Recent financial crises have impacted nearly all aspects of the global economy, including foreign aid. With the "fiscal cliff" looming in the United States, development programs throughout the world could face even greater budget cuts in the coming months. As donor countries tighten their belts, greater attention must be paid to which types of programs and interventions have the most impact in developing countries.
A new IFPRI brief, Foreign Aid Allocation, Governance, and Economic Growth, delves into the impact and effectiveness of three different types of aid: economic, social, and other. Economic aid focuses on increasing a country's production, including agriculture and manufacturing, as well as investing in infrastructure such as roads and telecommunications. Social aid, on the other hand, focuses on education, sanitation, and health outcomes. Other aid is defined in the brief as emergency aid in times of crisis such as famine or drought.
The author, Kamiljon Akramov, finds that investment in developing countries' production sectors (both agriculture and manufacturing) provides the most immediate returns. Such aid helps stimulate the economies of recipient countries by encouraging more domestic investment. Similar results were seen for investments in infrastructure, which drive down transaction costs and encourage further investments and higher productivity.
Surprisingly, the study found that investments in social aid have little impact on economic development. Even more surprising, these investments were found to have limited impact on social outcomes themselves, such as school enrollment. The reason for this last finding, Akramov suggests, may be due to the sluggish global economy. With labor markets struggling, people may see fewer incentives to seek education. Despite this finding, however, the brief calls for continued attention to social conditions within developing countries.