■Foreign aid looms large in the public discourse; and international development assistance remains squarely on most policy agendas concerned with growth, poverty and inequality in Africa and elsewhere in the developing world. The present review takes a retrospective look at how foreign aid has evolved since World War II in response to a dramatically changing global political and economic context. I review the aid process and associated trends in the volume and distribution of aid and categorize some of the key goals, principles and institutions of the aid system. The evidence on whether aid has been effective in furthering economic growth and development is discussed in some detail. I add perspective and identify some critical unresolved issues. I finally turn to the current development debate and discuss some key concerns, which I believe should be kept in mind in formulating any agenda for aid in the future.■

This paper focuses on the concept of the developmental state, the conditions of its consolidation, especially in the perspective of the modes of financing it requires. The issues of taxation, public revenue and spending, are examined, because they constitute crucial elements in the building of viable developmental states, and are problematic in least developed countries, especially in Sub-Saharan Africa. The concept of the developmental state stems from the analysis of fast-growing Asian economies. Its elements are presented, particularly the fact that they rely on low levels of taxation and public spending, at least at the early stages of their development. The principal elements and constraints regarding taxation in Sub-Saharan Africa are then analysed, in particular its dependence on commodities and external trade, as well as the effects of the programmes of international financial institutions, in particular trade liberalisation, which appear to be mixed. The constraints that affect aid in the building of developmental taxation systems and states are also examined. Aid provides incentives that may undermine tax structures and key state institutions of recipient countries, such as policy credibility and political legitimacy. Firstly, it is shown that the key features of developmental states are the capacity for a state to credibly commit and intervene, more under the form of policies that are directed towards growth than taxation policies.

While a political consensus has emerged to increase aid flows to Sub-Saharan Africa, empirical studies of the effectiveness of aid in stimulating growth and reducing poverty have yet to yield conclusive results. The present paper takes a different approach. Using the standard neoclassical growth model, we ask how much should be expected from aid a priori. Using a range of different parameter values and model specifications, we address three questions. (i) How much growth should aid flows have produced in Sub-Saharan Africa over the last 3 decades? (ii) How much aid would be needed to attain the First Millennium Development Goal (MDG#1) of cutting poverty in half by 2015? (iii) Taking proposed aid flows as given, how much would structural characteristics, such as domestic savings rates and productivity, have to change in order to reach the MDG#1? Our analysis indicates that, even under optimistic assumptions for the effectiveness of aid, past and future expectations for aid in fostering growth and poverty reduction have been too high.

Donor countries have committed themselves to increase aid to developing countries by 60 percent over the next five years; and larger increases would be needed to meet the Millennium Development Goals (MDGs). But there are concerns that there may be a limit on the amount of aid that developing countries can absorb and use effectively—and that large aid flows might even be harmful. Could a large increase in aid be “too much of a good thing? ” This essay disentangles the seven possible reasons why additional aid might not be effective. These include microeconomic effects (e.g., transactions costs), macroeconomic effects (e.g., ‘Dutch Disease’) and the impact on political economy (e.g., the ‘Resource Curse’). The paper looks at each possible constraint in turn. The paper finds that there are indeed serious obstacles to effective use of increased aid, but that none is immutable. All of the constraints which limit the effective use of additional aid can be addressed by a relatively small set of practical improvements in the way that aid is provided and used. Donors have already committed themselves to a significant program of aid

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Uganda has registered one of the most impressive economic turnarounds of recent decades. The amelioration of conflict and wide ranging economic reforms kick-started rapid economic growth that has now been sustained for some 20 years. But there is a strong sense in policy making circles that despite macroeconomic stability and reasonably well functioning markets, economic growth has not translated into significant structural transformation. This paper considers (i) Uganda’s record of economic transformation relative to the high growth Asian countries and (ii) the contending explanations as to why more transformation and higher

