today we're gonna be looking at a
controversial question foreign aid does
it increase growth I think the first
thing which needs to be acknowledged is
that we were much more optimistic about
the role of foreign aid and growth in
say the 1960s here is paul
rosenstein-rodan you can find out more
about him by the way in another video
lecture in this series he said launching
a country into self-sustaining growth is
a little like getting an airplane off
the ground there's a critical ground
speed which must be passed before the
craft can become airborne so he was
talking about the theory of the big push
the idea that if we increase investment
let's say enough that a country would
begin to launch itself on the path of
development that once we pushed once
that country reached ground speed
reached that critical speed however it
would take off on its own it would begin
to fly so the question is when we gave
foreign aid did the countries begin to
fly on the whole the answer is no some
countries it is Trude to take off but
they were the ones who didn't receive a
lot of foreign aid the countries that
received a lot of foreign aid simply did
not take off this by way is a picture of
the Spruce Goose Howard Hughes his
famous plane the world's largest plane
at the time it was built it had one
flight this was as far off the ground as
it ever got and it never flew again so
what happened well we could talk about
corruption we could talk about the
importance of institutions incentives
and so forth we do a lot of that in
other video lectures so I want to give a
slightly different perspective in this
lecture and I want to compare the
predictions of the big push with the
predictions of the solo model now if you
didn't do the solo model in previous
video lectures don't worry you'll get
the basic idea here if you did do the
solo model you remember that the sort of
natural rate of the capital stock is
given when the investment is equal to
depreciation and that natural level of
capital
that also will give you a natural level
of sort of GDP per capita your GDP per
capita your steady-state GDP per capita
which is given by your investment in
your depreciation population growth but
also by the fundamental institutions of
your society the productivity
organization and so forth okay now in
the big push model foreign aid pushes
you to the tipping point to change the
metaphor a little bit and gets you on
that self-sustaining path of growth what
happens with foreign aid in the solo
model well in the solo model some
foreign aid will increase your capital
stock you build some bridges some
railroads some roads some factories and
so forth that's great that increased
capital stock will get you into
increased GDP per capita however if you
haven't changed any of the fundamentals
in the economy if all you have done is
increase the capital stock then what
happens is your depreciation will exceed
your investment in other words the solo
model predicts that without changing any
of the fundamental factors an increase
in the capital stock above it's sort of
steady state level it will begin to
depreciate the roads will begin to fall
apart and they won't be repaired the
factories will begin to break down and
there won't be enough savings to fix the
factories the bridges will start to fall
apart and so forth and in fact in many
cases this is exactly what happened
factories were built in Ghana and they
began to fellip fall apart and no one
replaced them roads started to crumble
even the infrastructure which was
considerable leftover from the colonial
period start to started to decline
because of this countries were pushed
back towards their steady state level of
capital their steady state level of the
GDP so from the solo model we have that
if you don't improve any of the
fundamental factors organization
technology
investment and so forth that an increase
in foreign aid is just going to create
depreciation gonna put you back to your
steady-state that's the basic story I
want to talk a little bit about some of
the recent econometrics literature on
aid and growth so the modern literature
really begins with Boone who using data
from 96 countries over a period of about
20 years found that a didn't increase
investment that is that you couldn't
even find not even growth you couldn't
even find a connection between Aid and
the things which caused growth such as
investment this led to a lot of debate a
lot of different papers coming forth
back and forth yes and no the debate
seemed to be resolved by the Burnside
and dollar paper this paper sort of
split the difference in a way it said
overall aid does not work but when aid
is combined or interacted with good
policy it does work so when a country
begins to get its act together when it
has opens its borders when it reduces
corruption burnside and dollar said then
is the time that aid works this really
made both sides of people both sides of
the debate happy and it seemed to
suggest a policy direction that we ought
to tie aid to making policy better
however Easterling an easterly Levine
and roodman found that the Burnside and
dollar result was not robust I don't
want to say a little bit more about that
so here's the basic story what this
graph shows that start with the one on
the left is once you've controlled for
all the other factors what is the effect
of aid interacted with policy and in the
original Burnside and dollar paper you
had basically this story right here you
had a positive affective aid after you
controlled for other factors and when
that aid was interacted with good policy
okay
now even in the original Burnside and
dollar result you can see that it's not
a terribly strong result it may be
driven by some outliers possibly a lot
of things you know a lot of other things
are explaining growth rather than aid
the effect is not that large and so
forth even taking into account that
wasn't a strong result to begin with
easterly and Levine and roodman run it
with a little bit longer data okay
and over here you see the same basic
regression okay same variables and now
you have actually a negative result but
it's not statistically significant so
the whole result goes away with just
minor changes in assumptions the most
recent paper in this literature is by
Clements and co-authors it's a very good
paper what they do is they basically
rerun all of the regressions which have
been run before and by creating a
consistent data set by creating a
consistent set of control variables the
try and pinpoint where the agreements
are where the disagreements are and what
are generating some of the differences
they also point out many of the reasons
why it may be difficult to find an
effect of aid on growth so for example
consider timing when would you expect
aid to have an effect on growth if you
spend aid this period will it cause the
economy to grow right away in a year in
two years and five years depending upon
exactly what you're spending on if
you're building a road or a bridge for
example it may take several years to
even build the bridge or the road and
then you might not expect growth for
even several years down the line after
that that's one reason why it's
difficult another reason which a lot of
literature has tried to deal
is what about if you give aid to the
country so it's really most need it well
those are the countries which are
growing slowest so you might get a
correlation between aid and slow growth
even when aid in fact does increase
growth and there's been a lot of
different attempts at trying to overcome
this reverse causality problem
so when Clements and co-author deal with
these things as best as they can what
they do is the argued that there are
modest effects of Aid on growth and just
to illustrate how modest these are I
want to give you some quotes from their
article and it's really quite
illustrative when you compare with you
know some of the more optimistic
predictions from the 1960s so what they
say for example is it's clear that in
many countries even large aid in flows
have been insufficient to spark growth
over any time horizon so if you're in a
poverty trap it's really really hard to
get out even with a lot of AIDS
sometimes eight appears to have a
nonlinear effect on growth and there may
be limits on the degree to which even
large aid receipts can further increase
growth in the typical recipient so a
little bit of aid may go a long way but
as you apply more and more aid you get
less of a growth effect far more of the
variance in growth across countries is
accounted for by the non aid covariance
the non aid variables or explanatory
factors in these regressions then by the
aid variable so even when aid matters it
matters less than just about many than
many other things so I think that's an
accurate consensus view of the
literature on foreign aid and growth
today