The Value Chain of Foreign Aid: Development, Poverty Reduction, and Regional Conditions

333 Pages·2007·2.48 MB·English

by  Dr. Christian Schabbel (auth.)

The Value Chain
of Foreign Aid
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Christian Schabbel
The Value Chain
of Foreign Aid
Development, Poverty Reduction,
and Regional Conditions
With32Figuresand22Tables
Physica-Verlag
ASpringerCompany
SeriesEditors
WernerA.Müller
MartinaBihn
Author
Dr.ChristianSchabbel
ResearchAssistant
Duisburg-EssenUniversity
DepartmentofManagerialEconomics
MercatorSchoolofManagement-FacultyofBusiness
Lotharstraße65
47057Duisburg
Germany
[email protected]
This publication was accepted as doctoral dissertation at Duisburg-Essen University, Germa-
ny(2006),underthetitle:Foreignaid,povertyreductionstrategiesandtheimpactofregional
conditions.
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Foreword
For more than 50 years industrialized countries and international organiza-
tions attempt to improve the lives of people in low-income countries.
Many strategies and initiatives have been “tested” since then and, on the
whole, the results were sobering. It became evident during the 1990s that
conditional and standardized macroeconomic policy reform packages,
known as structural adjustment programs, were in most cases not able to
transform poor countries into high growth performers. Similarly, (even
large) inflows of Official Development Assistance (ODA) proved to have
little if any effect in promoting development, let alone in reducing poverty.
To the contrary, poverty in most sub-Saharan African, Latin American and
Asian countries (excluding China) remained high or even increased during
the last two decades. In some cases, foreign aid financed local elites,
strengthened undemocratic government structures, thwarted market forces
and gave adverse incentives to the locals.
The case for aid began to flourish again in the late 1990s following a
study by Craig Burnside and David Dollar that spurred immense interest
among researchers and practitioners. The authors claimed that foreign aid
does have a positive impact on growth in countries with a sound policy en-
vironment and provided empirical support for this hypothesis. Although a
general consensus on this relationship is far from emerging, the appealing
suggestion to select aid recipients based on their past performance in vari-
ous (e.g., policy) indicators quickly made its way on the agendas of most
high-level conferences. Aid practitioners and politicians pledged to scale-
up official aid flows. Following their rhetoric, halving poverty until 2015
(as envisioned in the Millennium Declaration) seemed to be primarily a
question of gathering enough official resources (‘halving poverty by dou-
bling aid”). Alongside, the World Bank shifted its analytical focus on pro-
poor growth, i.e. growth specifically designed to benefit the poor. A de-
tailed catalogue of objectives (Millennium Goals) should foster goal orien-
tation, extended debt relief initiatives (HIPC) should give selected recipi-
ent countries a “fresh start” and poverty reduction strategy papers (PRSP)
should serve as reference documents to guarantee donors and recipients act
in concert.
VI Foreword
Still, despite an improved analytical knowledge of poverty, a complex bi-
lateral and multilateral transfer system of ODA and a list of clearly defined
objectives, the problems of then are still the ones of today: The number of
countries seeking assistance and the demands (of donors and recipients)
increased, the conditions of success seem to be more heterogeneous and
the respective solutions more homogenous. The overall track record of 50
years of foreign aid is disappointing.
Against this background, Christian Schabbel assesses the potential of
ODA to reduce poverty. He analyzes the entire value chain of ODA, be-
ginning with its provision over its allocation to its utilization. Into each of
these components, region-specific conditions and influential factors are
embedded. The horizontal interactions between donors and recipients as
well as the vertical connections to local and regional conditions represent
the heart of Christian Schabbel’s approach. Chap. 2 analyzes supply-side
aspects of ODA (actors and instruments, innovative development finance,
donor coordination). In Chap. 3, optimal and factual ODA allocation, se-
lectivity as well as allocation policies, motives and strategies are exam-
ined. Chap. 4 deals with the utilization of aid, the aid-growth-inequality-
poverty nexus and the macroeconomic impacts of aid inflows. Finally,
Chap. 5 investigates the role of regional conditions for ODA and poverty
reduction and presents reform proposals.
Christian Schabbel’s dissertation shows that catchy prescriptions and
global plans to reduce poverty simply by accumulating enough official re-
sources are misleading. Doubling or tripling ODA (with or without so-
called innovative financing mechanisms) will not alleviate poverty in all
countries. Planning economic development by applying outsiders’ instruc-
tions (e.g., Western bilateral donors or multilateral organizations) is likely
to fail in the complex and heterogenous societies of the developing world.
This does not imply that foreign aid should be abolished. Instead of a
quantitative and planning approach, a demand-side oriented concept of
aid-financed poverty alleviation is urgently needed. The future of foreign
aid lies in finding (many) small-scale solutions specifically laid out for the
poor’s actual needs, which may be very different across societies, and exe-
cute them efficiently. The conditions under which aid works and the likeli-
hood of transferring practical solutions to other countries and regions must
be investigated further in order to alleviate poverty not only on a global
scale, but also in every country and region.

