What are the report's main findings?

Previous studies of foreign aid have not shown a consistent link between aid, on one hand, and growth and poverty reduction, on the other. By ranking countries according to the quality of their policies and institutions, and then examining the impact of aid, we found that aid has been highly successful in reducing poverty in countries with sound economic management and government institutions. This finding, that aid works in the right circumstances, means that, properly allocated, aid has a great potential to help hundreds of millions of people escape a hand-to-mouth existence.

What are "good" policies and institutions and who decides?

There is growing evidence about the policies that promote long-term development and poverty reduction: rule of law, absence of corruption, openness to trade, macro stability, effective social services—to name a few key ones. The measure of good policy has to be based on objective evidence: what actually leads to rapid poverty reduction?

What about poor people in countries with weak policies and crummy institutions? Doesn't this approach penalize them doubly, first by having bad government and second by getting less aid?

One of the important findings of the report is that aid does not have any measurable effect on poverty reduction in countries with weak management. The reason is that the governments in these countries are not helping the poor. The report suggests a number of useful approaches in these difficult environments: channeling aid through NGOs, trying to identify and support reformers at the country level or in particular communities. Our point is that these activities will generally require less finance, so more financial aid can be channeled to poor countries that have reformed.

Your findings seem to suggest that we could cut aid to countries with weak policies without in any way slowing worldwide poverty reduction. Yet the report bemoans the decline in aid and urges donors to provide more. Why?

Globally about three billion people are living in dire poverty, on the equivalent of about $3 per day. Yet aid averaged only 0.22 percent of donor country GDP in 1997. In these circumstances, increasing aid, and allocating this aid to countries that can use it well, is a very cost-effective way to reduce poverty. In addition, recent reforms in developing countries have greatly increased the opportunities to use aid well. Our research suggests that nearly two billion people in dire poverty live in countries where more aid would speed poverty reduction.

Won't the poor countries that have reformed their policies attract private investment? Shouldn't the official funds be directed to the countries that have yet to reform?

There is clear evidence that when a poor country such as Ethiopia or Uganda reforms, private investment does not immediately take off. Investors are cautious about rushing in to recently-reformed countries. This is when aid financing is most useful: in countries with good policies and institutions, aid is a magnet for private investment, drawing nearly $2 for each $1 of aid. This is because aid increases confidence in a reforming government and helps it provide services that investors rely on, such as infrastructure and social services. In countries with weak policies large-scale finance has not had the same beneficial effect, nor has it typically led to policy improvements.

Can't donors force countries to reform by attaching conditions to their aid, that is, through conditionality?

The track record indicates that making aid conditional on policy reforms does not always lead to policy reforms. Conditional lending—such as the Bank's structural adjustment lending—only works if there is a strong domestic commitment to reform. It is not possible to arm-twist governments to do reforms for which there is no support (nor in our view is that a defensible way for a donor agency to behave). When countries desire reform, conditional loans enable governments to lock in policy gains. To be effective in this, they need to focus on a small number of truly important measures.

Does the report have anything to say about the most useful sectors for donors to support—education or rural development, for example?

What sectors are important for developing country governments to support is an important question (but not the subject of our report). What sectors donors support with their money is not an important question. The evidence is that aid is typically fungible: if donors finance primary education, it frees the government to do other things with its other resources. Donors can help in particular sectors through policy advice (which may lead the country to spend more on a particular service) and through assistance to improve the way that services are delivered.

What are the implications of the report for the current financial crises in countries like Russia and Indonesia? Are the bailout packages for these countries just a waste of money?

The report is about foreign aid for low-income countries and is not directly about the mostly middle-income countries that have experienced financial crises in the past two years. Even Indonesia was not a particularly large recipient of aid during the past decade. Nevertheless, one might—cautiously—draw some lessons from the research as follows: the countries in crisis have all made policy mistakes of one stripe or another, and reform is the key to their resumption of growth. Carrying out reform depends primarily on countries' own initiative and commitment. Where that commitment exists, official finance can help consolidate reforms, give the government some breathing space, and increase the benefit of reform. Conditionality is no substitute for this genuine commitment.

What are some of the poor countries with good policy that are currently underfunded? Conversely, which countries get too much aid?

Countries with good reform programs and modest amounts of aid include Ethiopia, Uganda, India, and Vietnam. One cannot say scientifically that any particular country is getting "too much aid." What one can say is that—from the point of view of poverty reduction—aid to Egypt, Mozambique, Malawi, Nicaragua, Tanzania, and Zambia was not commensurate with their policies during the period covered by our data—that is, through the end of 1996. Of course, policies change over time and decisions about allocating aid to a specific country should be based on current policies and institutions. Where these are inadequate and aid levels are high, donors may be pursuing other objectives through this aid. Our work shows the cost—in terms of poverty reduction—of pursuing those other objectives.

What about the large debts of poor countries? Does the report have anything to say about debt relief?

The report points out that the low-income countries with large debts are ones that had particularly poor policies during the 1970s and 1980s, which helps explain how they got into debt problems. Debt relief is a form of aid and as such will have its largest impact in countries that have undone the policy distortions that were the root of their problems. The first countries to benefit from debt relief—Uganda and Bolivia—are countries with strong reform programs, and the lifting of their debt burdens should have a large, positive impact.

What are the implications of the report for how the World Bank does business?

The implications are that The World Bank should continue and strengthen the new approach it has been taking in the past few years:

• It should continue to ensure that countries with good policies and institutions get large amounts of concessional (IDA) resources;
• Because money is fungible, it should heed the call of World Bank President James Wolfensohn's call to "get beyond projects" and support governments in reforming whole sectors, such as health and education.
• It should continue to ensure that the affected people participate in public projects—because, as the report shows, this improves the outcome of these projects.
• Because policy reform works best when it is "home grown", the Bank should reaffirm that development assistance is a "partnership", with developing countries and their societies in the driver's seat.

More questions and answers about Assessing Aid are available in the Press Conference Transcript.