Does Aid Really Work?

Tim Harford reviews Barnerjee's book;

In Making Aid Work, a slim new book that deserves an audience, Banerjee cites a recent World Bank report as recommending a cornucopia of initiatives, including but not limited to ”computer kiosks for villages; cell phones for rural areas; scholarships for girls attending secondary schools; school-voucher programs for poor children; joint forest-management programs; water-users’ groups... ” The problem is that while this stuff sounds sensible, we don’t really know how much of it works. Whether and when aid works at all remains a hotly debated subject, which tells you something about the quality of the research devoted to working out whether it does...

Banerjee argues that there is a solution: aid agencies should copy medical researchers and run randomised trials. In one famous trial in western Kenya, economists used the alphabet to decide randomly which of 178 Kenyan schools would receive flip charts. Because the allocation was random rather than based on need, enthusiasm or political connections, improvements in test scores or attendance were almost certain to be due to the aid programme. Previous evidence suggested that children learnt more with flip charts, but the randomised trial proved otherwise.

I would count the flip chart trial a big success. Even though the children learnt nothing, the aid community learnt a lot.

There are, of course, limits to randomised trials; good luck using one to evaluate the relative merits of fixed and floating exchange rates. But Banerjee’s back-of-the-envelope calculations suggest that we have now sufficient randomised evaluations of specific projects to spend more than $10bn of aid a year on programmes with a proven record of success. That is about 15 per cent of official development aid, and more results are coming in each month. Successful projects included giving deworming tablets to children, which increased school attendance.

Related;
Making Aid Work
Microloans May Work, but There Is Dispute in India Over Who Will Make Them ;

The Poverty Action Lab at the Massachusetts Institute of Technology, run by Abhijit Banerjee and Esther Duflo, economics professors at M.I.T., and Sendhil Mullainathan, an economics professor at Harvard, has begun a study of microfinance in Hyderabad. The lab is monitoring thousands of borrowers from Spandana, one of the largest microlenders in India. At the end of a two-year trial period, the study will compare microfinance recipients to peers without comparable opportunities. The lab looks for the real-world equivalent of controlled experiments to study which programs actually alleviate poverty; this work is one of the hottest trends in the economics profession today.

My visit suggested that microfinance is working, but it is often more corporate, more commercial and under more attack than I had expected.