Aid allocation and poverty reduction

Paper

• uses new World Bank ratings of twenty different aspects of national policy to establish the current relationship between aid, policies and growth
• adds mapping from growth to poverty reduction which reflects the level and distribution of income
• compares the effect of using the headcount and poverty-gap measures of poverty.

Finds that the actual allocation of aid is radically different from the poverty-efficient allocation

• In the efficient allocation, for a given level of poverty, aid tapers-in with policy reform. In the actual allocation aid tapers-out with reform
• In the efficient allocation aid is targeted disproportionately on countries with severe poverty and adequate policies: a category of country in which 74% of the world?s poor people live. In the actual allocation such countries receive a much lower share of aid (56%) than their share of the world's poor.

Authors show that even with the present allocation, aid is effective in lifting around 30 million people per annum sustainably out of absolute poverty. With a poverty-efficient allocation this would increase to around 80 million people. Even with the introduction of political constraints keeping the allocations for India and China constant, poverty reduction would increase to around 60 million.

While the reallocation of aid is politically difficult, it may be considerably less difficult that the quadrupling of aid budgets which we estimate would be necessary to achieve the same impact on poverty reduction given the existing aid allocation. [author]