Relevance of poverty and governance for aid allocation

Abstract

The argument that aid can bolster growth and poverty reduction only in a conducive policy environment has generated attention on some conditions of the economic, political and institutional context in the recipient country which can allow aid to contribute to pro-poor growth. This has clear implications in terms of aid allocation.

This paper tries to contribute to such discussion by proposing a combined framework to address the aid-growth-poverty-governance nexus. Results show that aid is more effective – both for poverty reduction and for growth – when its allocation is inspired by a poverty-focused perspective and, to a certain extent, by a conducive environment in the recipient country.

A review of aid allocation over the past thirty years supports the criticism that this does not seem to be inspired by poverty-reducing aims, but it reveals as well how this has remarkably changed.

It is highlighted how both donors’ poverty-focused aid allocation and recipients’ proper aid utilization are necessary to improve aid effectiveness. At the same time it is considered how the ongoing changes of the poverty landscape will require some changes of the aid architecture.