Poverty-efficient allocation of Official Development Assistance in 2011

With the global aid flows stagnating or even decreasing over the next years, the only way to increase the impact of development aid is making the aid more efficient. A widely recognized and applied approach to improve the efficiency of aid is the framework of poverty-efficiency. This thesis analyzes the poverty-efficiency of Official Development Assistance in 2011 using a data from 58 developing countries. The marginal efficiency of the actual allocation is calculated as well as 16 poverty-efficient allocations using three estimates of the aid's impact on growth, four different poverty measures and, in four cases, a small country bias. In order to study whether donor behavior is in line with the principles of poverty-efficiency, a linear model is estimated. The bilateral development assistance of Finland is evaluated as a case study. From the perspective of poverty-efficiency, the inefficiency of the actual allocation of aid is clear. The calculated marginal efficiencies reveal that some aid-receiving countries would greatly benefit from additional aid but some are receiving such high amounts of aid that it actually causes negative effects. When comparing the poverty-efficient allocations to the actual allocation of aid, the latter is clearly not in line with the principles of poverty-efficiency. Almost half of the countries in the data do not receive any aid under the poverty-efficient allocation regardless of the used approach. A number of countries could also be flagged under-funded based on the poverty-efficient allocations. Regarding the case study of Finland, a third of Finland's bilateral aid was not used efficiently from the perspective of poverty-efficiency. The political feasibility of the poverty-efficient allocations is questionable: under the poverty-efficient allocations few populous countries receive very high shares of the global aid budget. In addition, an estimated linear model revealed that donors still prefer smaller countries over ones with a larger population. The calculated marginal efficiencies and poverty-efficient allocations are highly sensitive to aid-growth estimate choices. Hence, in contrast to some current practices, the choice of estimates should be thoroughly examined when using poverty-efficient allocations in practical applications