Dispatch #89: Rocking the priors - Did aid help in development?

In this dispatch, we will explore key arguments Lant Pritchett gave in his latest paper on whether development assistance resulted in development.

In his latest paper titled ‘Development Happened: Did Aid Help?’ Pritchett examines the causal contribution of development aid to economic development and material well-being in developing countries. 

He asserts that economic growth (GDP per capita is the proxy he uses) has undoubtedly led to economic progress and human development. All indicators of human well-being (income, poverty levels, health, nutrition, education and access to basic infrastructure) have improved significantly in developing countries during the development era (post-Second World War) as shown in Figures 1 and 2. 

Figure 1

Figure 2

He presents three conventional yet questionable narratives about development. 

Average economic growth vs variations between different countries:

The post-Second World War global order had three broad features:

1. Decolonisation and proliferation of sovereignty as more countries became independent.

2. Bretton Woods institutions were created to promote global peace and progress.

3. Cold War led to countries aligning with the two powerful blocs. 

Pritchett calls this new world order as the ‘development era’. He adds:

This new global order created a set of institutional, regional and national organisations whose explicit objective was to provide development assistance and a distinct field called development. I therefore label the post-Second World War period as the development era. The development field in this broad sense included politicians and statesmen in both developed and newly independent developing countries, organisations, and academics who perceived themselves as engaged in the development process.

National development is the process through which a country becomes a developed one. It involves 4 processes:

1. Higher productivity

2. Greater administrative capability

3. Responsive state

4. Equal treatment of individuals

Human development is the process through which individuals can realise their goals, wishes, ambitions and values for their lives. 

The bi-directional causality links the two kinds of development. With the increase in national development (productivity, administrative capability, state responsiveness and equal treatment of individuals), human development indicators also tend to improve. Similarly, individuals with enhanced human development contribute to national development. This, however, is more complex a relationship than it appears to be. One needs to examine the causal determinants of both forms of development, including the relationship between the two. 

One of the key components of national development is economic growth. While overall the average economic growth worldwide has increased as shown in the charts above, there are large variations. 

Pritchett explains:

The key fact of economic history is the hockey stick graph which shows that, while there were waves of progress and retrogress, the level of economic productivity or material standard of living was roughly constant from the dawn of time to at least around the late 18th century. Sometime in the late 18th or 19th centuries, a set of countries entered a phase of sustained exponential growth of both population and output per person such that a graph of income per capita against time looks like a hockey stick with a very long period of roughly stagnation followed by steady 2% per annum growth sustained for 100 years from 1870 to 1970 which produced an increase in the gross domestic product per capita (GDPPC) of the developed countries levels of a factor of 7.

In summary, during the development era, most of the countries in the world followed the hockey stick growth path. 

Variation in growth across countries

The world on average witnessed an increase in economic growth and progress but there were variations. The figure below shows the GDPPC for 5 countries between 1950 and 2018. The GDPPC in South Korea and Indonesia is much higher than that of the Democratic Republic of Congo, Uganda, and Kenya. This implies that the variation in the pace of economic growth resulted in variations in per capita GDP.

Figure 3. Source: Pritchett

 He further explains:

During the development era, the differences in GDPPC have grown larger and there are several distinct sets of countries, not just an undifferentiated ‘developing’ world. This creates potential confusion in the discussion of development progress because if one looks at some regions, say, South Asia, it has been the best of times and other sub-regions have been the worst of times (central Africa).

Relationship between national development and human development

Basic human development indicators (primary health, nutrition levels, sanitation, education etc.) are strongly related to 3 key components of national development - GDPPC, state capability and democracy. Pritchett argues that high levels of GDPPC are prerequisites for high levels of human development. In his 2022 paper with Addison Lewis, titled ‘Economic growth is enough and only economic growth is enough’, Pritchett argued that economic growth is central to poverty reduction and material well-being worldwide. The paper shows that no countries have improved human development indicators at a low GDPPC. 

Therefore, it can be said that during the development era:

1. Economic conditions improved and progress happened

2. A strong correlation between GDPPC and human development

3. Human development indicators improved

But did all this happen due to development aid?

Pritchett gives 3 pieces of evidence to answer this question.

