Linking Aid, Pro-Poor Public Spending and Poverty Reduction: A Cross Country Panel Analysis Using Eight Poverty and Well-being Indicators

Abstract

Historically, the economic justification for aid-flows to developing countries is to reduce poverty, which can be applied through direct targeting of the poor or indirectly through economic growth or pro-poor public expenditure. This study investigates whether or not aid has produced the anticipated result in 144 developing economies using panel data analysis. Our variables of choice for measuring aid impact on poverty involve monetary and non-monetary poverty measures. Overall, Aid is good for poverty reduction; more so when institutional quality is controlled for. Secondly, for the analysis studying the poverty impact of aid via Pro-poor Public Expenditure (PPE), PPE was partially analysed as a function of aid, GDP and institutional quality (CPIA) using OLS in first differences. Evidence suggests that increase in aid does not lead to higher pro-poor public spending. In turn, pro-poor public spending is only good for the dollarized poverty measures, but not wellbeing. Consequently, institutional quality and absence of corruption is vital for aid effectiveness.

Keywords: Official Development Assistance, PPE, Poverty Reduction, Wellbeing, Institutional quality.