Journal of Economic Perspectives: Vol. 22 No. 2 (Spring 2008)

Easterly, William, and Tobias Pfutze. 2008. "Where Does the Money Go? Best and Worst Practices in Foreign Aid." Journal of Economic Perspectives, 22(2): 29-52.

DOI: 10.1257/jep.22.2.29

This paper does not address the issue of aid effectiveness -- that is, the extent to which foreign aid dollars actually achieve their goals -- but on "best practices" in the way in which official aid is given, an important component of the wider debate. First we discuss best practice for an ideal aid agency and the difficulties that aid agencies face because they are typically not accountable to their intended beneficiaries. Next we consider the transparency of aid agencies and four additional dimensions of aid practice: specialization, or the degree to which aid is not fragmented among too many donors, too many countries, and too many sectors for each donor); selectivity, or the extent to which aid avoids corrupt autocrats and goes to the poorest countries; use of ineffective aid channels such as tied aid, food aid, and technical assistance; and the overhead costs of aid agencies. We compare 48 aid agencies along these dimensions, distinguishing between bilateral and multilateral ones. Using the admittedly limited information we have, we rank the aid agencies on different dimensions of aid practice and then provide one final comprehensive ranking. We present these results as an illustrative exercise to move the aid discussion forward.

Easterly, William (NYU)
Pfutze, Tobias (NYU)

F35: Foreign Aid