The contribution of Official Development Assistance in the elimination of poverty

by Mili Lechleiter

Official Development Assistance (ODA) is financial aid given by countries who are members of the Organization for Economic Co-operation and Development (OECD) with the purpose of promoting economic development and welfare in developing countries.  In 2013, net Official Development Assistance (ODA) was 132.4 billion dollars, representing 0.30% of the donors’ combined gross national income.

The current discussion is if ODA is accomplishing its purposes of promoting economic development and welfare in developing countries. On one hand, experts believe that ODA has a negative effect on the economic and social development of developing countries. For example, Tamer (Tamer, 2013) points out that in African Countries, ODA has had a negative effect on the Human Development Index (HDI). Authors supporting this arguments argue that ODA is a form of neocolonialism of the global north over the global south and that it is doing more harm than good. On the other hand, authors such as Sachs (Sachs, 2005) and Easterly (Easterly, 2006) suggest that ODA is highly successful in improving education (measured as school enrollment) and health indicators (measured as reduction of child mortality). Overall, these arguments suggests the ODA has a positive impact in addressing development problems. Moreover, Sachs is an advocate of increasing ODA. His argument concentrates in the way ODA is broken down in per capita amounts. For example, the amount of ODA that Sub-Saharan countries received in 2002 ended up being $30 per person a year. From that total, $12 went to cover those countries’ basic needs, the other $18 were used to pay consultants, emergency relief, debt payment and debt relief operations, living only $12 per person to invest in direct development initiatives. Therefore, according to Sachs, the reason why we haven’t seen larger results of ODA investment in Africa is because ODA has not been large enough to produce results.

Study Design

Given the before mentioned context, this post seeks to explore if there is a positive significant relation in between ODA and poverty reduction that justifies the large amounts of financial aid allocated to this purpose. In order to do so, we decided to use variables from the Quality of Government Data set. The dependable variable used was “Population living below the poverty line” and the Independent variable was “Net Official Development Assistance received per capita (In constant US$)”. The original variable, Net Official Development Assistance was divided between the population numbers in order to get a per capita measurement. In order to control for co founds other variables were introduced. For example: Gross Domestic Product per capita was introduced to control for the effects of the country’s own economic development on the reduction of poverty. The variable was logged due to its negative skew given there are more low income countries than high income countries in the world. 

Additionally, we introduced social variables to control for the effects of social development in the reduction of poverty. For example: average years of education of the country’s population, and Life expectancy at birth.

Finally, we wanted to control for the effects that democratic and efficient governments have on poverty reduction. First, we argue that democratic countries tend to have a better redistribution of national income and, therefore, are more likely to reduce poverty levels on their own. We used the dummy variable “democracy” with two values: 0 if the country has a dictatorial regime and 1 if it has a democratic one. The variable democracy is part of the Quality of Governance Data Set’s typology of authoritarian regimes in which using the mean of the “Freedom House and Polity Scales”, the line between democracies and autocracies is drawn at 7.5. This threshold value was chosen by estimating the mean cutoff point separating democracy from autocracy in five well-known categorical measures of democracy: those of Przeworski et al. (2000), 34 Mainwaring et al. (2001), and Reich (2002), together with Freedom House’s and Polity’s own categorical thresholds for democracy. From the 192 countries taken into account for this measure, 74 countries were considered a dictatorship and 118 were considered a democracy. For a list of countries according to their regime please see the appendix.

Second, when a government’s bureaucracy works more efficiently, its resources tend to be better allocated and, therefore, such governments are more efficient at poverty reduction tasks. We used the “Government Effectiveness – Estimate” which combines responses on the quality of public service provision, the quality of the bureaucracy, the competence of civil servants, the independence of the civil service from political pressures, and the credibility of the government’s commitment to policies. The main focus of this index is on “inputs” required for the government to be able to produce and implement good policies and deliver public goods. (This information was taken from the Quality of Governance Codebook)

Analysis

The variable ODA per capita shows us that most countries who receive ODA, receive in between $0 and $150 per person. Only 5 countries in the world receive more than $500 per person. These countries were deleted from the following graph (the countries deleted are listed under the graph).

