The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of SnoQap, any other agency, organization, employer or company. Assumptions made in the analysis are not necessarily reflective of the position of any entity other than the author(s). These views are subject to change and revision.

Aid and Poverty: A Complicated Causality

Aid and Poverty: A Complicated Causality

Several theorists conclude that aid directly affects poverty. This stems from the notion that certain countries need an external push of foreign capital to help them move out of the inescapable situations in which they find themselves . These circumstances, referred to as poverty traps, cause present incomes of individuals  to be lower than their future incomes. Some traps exist through no party’s direct fault like being landlocked and having harder access to water orlacking arable land for food, yet others are a result of the colonial period. While some regions were deemed viable settlement colonies and were heavily invested in by global powers, many, because of undesirable internal issues, were used as extractive states. This resulted in these nations not only being snubbed of resources needed to improve quality of life, but also being deprived of infrastructure, political institutions, and social services that positively contribute to economic development and poverty reduction. Either way, poverty traps cause endemic problems for regions which, because of hindered state capacities, cannot tackle them through free market or democratic policies. Aid, thusly, can serve as a quasi-catalyst for addressing these critical areas of underdevelopment, promoting economic growth, and allowing individuals to better themselves and live the lives they have reasons to value.

One issue proving the effect of aid on poverty is the nutrition trap facing South Asia. While this region doesn’t lack food, individuals have statistically not received the nutrients needed for proper development. The poor cannot afford necessary nutrient-rich foods, and because of their not eating properly they grow ill, perform worse at work, and go on to make less money; this is the poverty trap South Asians face. External efforts have addressed supply and demand issues regarding nutrition, and by investing in South Asia and providing food, the region has seen enormous payoffs. Not only have more individuals been able to work, but the mortality rates of women and children have decreased, improving female labor force participation, childhood education, and other externalities that are shown to efficiently combat poverty. Therefore, aid is seen as a determinant of experienced underdevelopment, stepping stones towards change for regions that by themselves cannot self-legislate.

Though many believe this linear causality, the relationship is more complex. There exists reverse causality and selection bias concerns. These problems contribute to the larger issue of endogeneity, which occurs when the treatment variable is not random; the “X” variable is not independent of “Y,” which prevents this linear causality from being determined. Looking at reverse causality we can see that poverty, our dependent variable, is not exclusively following, or changing, as aid changes. Rather, existing poverty can be the determinant of the aid a region receives. This can be understood by acknowledging the motives donors have when providing aid. As many external agencies and affiliates hold certain ethnocentric preconceptions about what poverty is, aid is most typically given to regions that greatly contrast Western models in terms of economic and political structures which are, quite notably, the poorest ones. (Escobar). While aid can be seen as being affected by, rather than affecting, global poverty, these external motives of donors provide further context for the variables’ relationship.

The aid-poverty relationship is complicated further by the presence of omitted variables which are important, often neglected, factors in causal determination. These variables are typically unaccounted for due to how difficult they are to quantify, yet some are omitted simply because of error. In assessing how aid affects poverty, there exist several outside factors that influence aid. Again, donor motives are imperative; as most foreign investors gravitate towards seeing their money go towards flashy projects that could potentially be ineffective, a region’s technological innovations and institutional capacity to carry out donor desires can very well influence whether or not that nation receives aid. Additionally, if that region demonstrates a charismatic desire to change and pursue Western-model development like many donors wish for, that gusto, though hard to measure, can clearly have a tremendous effect on the  distribution of aid. Omitted variables can also affect both variables; the occurrence of a natural disaster on a region would keenly affect both the aid that region was to receive and the poverty they would experience, thus distorting our understanding of linear causality. Either way, these factors prove that aid is not independent of poverty which necessitates a reassessment of this relationship.

Acknowledging the issues regarding aid’s effect on poverty, we see that the conclusion of linear causality is incomplete. Several social and political factors hold weight in this association, and even poverty can be seen to influence aid. Therefore, it follows that poverty is complicated to assess causally via aid; given the propensity for multicollinearity to occur within the omitted variables (their being so interconnected that it is difficult to determine how one determines an outcome independently), no scholars can come to a consensus on the aid-poverty issue. While efforts to conclude causality on this matter can be fruitless, certain efforts can be made to achieve more certainty on the relationship. In conducting drug trial-type experiments on the real world and determining instrumental variables that affect aid without affecting poverty, steps can be made to combat endogeneity and prevent any concerns for reverse causality. Though such attempts can clarify the relationship between aid and poverty, they are somewhat difficult to enact, and until then, we cannot be too unwavering in our causal assumptions, as it could very well affect proper poverty alleviation from occurring.

Works Cited

Acemoglu, Daron, and James A. Robinson. Why Nations Fail: the Origins of Power, Prosperity,

and Poverty. Crown Business, 2013.

Banerjee, Abhijit, and Esther Duflo. Poor Economics: A Radical Rethinking of the Way to Fight

Global Poverty. PublicAffairs, 2012.

Collier, Paul. The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be

Done about It. Oxford University Press, 2008.

Escobar, Arturo. Encountering Development: the Making and Unmaking of the Third World.

Princeton University Press, 2012.

“For Profit Education: The $1-a-week school” The Economist. August 1, 2015.

Prahalad, C. K. Fortune at the Bottom of the Pyramid. Wharton School Publishing, 2007.

Sen, Amartya. Development as Freedom. University Press, 2000.

Woolcock, M., & Narayan, D. (2000). Social Capital: Implications for Development, Theory,

and Policy. World Bank Research Observer, 15, 225-249.

Are Publicly Funded Stadiums Worth It?

Are Publicly Funded Stadiums Worth It?

Normative vs Descriptive Theory

Normative vs Descriptive Theory