Does Aid Reduce Poverty?

Abstract

Fifty years of literature on aid effectiveness has so far proven inconclusive. Two main challenges still require some attention. The first is to properly identify the causal effect of aid on poverty alleviation. To address it, I exploit differences in the number of years countries have been temporary members of the United Nations Security Council as an instrument for the average amount of economic aid disbursed by the United States. The second is to obtain reliable data on poverty, which I confront by using multidimensional poverty data from the Oxford Poverty and Human Development Initiative (OPHI). For a sample of 64 developing countries, I estimate a significant relationship between higher amounts of aid received during the period 1946–1999 and lower Multidimensional Poverty Index (MPI) between 2000 and 2014. On the contrary, the relationship does not seem to be significant when poverty is measured from an income perspective. Alternative measures of poverty could help improve the understanding of the relationship between development aid and poverty alleviation and might also contribute to improved targeting for aid disbursements.