The concepts of coordination and cooperation are widely used in economics, and particularly in game theory. They were also at the foundation of development economics at the time of WWII, with Paul Rosentein-Rodan highlighting the existence of intersectoral spillovers effects, multiple equilibria and underdevelopment traps. These concepts returned to the forefront of development theory in the 1970s with the notions of coordination failure and poverty traps, as well as the research on social norms. One example was Samuel Bowles ’ seminal concept of ‘institutional poverty traps’, of highly inegalitarian institutions that persist even though they are inefficient. Membership institutions are of particular relevance in development economics. Firstly, it is argued that institutions and norms are key causes of the formation and persistence of poverty traps. Institutions and norms are complex cognitive devices, some beliefs and norms appear to be particularly resilient and difficult to revise. Secondly, it is shown that no particular institution is ex ante a cause of traps: the same institutional forms can be efficient or inefficient. It is the combination of multiple elements – economic and political environment, and social norms- that create thresholds effects and entrap groups into low equilibria. Thirdly, it is argued that the norms that organise group membership, because they involve beliefs that are difficult to revise, are typical factors of poverty traps. The paper firstly examines the literature on poverty traps and then explores the cognitive dimension of coordination failures and institutional traps. It reveals that local institutions in developing countries may be efficient and examines the conditions in which norms create poverty traps, particularly in the case of membership norms. 2

Several studies have documented a negative relationship between democracy and volatility. The latter is usually measured at high frequency – as the standard deviation of annual GDP growth rates. On the other hand, growth researchers have recently focused on the medium term and documented frequent shifts in the trend-growth process within countries. In this paper we aim to connect these two strands of the literature: we ask whether trend-volatility is also lower in more democratic countries. We find evidence of a common pattern in less democratic countries – there appear to be frequent medium term reversals of growth, i.e. episodes when a period of exceptionally high growth is followed by a period of exceptionally low or even negative growth, and vice versa. When compared with factors commonly associated with volatility such as measures of quality of institutions, macroeconomic policies and financial development, we find that democracy is the most robust predictor of a country’s propensity for growth reversals. Motivated by this evidence we construct a model in which non-democracies have high barriers of entry for new firms. This leads to less sectoral diversification: fewer sectors are operated but more resources are channeled to each. In an uncertain environment this leads to infrequent but large growth accelerations when one of the few sectors operated is successful. However, these accelerations are followed by large declines when fortunes change in favor of the missing sectors. We present empirical evidence that confirms the positive relationship between democracy and industrial diversification.

weapons of mass salvation

A crucial factor explains the poor economic performance of Sub-Saharan Africa, i.e. the risky market and trade structure that is entailed by commodity dependence, because of the volatility of commodity prices, therefore the volatility of earnings and its negative fiscal effects, which in turn threaten to create poverty traps. This structure is compounded by additional constraints stemming from globalisation, and trade reforms that are conditional on programmes with the international financial institutions (IFIs) and WTO membership. The paper shows that the detrimental factors of commodity dependence and lack of an industrial base, though they constitute crucial obstacles to long-term growth in Sub-Saharan Africa, have not been addressed in depth by the IFI programmes and the WTO rules and negotiations, including albeit welcomed decisions on the enhancing of market access and the removal of agricultural subsidies. The latter, particularly when some form of tariff escalation is maintained, does not transform the commodity-exporting structure of Sub-Saharan Africa. The disappointment with multilateralism that emerged in the 1990s has reinforced the thrust towards regional and

There are significant weaknesses in some of the traditional justifications for assuming that aid will foster development. This paper looks at what the cross-country aid effectiveness literature and World Bank Operations Evaluation Department (OED) reviews have suggested about effective aid, first in terms of promoting income growth and then for promoting other goals. This review forms the basis for a discussion of recommendations to improve aid effectiveness and a discussion of effective aid allocation. Given the multiple potential objectives for aid, there is no one right answer. However, it appears that there are a number of reforms to aid practices and distribution that might help to deliver a more significant return to aid resources. We should provide aid where institutions are already strong, where they can be strengthened with the help of donor resources, or where they can be bypassed with limited damage to existing institutional capacity. The importance of institutions to aid outcomes, as well as the fungibility of aid flows, suggests that programmatic aid should be expanded in countries with strong institutions, while project aid should be supported based on its ability to transfer knowledge and test new practices and/or support global public good provision rather than (merely) as a tool of financial resource transfer. The importance of institutions also suggests that we should be cautious in our expectations regarding the results of increased aid flows.