1. The impact of development projects tells nothing about the impact of aid

Most of the project evaluations are ex-post that typically point out the determinants of aid-financed projects' success and failure. We cannot say that the development aid for a specific project was a success or failure based on the success or failure of the project for 2 reasons:

1. Due to full aid fungibility, (when a government receives aid, it can change its planned spending and use the aid for a different purpose than intended) the net impact of the additional aid is not the impact of the funded project but the impact of the marginal project which got the incremental funding. Fungibility adds an element of confusion. The 1998 World Bank report on development aid concluded:

Agencies often hone in on the sectors that provide a success rate of individual projects as one measure of their effectiveness. At first glance, this appears to be a focus on "quality." However, it can lead to distorted incentives, depending on the criteria for judging success. Since money is often fungible, the return to any particular project financed by aid does not reveal the true effect of assistance. Moreover, if agencies are evaluated mainly on the success rate of projects (defined narrowly, without accounting for spillover benefits), managers will avoid risky, innovative projects in favor of things that are known to work. With fungibility, the impact of aid is not the same as the impact of the aid-financed project. The return on the finance depends on the overall effectiveness of public expenditures.   

2. Donor projects often operate with completely different incentives and contexts when compared to government projects. Some of the incentives could be higher pay structures for program managers than civil servants or when donor projects are driven with a high sense of efficiency. This may increase the likelihood of successful donor projects that often come at the cost of government projects. Pritchett argues that the pressure of accountability and providing rigorous evidence about the success of donor projects can have a negative effect on the impact of projects assisted by development aid for 3 main reasons:

   1. Projects that are amenable to evaluations or have observable outcomes are often prioritised.

   2. Donors prefer projects where direct attribution of success on a few indicators is possible.

   3. Donor-funded projects may lead to high levels of cocooning (very high unit costs which include design and implementation support that comes with impact evaluation) which may work for donors but do not work for government projects. 

2. Development aid’s contribution to national development has been modest

The impact of financial flows through development aid on economic growth or national development has often ranged from negative to zero to modestly positive. Rajan and Subramanian in their paper titled ‘Aid and Growth: What does the cross-country evidence really shows’ conclude:

We find little evidence of a robust positive impact of aid on growth, even though our instrumentation strategy corrects the bias of conventional (ordinary least squares) estimation procedures against finding a positive impact of aid. To be more concrete, in the cross-sectional analysis, we find some evidence for a negative relationship in the long run (40-year horizon), though this is not significant and does not survive instrumentation. We find some evidence of a positive relationship between 1980 and 2000, but only when outliers are included. We find virtually no evidence that aid works better in better policy or institutional or geographical environments, or that certain kinds of aid work better than others. 

The pressure of ‘normative isomorphism’ where countries (especially LMICs) adopted the global development discourse and norms, which happened simultaneously with enormous development assistance through aid during the development era, could be a possible reason which would have led to significant improvement of human development indicators. This, according to Pritchett, makes it harder to say that the aid led to development conclusively.

Pritchett explains:

It is possible that the main effect of the field of development and the agencies and organisations within it was to act as a space in which a global discourse about what should be done was held and facilitate within that space some modicum of research and evidence relevant to the problems faced by developing countries. Or the field of development acted as a vector for diffusing normative isomorphism about what should be done (example schooling) and how it should be done (public provision of a certain vision of quality schools).

The biggest contribution of the essay comes at the last where Pritchett explains the ‘bird on the elephant’ model of development. He explains:

This leads to what I call the ‘bird on the elephant’ model of development. The existence of a big elephant (the development industry with more than a hundred billion dollars of official development assistance annually) creates an ecosystem for a small bird to live on top of the elephant. The bird is the space for research, policy discourse, advocacy, international pressures and norms that not only affect what the specific elephant the bird lives on does but also, by, at times, being able to see farther or clearer can move the whole herd in a different direction. So, for instance, I think the difference between my relatively positive view of the development industry and the more negative view of my friends Bill Easterly (2006) and Angus Deaton (2014) is not about the ‘elephant’ (the movement of resources, projects). I believe the three of us are pretty sceptical of the benefits of most of what the development industry does day to day and about the impacts of the specific projects and funding vehicles the industry uses. Moreover, I believe all three of us are very concerned that the elephant tends to empower technocrats (both national and international) and certain ‘dirigiste’ and ‘top-down’ approaches in ways that carry great risks (Scott 1998; Ferguson 1994). I also think we three think the ‘bird’ (ideas, research, advocacy) gets it pretty wrong lots of the time and that the ‘conventional wisdom’ in development is frequently more conventional than wise.