Global efforts to eradicate poverty by raising more foreign aid have had limited success. Yet it appears premature to conclude that foreign aid is ineffective, even though the existing literature does not provide robust evidence that aid promotes economic growth in the recipient countries. A serious shortcoming common to most previous studies is that the analysis is based on aggregate aid flows and broadly defined outcome variables. Moreover, complementarities of aid with other donor policies have received scant attention. Reconciling the global challenge of fighting persistent poverty through improved donor support with the local challenge of using external help productively remains an important issue for research on sustainable development in the post-2015 era.
We pursue different avenues to address this issue. First, we analyze whether aid would be more effective if the targeting of aid went beyond a stronger concentration on countries with low per-capita income. The specific needs of recipients in areas such as education, health, governance, and physical infrastructure are likely to vary across countries and regions. At the same time, it is open to question whether donors take note of varying needs in specific areas. Second, we assess possible complementarities between aid and related donor policies. The interrelations between aid, trade, foreign direct investment, and migration appear to be important to design consistent and mutually reinforcing donor policies, as well as to enable recipients to reduce aid dependencies.
Third, we focus on local needs and effects to overcome the shortcomings of cross-country analyses of aid. Geocoded information on aid projects in an increasing number of recipient countries invites localized approaches to assess the allocation and effectiveness of aid. In particular, the location of sector-specific aid projects together with the mapping of social and economic needs can be expected to offer new insights. Likewise, enterprise and investor surveys could reveal whether donor choices on project locations help remove critical bottlenecks hindering private production and investment, and whether firm-specific performance measures depend on targeted aid projects.