**1. Introduction**

The theoretical foundations of economic development as a full discipline go back to the 1950s and 1960s, thanks to the work of outstanding economists such as Arthur Lewis, Ragnar Nurske, Paul Rosenstein‐Rodan, and Kurt Mandelbaum, considered as the founding fathers of classical development economics. The emergence of this new body of economic literature was accompanied by important political changes in Africa and Asia. As the European colonial

empires began to crumble, more than 35 African and Southeast Asian countries gained their independence. And to get these countries back on their feet, especially Africa, was challeng‐ ing. Just like an OECD report mentions, some of these countries are actually "creations of the great European colonial carve‐up rather than traditional nation states" [1].

What were the appropriate policies these new countries needed to adopt? Being influenced by the work of Harrod and Domar, the early development economists strongly supported aid as a key engine of growth and development. Emphasizing the essential role of saving and capital accumulation in promoting economic growth, Nurske and others have argued that poor nations remain poor because of the vicious circle of poverty. And, according to the Big Push Theory, foreign aid was needed to help poor countries escape from the poverty trap [2]. The years that followed could easily be described as "glory years" for the development poli‐ cies and foreign aid. By the end of the 1960s, many of the East Asian countries had started to grow rapidly and suspended shortly receiving foreign aid. In the following years, the African experiment (in particular, Sub‐Saharan countries) registered disappointing results of foreign aid. "The '1970s' and '1980s' were pretty dire. It got worse rather than better … countries got very economically out of balance," concludes Richard Manning [3], a former chairman of the OECD's Development Assistance Committee, when referring to the African countries. It was not surprising to observe a decline of enthusiasm among development theorists and aid supporters. The classical theoretical justifications of the development assistance based on "saving gap" and "trade gap" have come to be challenged. Many researchers suggest in their academic studies that aid is necessary but not sufficient for growth.

The economic literature on aid started to take into consideration various new paradigms. Some studies such as Riddell's are based on direct experience of aid experts [4], others have been developed by various academic researchers like Tarp and Peter [5]. However, in the 1970s the idea of "aid for growth" became seriously questioned. The holistic focus on growth did not prove to be enough to improve living conditions of the poor. In that context, academia advice for policy makers was to include accountable conditionalities for aid recipients, to direct financial assistance rather than to satisfy basic needs such as safe water, proper nutri‐ tion, education, and healthcare programs to promote economic growth.

But the dark clouds continued to linger over foreign aid in the 1980s. It is worth to men‐ tion here the increasing (real) cost of borrowing in the early 1980s that affected the poor and developing countries capacity to repay the loans. For instance, in 1982, Mexico defaulted on its debt. Many African countries defaulted too or were increasingly struggling with debt. The international debt crisis radically influenced the approach of international institutions and donors regarding aid. Considered countries with "profound economic mismanagement," as Jeffrey Sachs said, the aid recipients were asked to make substantial changes in their macro‐ economic policies [6]. "Two ideas came to dominate: stabilization and structural adjustment." The first required developing countries to "stabilize" their economies, for example, by reduc‐ ing fiscal imbalances; the second called for fundamental structural reforms such as trade lib‐ eralization. Aid came attached with ever more "conditionalities" and policy advices, which today are often criticized [1].

In line with neo‐liberal mainstream approach and ignoring endogenous factors such as cul‐ ture or prevailing institutional framework, the ingredients for economic success in the 1990s were: privatization of state‐owned enterprises, open‐up the goods and financial markets, giv‐ ing up to protectionism practices, cutting government expenditures, and including spending for education and health. This development recipe was common for all developing countries around the world, from Africa to Central and East Europe.

empires began to crumble, more than 35 African and Southeast Asian countries gained their independence. And to get these countries back on their feet, especially Africa, was challeng‐ ing. Just like an OECD report mentions, some of these countries are actually "creations of the

What were the appropriate policies these new countries needed to adopt? Being influenced by the work of Harrod and Domar, the early development economists strongly supported aid as a key engine of growth and development. Emphasizing the essential role of saving and capital accumulation in promoting economic growth, Nurske and others have argued that poor nations remain poor because of the vicious circle of poverty. And, according to the Big Push Theory, foreign aid was needed to help poor countries escape from the poverty trap [2]. The years that followed could easily be described as "glory years" for the development poli‐ cies and foreign aid. By the end of the 1960s, many of the East Asian countries had started to grow rapidly and suspended shortly receiving foreign aid. In the following years, the African experiment (in particular, Sub‐Saharan countries) registered disappointing results of foreign aid. "The '1970s' and '1980s' were pretty dire. It got worse rather than better … countries got very economically out of balance," concludes Richard Manning [3], a former chairman of the OECD's Development Assistance Committee, when referring to the African countries. It was not surprising to observe a decline of enthusiasm among development theorists and aid supporters. The classical theoretical justifications of the development assistance based on "saving gap" and "trade gap" have come to be challenged. Many researchers suggest in their