Also, we can see in the graph below that most countries in the world have in between 10 to 50% of their population living below the poverty line.

The relationship between ODA per capita and poverty reduction is linear, but the slope of the relationship is minimal. Therefore, we decided to log the variable ODA per capita for the multivariable regression analysis.

By looking at the regression table, we can see that ODA has no significant relationship with poverty reduction either alone or when included in the multivariable model. Although, the independent variable of the model does not seem to have an effect on the dependable variable, the model does give us hints on other variables that could be effective in the fight against poverty. From the bi variate regression estimates, we can see that when regressed alone, the dependent variable and the control variables are all statically significant. Therefore, the relationship between them (Ln GDP per capita, Years of schooling, life expectancy at birth, government effectiveness) and the dependent variable is at least 90% not due to chance with the exception of ODA per capita and living in a democratic regime. We can see that in the case of education, for every year of education, the percentage of population living below the poverty level decreases in 2.72 units on average. Likewise, for every additional year of life expectancy, the percentage of the population living below the poverty line decreases in 1.04 units in average. Government effectiveness seems to have a great impact because for every unit increase in government effectiveness, poverty decreases in 17.15 units on average. GDP per capita has a significant contribution with the reduction of poverty. For every unit increase in GDP per capita, there is a 7.75 unit decrease in population living in poverty. (See Appendix for a summary of the relationships between the dependent variable and the independent variables).

When all the variables are included in the model, we see that the variables Ln GDP per capita and average years of education are not significant in explaining the percentage of population living below the poverty line.The model, however, gives us significant input regarding variables that do have a significant effect on poverty reduction. For example, we can see that for every unit increase in life expectancy at birth, the percentage of a country’s population living below the poverty line experiences a 0.87 unit decrease while controlling for the effects of government effectiveness, education, GDP per capita, and democracy. Likewise, when government effectiveness increases in one unit, the population living below the poverty line experiences a 9.96 unit decrease while controlling for the effects of the independent and control variables. Finally, it appears that democratic regimes have a higher population below the poverty line. According to the model, when a country lives in a democratic regime, its population is 10.14 times more likely to live below the poverty line than the population of countries living in a dictatorship. While controlling for all variables, the variables of life expectancy at birth, government effectiveness, and democracy had more predictive value than Average schooling years, GDP per capita, and ODA per capita over poverty reduction.

Conclusion

After analyzing the model, we conclude that there is no significant relationship between ODA and percentage of the population living below the poverty line. At a first glance, these results could encourage academics and policy makers that are looking to lower the amount of ODA given to developing countries. We need to consider, however, that the model presented in this analysis is a cross sectional analysis. The sample used was taken in a specific period of time which was the same for both variables. If ODA has any effect on poverty reduction, this effect will be seen a considerable amount of years after ODA resources have been invested. Therefore, we recommend to use a time series analysis for future models.

Although neocolonialism theorists would argue that ODA is another mechanism for developed countries to have control over developing countries’ economies, many developing countries depend on ODA to implement social programs related to health and education. It would be important to see the impact of ODA in average schooling of years, or in life expectancy. Following Sachs’ argument, ODA might not be effective in addressing the issue of economic development but it might be effective in addressing social development related to school enrollment and life expectancy.  In any case, further analysis needs to be implemented in order to have a better understanding of the effectiveness of ODA in poverty reduction. 

Appendix

Bibliography

·        Sachs, J. (2005). The End of Poverty: Economic possibilities for our time. New York: Penguin.

·        Easterly, W. (2006). The White Man's Burden: Why the West's efforts to aid the rest have done so much ill and so little good. New York: Penguin Press.

·        Tamer, Christina (2013). The effects of foreign direct investment and official development assistance on the human development index. In Africa. University of Massachusetts