Aid Effectiveness for Poverty Reduction: Lessons from Cross-sectional Studies with a Focus on Structural Vulnerability

Cross-country econometric studies of aid effectiveness are numerous and often criticized. Relying on results of those which seem the most relevant and robust, this paper argues that aid is leading to poverty reduction, in particular in vulnerable countries. It examines the main methodological challenges faced by these studies, related to the definition aid, to its endogeneity, to the heterogeneity of the country features conditioning its effectiveness, to its variable returns, to the time dynamics of this effectiveness. Three main channels by which aid may influence the poverty levels are considered: the economic growth, the public social expenditures, and the macroeconomic stabilizing impact, interrelated with the two other channels. The stabilizing impact of aid has a major influence on poverty reduction, which cannot be evidenced without cross country analyses.