Distortionary economic impacts of aid interventions in fragile states (GSDRC Helpdesk Research Report).
This report looks into ‘crowding out’ in relation to foreign direct investment, domestic revenue mobilisation, savings and expenditures
Please identify findings and policy recommendations on the economic impact of humanitarian and development interventions in conflict and post-conflict environments. Where possible, focus on the impacts on factor prices, wages, commodity prices, flows of factors of production (such as human capital), and identify the key distortions that aid flows can cause by crowding out.
There is a wide range of literature that touches on the issues of economic impacts related to humanitarian and development interventions, including analyses and evaluations on different types of projects or programmes that have had impacts on the local economy. Within this literature the area of most relevance to conflict and post-conflict environments is that focused on peace operations. Peace operations include a wide range of humanitarian and development interventions, in addition to peacekeeping duties.
The first part of this report explores economic impacts and policy recommendations that have been identified in relation to peace operations. Peace operations are often perceived as having negative impacts on salary levels, rents, commodity prices and general prices (i.e. inflation). However, changes in prices may be part of the ‘peace dividend’: as a country emerges from conflict, the resumption of peace and return to business-as-usual is likely to influence prices. Some also argue that the humanitarian and development interventions that peace operations entail actually result in an overall positive economic impact on the local economy, because they restore basic security and their expenditures act as an economic boost at a point when arguably the economy needs it most.
The second part of the report looks into ‘crowding out’ in relation to foreign direct investment (FDI), domestic revenue mobilisation, savings and government expenditures. The report finds that there is little evidence that aid ‘crowds out’ other financial flows; in fact, it seems to increase FDI. This effect seems to be most pronounced when aid is focused on economic infrastructure, and when it is targeted at countries with especially low incomes. There is a strong negative correlation between aid, specifically multilateral aid, and savings, but it is unlikely that one causes the other. Overall, the complex nature of spending allocation decisions means that it is very difficult to confidently attribute changes in financial flows to a ‘crowding out’ effect of aid.
Rao, S. Distortionary economic impacts of aid interventions in fragile states (GSDRC Helpdesk Research Report). Governance and Social Development Resource Centre, University of Birmingham, Birmingham, UK (2012) 12 pp.