, as there is
risk of them remaining under-developed. It is largely the responsibility of developed
economies which historically polluted the environment to invest in technologies that reduce
waste accumulated in the environment during their development process.
Last, if aid is free from conditionalities and recipients take greater ownership of the
aid programmes, then developing countries should target capital accumulation in the
manufacturing industry. More aid should be used to promote industrialisation through closing
trade gaps and overcoming low domestic savings. Aid should be used to fuel the pre-
conditions of take-off in the Rostow model and help build the domestic industry with a
greater share of local owners. There is a need to make use of domestic technocrats in
evaluating areas that require financing from donors. Recipient countries should avoid
allocating aid to non-productive sectors that do not stimulate economic growth. Aid should
instead be used to develop permanent domestically-owned industries that will provide these
social services for life with little variation (Re-word).

References
ABDULKADIR, M. S., JAYUM, A. A. AND ASNARULKHADI, A. S. (2010) “Africa’s
Slow Growth and Development: An Overview of Selected Countries”. European
Journal of Social Sciences 4 (2010): 618-634.
ARNDT, C., THURLOW, J. AND TARP, F. (2013) “Regional Climate Change of the
Greater Zambezi River Basin”. WIDER working paper No. 2013/040. Finland:
UNWIDER.
BAUER, P. (1971) Dissent on Development: Studies and Debates in Development
Economics. London: Weidenfeld and Nicolson.
BOULDING, K. E. (1966) The Economics of the Coming Spaceship Earth: Environmental
Quality in a Growing Economy. USA: John Hopkins Press.
BOURGUIGNON, F. AND SUNDBERG, M. (2007) “Aid Effectiveness: Opening the Black
Box”. World Bank Development Papers 2007. Washington DC: World Bank.
BRAUTIGAM, D. A. AND KNACK, S. (2004) “Foreign Aid, Institutions, and Governance
in Sub-Saharan Africa”. Economic Development and Cultural Change 13: 255-285.
BURNSIDE, C. AND DOLLAR, D. (2004) “Aid, Policies and Growth: Revisiting the
Evidence”. World Bank Policy Research Paper No. O-2834. Washington DC: World
Bank.
──────── (2000) “Aid, Plolicies and Growth”. American Economic Review 90: 847-868.
CHANG, H. G. (2002) Kicking Away the Ladder. Anthem: Anthem Press.
──────── (2007) Bad Samaritans. London: Random House.
CHANG, H. G. AND GREEN, D. (2003) The Northern WTO Agenda on Investment - Do as
We Say, Not as We Did. Geneva: South Centre.
DALGAARD, C. J., HANSEN, H. AND TARP, F. (2004) “On the Empirics of Foreign Aid
and Growth”. Economic Journal 114: 191-216.
DJANKOV, S., MONTALVO, J. G. AND REYNAL-QUERY, M. (2005) The Curse of Aid.
Washington DC: World Bank.
DOLLAR, D. AND PRITCHETT, L. (1998) Assessing Aid: What Works, What Doesn’t, and
Why? New York: Oxford University Press.
DOUCOULIAGOS, H. and PALDAM, M. (2009) “Conditional Aid Effectiveness: A Meta-
Analysis”. Journal of International Development 21 (7): 1582-1601.
DURBARRY, R., GEMMELL, N. AND GREENAWAY, D. “New Evidence of Foreign Aid