The economic literature on aid started to take into consideration various new paradigms. Some studies such as Riddell's are based on direct experience of aid experts [4], others have been developed by various academic researchers like Tarp and Peter [5]. However, in the 1970s the idea of "aid for growth" became seriously questioned. The holistic focus on growth did not prove to be enough to improve living conditions of the poor. In that context, academia advice for policy makers was to include accountable conditionalities for aid recipients, to direct financial assistance rather than to satisfy basic needs such as safe water, proper nutri‐

But the dark clouds continued to linger over foreign aid in the 1980s. It is worth to men‐ tion here the increasing (real) cost of borrowing in the early 1980s that affected the poor and developing countries capacity to repay the loans. For instance, in 1982, Mexico defaulted on its debt. Many African countries defaulted too or were increasingly struggling with debt. The international debt crisis radically influenced the approach of international institutions and donors regarding aid. Considered countries with "profound economic mismanagement," as Jeffrey Sachs said, the aid recipients were asked to make substantial changes in their macro‐ economic policies [6]. "Two ideas came to dominate: stabilization and structural adjustment." The first required developing countries to "stabilize" their economies, for example, by reduc‐ ing fiscal imbalances; the second called for fundamental structural reforms such as trade lib‐ eralization. Aid came attached with ever more "conditionalities" and policy advices, which

great European colonial carve‐up rather than traditional nation states" [1].

136 International Development

academic studies that aid is necessary but not sufficient for growth.

tion, education, and healthcare programs to promote economic growth.

today are often criticized [1].

The relative lack of positive results, in terms of improving economic performance, forced both scholars and aid community to abandon to some extent for the framework of traditional devel‐ opment economics. By the end of 1990s, as Riddell emphasizes, there was a wide recogni‐ tion that "development is an extremely complex process […] difficult for outsiders to help in promoting without an in‐depth understanding of the attributes and constraints of each poor country" [7].

The rethinking of the concept of development was also reflected in the creation of Human Development Index (HDI) in 1990 by the United Nations Development Programme (UNDP). Since then, UNDP has annually published Human Development Report, which takes the position that "people are the real wealth of a nation." Its approach to development is about enlarging people's choices, focusing broadly on the richness of human lives rather than narrowly on the richness of economies. In partial response to aid programs critics, the global development community has agreed on setting firm targets for results. This led to the creation of the eight millennium development goals (MDGs) in 2000, which set down a series of economic and social progress indicators that were expected to be achieved by the end of 2015.

Especially after 2000, exploring unconventional determinants of development process has become a new trend in the academic world. The institutional paradigm, for instance, has proved its relevance for analysis of foreign aid and aid effectiveness [8]. Convinced by the fact that the quality of institutions matters, Martens et al. analyzed particularly the incentives problem that drives the behavior of agents (donor governments, agencies' experts and bureau‐ crats, recipient governments, etc.) involved in foreign aid policy. In their very influential article in 2000, Burnside and Dollar found that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies, but has little effect in the presence of poor policies [9]. Although their article does not follow a specific institutional approach, the conclusion is quite clear: institutional environment in recipient countries strongly influences aid's effectiveness.

The fresh focus brought by institutional economics, a subfield that grew rapidly since the 1990s, is accompanied with more and more academia debates on aid effectiveness, and the general tendency was to highlight its negative effects rather than positive aspects. As The Economist has stated, the MDGs managed to shift the debate away from how much is being spent on development to how much is being achieved. However, theoretical and empirical criticisms seem to overcome the political optimism. William Easterly, a New York University professor, has published a great number of critical articles and books on aid, arguing that "aid cannot buy growth" [10]. Moreover, based on his personal experience during his past career at the World Bank, Easterly considers that present aid policies do more harm than good for poor countries [11]. More recently, this perspective which underscores the negative effects of foreign aid is shared by Angus Deaton, a well‐known economist from Princeton University. Deaton argues that aid rarely reaches the poor. Moreover, there is no unquestionable empiri‐ cal evidence that aid promotes growth [12].

The next section of this chapter analyzes the conceptual framework of foreign aid, who are the donors and international institutions that channel aid to the third world countries. Then, our focus is on testing the effectiveness of aid on improving life conditions of the African people, measured by the Human Development Index. We prefer Human Development Index instead of economic growth because it is a more comprehensive approach, and reflects both quantitative and qualitative improvements in human life conditions. According to the UN, development can be described as the process of enlarging people's choices, which means allowing them to "lead a long and healthy life, to be educated, to enjoy a decent standard of living," as well as "political freedom, other guaranteed human rights and various ingredients of selfrespect" [13]. Therefore, to increase the theoretical and practical relevance of our model, we have opted to integrate other two exogenous variables (economic freedom and political freedom), as important determinants of human development. Economic Freedom Index, pub‐ lished by the Fraser Institute, reflects the quality of economic environment, scoring a country between two extreme regimes: interventionist and free‐market based. Polity score measures the quality of a political environment, the scale moving from authoritarian to a democratic regime. The outcomes of our research might prove helpful for aid agencies to adapt their poli‐ cies in order to increase aid effectiveness. The lessons and policy recommendations are found in the final section.
