Aid, Poverty Reduction and the 'New Conditionality'

The paper examines the effect of aid on "poverty", rather than on economic growth. We devise a 'pro-poor (public) expenditure index', and present evidence that, together with inequality and corruption, this is a key determinant of the aid's poverty leverage. After presenting empirical evidence which suggests a positive leverage of aid donors on pro-poor expenditure, we argue for the development of conditionality in a new form, which gives greater flexibility to donors in punishing slippage on previous commitments, and keys aid disbursements to performance in respect of policy variables which governments can influence in a pro-poor direction. Copyright 2004 Royal Economic Society.