on Economic Growth”. Credit Research Paper No. 98/8.
14
EASTERLY, W., LEVINE, R. AND ROODMAN, D. (2004) “Aid, Policies and Growth:
Comment”. American Economic Review 94: 774-780.
EASTERLY, W. (2003) “Can Foreign Aid Buy Growth?” Journal of Economic Perspectives
17: 23-48.
EUROPEAN STATISTICS. (2008) http://www.eurostats.org
GIDDENS, A. (1991) The Consequences of Modernity. California: Stanford University Press.
GOMANEE, K., GIRMA, S. AND MORRISEY, O. (2005) “Aid and Growth in Sub-Saharan
Africa: Accounting for Transmission Mechanisms”. Journal of International
Development 17 (8): 1055-1075.
GUPTA, S., CLEMENS, B., BALDACCI, E. AND MULAS-GRANADOS, C. (2004) Fiscal
Policy, Expenditure Composition and Growth in Low-income Countries. Washington
DC: International Monetary Fund.
HANSEN, H. AND TARP, F. (2001) “Aid and Growth Regressions”. Journal of
Development Economics 64: 547-570.
HJERHOLM, P. AND WHITE, H. (2000) Survey of Foreign Aid: History Trends and
Allocation. Copenhagen: Institute of Economics.
INTERNATIONAL MONETARY FUND (IMF). (2013) http://www.imf.org
JENSEN, P. S. AND PALDAM, M. (2003) “Can the New Aid-Growth Models be
Replicated?”. Working Paper No. 2003-17. Aarhus: Institute for Economics.
KANBUR, R. (2003) The Economics of International Aid. London: Routledge.
KARGBO, M. P. (2012) “Impact of Foreign Aid on Economic Growth in Sierra Leone:
Empirical Analysis”. UNU-WIDER Working Paper No. 2012/07.
KARRAS, G. (2006) “Foreign Aid and Long-run Economic Growth: Empirical Evidence for
a Panel of Developing Countries”. Journal of International Development 18 (7): 15-28.
KILLICK, T. (2004) “Politics, Evidence and the New Aid Agenda”. Development Policy
Review 22 (1).
KNACK, S. (2001) “Aid Dependence and the Quality of Governance: Cross Country
Empirical Tests”. Southern Economic Journal 68 (2001): 310-329.
LEWIS, A. (1954) “Economic Development with Unlimited Supplies of Labour”.
Manchester School of Economic and Social Studies 22: 139-191.
MANDELBAUM, K. (1945) The Industrialization of Backward Areas. Oxford: Blackwell.
MINISTRY OF EDUCATION, SPORTS, ARTS AND CULTURE. (2013) “Zimbabwe
Education Statistics” http://www.moesac.gov.zw
MOREIRA, S. B. (2005) “Evaluating the Impact of Foreign Aid on Economic Growth: A
Cross-Country Study”. Journal of Economic Development 30 (2): 25-49.
NAJAM, A. (1995) “International Environmental Negotiation: A Strategy for the South”.
International Environmental Affairs 7 (2): 249-287.
NURKSE, R. (1953) Problems of Capital Formation in Underdeveloped Countries. New
York: Oxford University Press.
O’BRIEN, F. S. AND RYAN, T. C. (2001) “Kenya”. In: Shantayanan, D. et al (eds) Aid and
Reform in Africa: Lessons from Ten Case Studies. Washington DC: World Bank.
ORGANIZATION OF ECONOMIC CORPORATION AND DEVELOPMENT. (2009b)
Development Aid at a Glance 2008. Statistics by Region: OECD.
──────── (2002) Development Aid at a Glance 2001. Statistics by Region: OECD.
──────── (1993) Development Aid at a Glance 1992. Statistics by Region: OECD.
PAGE, J. (1994) The East Asian Miracle: Four Lessons for Development Policy. USA: MIT
Press.

