A growing body of academic literature has been assessing how effective foreign aid is in an average country, as well as the conditions that allow such aid to have its intended impact and spur development. Called “conditional aid effectiveness,” this research has in the past focused on factors such as geographic location and the size of a country’s local elite, and examined how such variables are associated with foreign aid’s impact on economic growth.

A 2011 study from the University of Melbourne published in the Journal of African Economies, “Ethnic Fractionalisation and Aid Effectiveness,” tests the hypothesis that, in ethnically homogenous countries, foreign aid has a positive effect on economic growth, but this effect decreases in ethnically heterogenous countries.  The study examines data from 114 countries that received foreign aid from 1962 to 2001 and analyzes the “growth effects of both foreign aid and its interaction with the index of ethnic fractionalization,” which the authors say serves as a proxy for the number of rival groups in a society.

The study’s findings include:

• Overall, foreign aid is indeed more effective in ethnically homogenous countries. As fractionalization increases, the efficacy of aid in helping to spur economic growth decreases.
• At least half of the countries in sub-Saharan Africa “are so ethnically fractionalized that foreign aid tends to retard their economic growth.” This happens because higher degrees of ethnic fractionalization are associated with “rent-seeking contests for aid inflows,” which diminishes the positive economic impact these inflows can have by fostering poor policies, diminished institutions and bad governance.
• Additionally, as the “racial differences between the major ethnic groups grow larger,” the rent-seeking behaviors — attempts to manipulate systems for gain — are associated with an increased detrimental effect of aid inflows on economic growth.
• An increased proportion of colonial settlers in populations was also associated with lower aid effectiveness.

The researchers conclude that “if a country is starkly fractionalized, fungible aid flows without conditions and close oversight may do more harm than good.” In any policy calculus, therefore, “more focus should be placed on the degree of integration of distinct groups in a country.”

Tags: poverty, ethnicity and community