Aid allocation, poverty reduction and the assessing aid report

Assessing Aid argues that aid should be reallocated in favour of poor countries with good policies. This argument is based on a model in which poverty depends on growth, and growth on aid, the impact of aid being higher in countries with good policies. So-called ‘poverty-efficient’ aid allocations are thus calculated, which are shown to be at odds with those of bilateral donors. There are a number of theoretical and empirical shortcomings in this work. First, aid can affect poverty through channels other than growth. Second, what constitutes ‘good policies’ is debatable. Third, the empirical estimates are very sensitive to changes in model specification and sample. This paper critically reviews these three issues and finds the poverty-oriented aid reallocations implied in Assessing Aid to be an unreliable guide to policy