François Bourguignon* and Jean-Philippe Platteau
This article was originally published in the April 2021 edition of 5 papers…en 5 minutes!
A key issue for development aid donors arises from the need to reconcile demands for efficiency in the use of that aid with its prime objective of reducing poverty. The problem assumes the form of a dilemma insofar as poverty tends to be concentrated in countries with the weakest governance, and particularly in those countries defined as ’fragile’ states. To resolve this dilemma, optimal allocation decisions could be derived from an objective function that states the trade-off between efficiency and needs considerations explicitly. That was the idea that guided the first writers on this question- see for instance Paul Collier and David Dollar (1). Intuitively, they arrived at the following conclusion: at a constant level of governance, poor countries should receive more aid, and at a constant level of poverty, a country with better governance should be favoured. Nevertheless, the donor’s degree of aversion to poverty was not specifically addressed in their design.
In this article, François Bourguignon and Jean-Philippe Platteau seek to understand whether this aversion to poverty is likely to be important in the allocation of aid and, more specifically, to change Collier and Dollar’s main finding. Two effects are at work simultaneously. On the one hand, when a country improves its governance, the utility for the donor of the amount of aid transferred to that country increases as a greater share of it reaches the targeted recipients, that is, the poorest. This encourages the donor to allocate more aid to that country (the substitution effect). On the other hand, the improvement in governance raises the income level of the poorest country so that its degree of poverty diminishes (the income effect) making aid less needed. If the second effect outweighs the first, then the donor will transfer a smaller amount of aid to the country whose governance has improved. This result is more likely if the marginal utility that the donor derives from aid is highly elastic in relation to the level of poverty among those whom the aid is intended to help, that is, if the donor has a strong aversion to poverty. Thus, an allocation rule that seems self-evident – a country that improves its governance (in comparison with others) should be rewarded by a greater share of the total aid – is only confirmed if the donor’s aversion to poverty is not too high.
The problem that this result raises should not be underestimated. Indeed, Bourguignon and Platteau show that donors tend to prioritise considerations of aid efficiency, that is, good governance, rather than considerations of the needs of poor populations. This is the case of the Performance-Based Allocation rule applied by the International Development Association (the World Bank arm that specialises in managing multilateral aid to the poorest countries), and the rule used by the European Union. These principles reflect an implicit weak aversion to poverty on the part of donors and thus it is not surprising that they must resort to ex-post and ad hoc adjustments so that fragile states are not excluded from the programmes. There would be obvious merit in a more comprehensive rule, one that would attach greater importance to the aim of reducing poverty, and that donors would promise to respect systematically, thus avoiding the all too tempting criticism that aid decisions are largely driven by political and geo-strategic considerations.
(1) Aid allocation and poverty reduction, European Economic Review, vol. 46, issue 8, 1475-1500
Original title of the article: Should a Poverty-Averse Donor Always Reward Better Governance?
Published in: The Economic Journal, ueaa131, December 2020
Available at: https://doi.org/10.1093/ej/ueaa131
Credits (picture): Fredcardoso – Fotolia
* PSE member