Duisburg, October 19, 2006 Günter Heiduk
Acknowledgements
When I started my PhD dissertation at the Chair for International Eco-
nomic Relations (University of Duisburg-Essen) in August 2002, the first
conversation with my thesis advisor Prof. Dr. Günter Heiduk encouraged
me to start researching on developing countries. Instead of having a prede-
fined topic in mind, Prof. Heiduk gave me a high degree of academic free-
dom. When my academic search led me to the fields of foreign aid and
poverty reduction, he was very supportive and assisted by asking the right
questions. The discussions with him were always very rewarding. I would
like to thank Prof. Dr. Günter Heiduk for a great time at his institute, an
enjoyable work atmosphere and an exemplary “open door policy”. He was
always available for the exchange of thoughts, ideas and chapter outlines.
My two referees Prof. Dr. Günter Heiduk and Prof. Dr. Markus Taube
graded the dissertation in a very short time despite their packed workload.
The examining committee consisting of Prof. Dr. Günter Heiduk, Prof. Dr.
Markus Taube, Prof. Dr. Peter Anker and Prof. Dr. Bernd Rolfes made it
possible to hold my oral defense soon after submitting my thesis. I greatly
appreciate their courtesy in this matter.
During the four years working for the Chair, I shared the office with my
collegue and friend Dr. Kerstin Preß. I would like to thank her for joint re-
search and classroom work, valuable discussions (on and off-topic) and her
time to proofread and review major parts of my studies. It was always a
great pleasure and fun working with her.
I also would like to thank my colleague Yiping Zhu (PhD), who I luck-
ily got the chance to work with during my last year, for a very harmonious
and mutually rewarding companionship at our institute.
The secretaries Marianne Appelt and Nicole Jaschinski as well as a
number of student assistants were a great help throughout the last years.
Once a student assistant myself I know that the research assistants usually
outsource “the boring stuff“ such as collecting and formatting data and
copying endless amounts of articles and books. I am especially indebted to
Sonja Fischer, Nadja Kremser, Stefanie Lenz and Andreas Eickel for pro-
viding great assistance to me in these issues.
The valuable feedback I got from staff members and research colleagues
of the Department of Managerial Economics during the PhD research
VIII Acknowledgements
seminars and also at lunch talks supported me as well. I very much appre-
ciated their help. Moreover, I would like to express my thankfulness to Dr.
Nejc Jakopin for his suggestions and constant motivation, as well as my in-
ternational friends Ania Nadgrodkiewicz, Drew Kompanek and Christine
Svitlana Otsver for proofreading and critically questioning some ideas of
my work.
I thank my parents Brigitte and Peter Schabbel for their love and support
throughout my life, for encouraging me to pursue my own way and, of
course, for asking the question PhD candidates like the most (“how is your
thesis going, son?”).
Finally, I would like to express my deepest gratitude to my girl-friend
Yvonne Dalkowski who, especially in the final year of writing, endured
many complaints and had to do without me a number of weekends. Having
a much harder educator job than I have sitting in a bureau the entire day, I
admire her durability and energy.

I thank you all for your support to make this thesis reality.

Duisburg, October 20, 2006 Christian Schabbel
Contents
Foreword...................................................................................................V
Acknowledgements................................................................................VII
List of abbreviations............................................................................XIII

1 Introduction.............................................................................................1
1.1 Overview..........................................................................................1
1.2 Provision of ODA.............................................................................5
1.2.1 Actors and institutions...............................................................5
1.2.2 ODA volume and instruments...................................................6
1.3 Allocation of ODA...........................................................................7
1.3.1 International and national ODA allocation................................7
1.3.2 Underlying allocation policies...................................................7
1.4 Utilization of ODA...........................................................................9
1.4.1 Causal links between ODA, growth and poverty reduction......9
1.4.2 Macroeconomic impact of ODA inflows................................10
1.5 Propositions and structure...............................................................11
2 The provision of ODA...........................................................................13
2.1 Halving poverty by doubling aid?..................................................13
2.2 Actors in the provision of ODA......................................................14
2.2.1 Multilateral donor agencies.....................................................14
2.2.2 Regional donor agencies..........................................................17
2.2.3 Bilateral donors.......................................................................18
2.2.4 Non-governmental organizations............................................19
2.3 Present ODA volume......................................................................19
2.3.1 Definitions...............................................................................19
2.3.2 Empirical analysis of ODA flows............................................21
2.3.3 Summary..................................................................................32
2.4 Estimates of ODA requirements.....................................................33