Working Paper Series,
Research Institute of Industrial Economics

Abstract: In this study, we derive a poverty-minimizing allocation rule, based on which we assess the poverty-efficiency of actual aid allocations, with a special focus on the comparative impact of new donors and new non-aid flows. The results suggest a substantial misallocation of aid. Our benchmark estimates indicate that donors should reallocate nearly half the total aid budget from aid darlings (countries receiving more aid than the allocation rule specifies) to aid orphans (countries receiving less aid than the allocation rule specifies). The estimated poverty-reducing efficiency varies considerably across donors. In terms of average poverty reduction per aid dollar, new global actors such as the Gates foundation perform well above average, whereas the non-DAC bilateral donors perform clearly worse. Overall, neither the new donors nor the new financial flows alleviate the observed misallocation of aid. While the new donors stand for a non-negligible share of overall poverty reduction, together they perform below average in terms of poverty reduction per aid dollar. Similarly, rather than counteracting the relative neglect of countries identified as particularly underfunded in terms of aid, the non-aid financial flows add to the inequitable distribution. For the countries that we identify as ‘aid orphans’, these flows are not significant enough to substitute for the lack of aid.

Keywords: Aid allocation; Poverty; Donors; Official development assistance; Other official flows

JEL-codes: D63; E61; F35; O11

64 pages, November 15, 2021

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