15
PENG, S. AND BAO, Q. (2006) “Economic Growth and Environmental Pollution: An
Empirical Test for the Environmental Kuznets Curve Hypothesis in China”. Research
On Financial And Economic Issues 8: 3-17.
RADELET, S. (2003) Bush and Foreign Aid. Foreign Affairs: 09/10.
RAJAN, R. G. AND SUBRAMANIAN, A. (2005) “Aid and Growth: What Does the Cross-
Country Evidence Really Show?”. IMF Working paper WP/05/127. Washington DC:
International Monetary Fund.
RANIS, G. (2004) “The Evolution of Development Thinking: Theory and Policy”.
http://www.econ.yale.edu
RATTSO, J. AND TORVIK, R. (1998) “Zimbabwean Trade Liberalisation: Ex post
Evaluation”. Cambridge Journal of Economics 22: 325-346.
ROSENSTEIN-RODAN, P. (1943) “The problem of Industrialisation of Eastern and South-
Eastern Europe”. Economic Journal 53: 202-211.
ROSTOW, P. (1960) The Stages of Economic Growth: A Non-Communist Manifesto.
Cambridge: Cambridge University Press.
SACHS, J. AND WARNER, A. (1995) “Economic Reform and the Process of Global
Integration”. Brooking Papers on Economic Activity 1995: 1.
SANTISO, C. (2001) “Good Governance and Aid Effectiveness: The World Bank and
Conditionality”. Georgetown Public policy Review 7 (1): 1-22.
SCHULTZ, T. W. (1964) Transforming Traditional Agriculture. New Haven, CT: Yale
University Press.
SCHUMPETER, J. A. (1959) The Theory of Economic Development. Cambridge, MA:
Harvard University Press.
SIMPSON, M. AND DORE, D. (2009) International Aid and its Management: Some Insights
for Zimbabwe in the Context of Re-engagement. Harare: United Nations Development
Programme.
SMITH, B. C. (2003) Understanding Third World Politics: Theories of Political Change and
Development. New York: Palgrave Macmillan.
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT. (2006)
Doubling Aid: Making the “Big Push” Work. Geneva, New York: United Nations
Publications.
UNITED NATIONS ENVIRONMENTAL PROGRAMME (UNEP). (2007) Year Book
Annual Report 2007. http://www.unep.org/PDF/AnnualReport/2007
WHITAKER, M. T. (2006) The Impact of Foreign Aid on Economic Growth. Pennsylvania:
University of Pittsburg.
WORLD BANK DEVELOPMENT INDICATORS STATISTICS. (1980, 2002, 2007, 2010)
“Sub-Sahara Africa Development Indicators”. http://ddp-ext.worldbank.org
WORLD BANK GROUP. (2010) Five Year Average International Development Assistance
by Sector. http://www.aidflows.org.
ZHANG, B., Bi, J. AND GE, J. (2008) “Empirical Study of Environmental Kuznets Curve in
South Jiangsu”. Economic Geography 28 (3): 376-379.

16
 APPENDIX
Table 1: The Impact of Aid on Economic Growth in Low-income Countries
Coefficient Statistical Significance Founder
-0.021 No Easterly et. al (2003)
-0.156 No Easterly et. al (2003)
-0.007 No Sachs and Warner(1995)
-0.262 No Sachs and Warner(1995)
-0.203 No Sachs and Warner(1995)
0.058 No Ekanayake and Chatrna (2009)
-0.017 No Ekanayake and Chatrna (2009)
0.005 No Ekanayake and Chatrna (2009)
-0.094 No Moreira (2005)
0.017 No Moreira (2005)
0.032 No Moreira (2005)
0.041 No Moreira (2005)
0.164 Yes Moreira (2005)
0.218 Yes Durbarry et. al (1998)
0.197 No Durbarry et. al (1998)
-0.091 No Durbarry et. al (1998)
0.052 No Durbarry et. al (1998)
0.199 Yes Durbarry et. al (1998)
0.112 Yes Kargbo (2012)
0.065 Yes Kargbo (2012)
0.091 Yes Kargbo (2012)
-0.067 No Baur (1971)
-0.134 No Brautigam and Knack (2004)
0.004 No Djankov et. al (2006)
-0.213 No Whitaker (2006)
0.014 Yes Harnsen and Tarp (2001)
-0.012 No Jensen and Paldam (2003)
0.021 No Doucouliagos and paldam (2009)
-0.002 No Knack (2001)
0.013 Yes Dalgaard et. al (2004)

17

View publication stats