In the actual allocation of aid, aid tapers out with reform.Aid now lifts about 30 million people a year out of absolute poverty. With a poverty-efficient allocation, the same amount of aid would lift about 80 million people out of poverty.

Africa has had slow growth and a massive exodus of capital. In many respects it has been the most capital-hostile region. We review and interpret the aggregate-level and microeconomic literatures to identify the key explanations for this performance. There is a reasonable correspondence of the two sets of evidence, pointing to four factors as being important. These are a lack of openness to international trade; a high-risk environment; a low level of social capital; and poor infrastructure. These problems are to a substantial extent attributable to government behavior, and the paper includes a review of the political economy literature addressing that behavior.

The impact of climate change on Africa is likely to be severe because of adverse direct effects, high agricultural dependence, and limited capacity to adapt. Direct effects vary widely across the continent, with some areas (e.g. eastern Africa) predicted to get wetter, but much of southern Africa getting drier and hotter. Crop yields will be adversely affected and the frequency of extreme weather events will increase. Adaptation to climate change is primarily a private-sector response and should involve relocation of people, changes in the sectoral structure of production, and changes in crop patterns. The role of government is primarily to provide the information, incentives, and economic environment to facilitate such changes. Adaptation will be impeded by Africa's fragmentation into small countries and ethnic groups, and by poor business environments. On the mitigation side, there is a need to design emissions-trading frameworks that support greater African participation than at present, and that include land-use change. Mitigation undertaken elsewhere will have a major impact on Africa, both positive (e.g. new technologies) and negative (e.g. commodity price changes arising from biofuel policies).

More effective development aid could greatly improve increase the likelihood of sustained good policy (an idea poverty reduction in the areas where poverty reduction is ratified in several recent case studies of low-income expected to lag: Sub-Saharan Africa, Eastern Europe, and reformers). Central Asia.Collier and Dollar find that the world is not operating Even more potent would be significant policy reform on the efficiency frontier. With the same level of in the countries themselves.concern, much more poverty reduction could be Collier and Dollar develop a model of efficient aid in achieved by allocating aid on the basis of how poor which the total volume of aid is endogenous. In countries are as well as on the basis of the quality of their particular, aid flows respond to policy improvements policies. that create a better environment for poverty reduction Global poverty reduction requires a partnership in and effective use of aid.which "third world" countries and governments improve They use the model to investigate scenarios-of policy economic policy while "first world" c izens and reform, of more efficient aid, and of greater volumes of governments show concern about poverty and translate aid-that point the way to how the world could cut that concern into effective assistance. poverty in half in every major region.The fact that aid increases the benefits of reform suggests that a high level of aid to strong reformers may This paper-a product of the Development Research Group-is part of a larger effort in the group to study aid effectiveness. Copies of the paper are available free from the World Bank,