The empirical literature on aid effectiveness has yielded unclear and ambiguous results. This is not surprising given the heterogeneity of aid motives, the limitations of the tools of analysis, and the complex causality chain linking external aid to final outcomes. The causality chain has been largely ignored and as a consequence the relationship between aid and development has been mostly handled as a kind of 'black box'. Making further progress on aid effectiveness requires opening that box. This paper examines the causality chain linking aid flows to development outcomes. It argues that many of the questions that policy makers and economists would like to squeeze data into answering simply cannot be answered due to the complexity and 'noise' along links in the chain, and hence the problem of attribution. It then examines what is known about aid effectiveness along different links in the causality chain.Finally, it turns to recent trends in the way aid is delivered and the new model that appears to be emerging.
The ability of low-income countries to productively absorb large amounts of external assistance is a central issue for efforts to scale-up aid. This paper examines absorptive capacity in the context of MDG-based development programmes in low-income countries. It first defines absorptive capacity, and proposes a framework for measuring it. Applying a dynamic computable general equilibrium model to link the macro framework to sector results, the paper simulates MDG scenarios for Ethiopia and examines the role of infrastructure, skilled labour, macroeconomic, and other constraints on absorptive capacity. The main policy conclusions are that careful sequencing of public investment across sectors is key to minimizing the costs of reaching the MDGs; the macro impact of large aid flows on the tradeables sector can potentially be serious in the short run; large-scale frontloading of aid disbursements can be costly as it pushes against absorptive constraints; and that improvement of governance and institutional structures can significantly reduce the cost of achieving the MDGs.
Transition literature has emphasized stabilization and * Reduced spending on government transfers enterprise restructuring. Both cross-country analyses and contributed to a sharp increase in income inequality in country-specific studies have tended to focus on fiscal the CIS. stabilization and its indicators, highlighting the * Fiscal risks increased during the transition. importance of quantitative fiscal adjustment to * Initial conditions allowed Central European and stabilization outcomes. Less attention has been paid to Baltic countries to maintain higher expenditures, the qualitative dimensions of fiscal adjustment in which may have contributed to their faster economic transition.recovery and political support for the reforms. Alam and Sundberg take stock of the extent to whichThe authors argue that the challenge today for fiscal adjustment has occurred during the first decade fiscal policy in these countries is to facilitate the of transition in both qualitative and quantitative transition-particularly in reallocating resources from dimensions. They define quality as the extent to which: large state-owned enterprises to new small and (1) pro-growth expenditure essential for creating future medium-size firms, and providing priority public economic and social assets are maintained; (2) pro-poor services and targeted transfers to assist those expenditure, such as poverty-targeted transfers, necessary adversely affected by transition and reverse the to ensure income for the poor and vulnerable are deterioration in social outcomes. The interplay adequately provided; and (3) fiscal risks, impinging on between fiscal policies and institutional arrangements both expenditure and revenue, are managed through is increasingly important as transition economies transition.embark on their second decade of reforms. In The authors conclude that while the quantitative particular, incentives embedded in the institutional magnitude of the fiscal adjustment was dramatic, the arrangements for fiscal management needs to be quality of this adjustment has compromised the social strengthened so that policies, resources, and outcomes and economic objectives of transition, particularly in the can be better aligned, and the fiscal adjustment is Commonwealth of Independent States (CIS). They draw consistent with qualitative considerations. four main conclusions: * Investments in public services fell in both absolute and relative terms. This paper-a product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Region-is part of a larger effort in the region to understand economic transition in former centrally planned economies.
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