From commitment to action:
human development and growth

Department for International Development
HM Treasury
September 2005

SUMMARY: THE POSITION NOW AND OUR PLAN OF ACTION
The main message of this paper is that increased aid must promote both humandevelopment and economic growth. Economic growth is crucial for making
sustained progress towards the MDGs, for reducing income poverty, for improving
human development outcomes and for providing the basis for continued progress.
The MDGs on health and education cannot be achieved by focusing solely oninterventions aimed at those two sectors.
Growth increases a country’s tax base and allows for more spending on health andeducation. Growth also raises the incomes of poor people and thereby increases
their ability to pay for activities and goods that improve their health and education.
Finally, investing in health and education is also good for long-term growth, as
virtuous circles are generated both at the national and household level.
Strengthening this two-way causal relationship between growth and humandevelopment requires conscious strategies that incorporate two enabling conditions:a favourable investment climate and empowerment of poor people to make the mostof the expanding opportunities. This paper focuses particularly on the need fordeveloping infrastructure, strengthening governance and institutions, and providing
vulnerable groups with better social protection.
Higher rates of growth and improved health and education outcomes require
additional resources to finance the increased investment and expenditure indeveloping countries. The funds for these investments will need to come from a
combination of private and public sources. In some low-income countries,
particularly in Africa, foreign aid will be an important part of the story. This requires
careful consideration of a country’s absorptive capacity. We argue that many actions
can be taken to enhance absorptive capacity and that there is a need forcomplementary policies to maximise the positive impact of increased aid.
The key points made in the paper are as follows:
There is a two-way causality between growth and human development• Economic growth reduces income poverty.
• Countries with higher incomes tend to have better human development.
• Better human development outcomes contribute to higher economic growth.
The challenge is to promote both growth and human development
Challenge 1: Investment climate improvements• Good infrastructure is a key element of a good investment climate.
• Better governance and institutions permit the two-way causality to work
better.
Challenge 2: Empowering and investing in people• Social protection contributes to growth and human development.

1

We must both increase aid and make it more effective•
Private sources of domestic finance will lead to growth in developing
countries.
•
In sub-Saharan Africa, frontloaded aid is key for growth and development.
•
The quality of policies and institutions affect aid absorption.
•
How donors supply aid affects aid absorption and effectiveness.
•
Better management of aid inflows and improved relationships between
donors and recipients are crucial.
•
Scaling up aid in fragile states poses challenges.
•
Better absorption will require attention to the workings of labour markets.
Plan of action
1. Promote economic growth and mobilisation of domestic revenue in order tofinance and sustain improved health and education services and to reducepoverty.
2. Promote a good investment climate, with enhanced support for trade andregional integration, strengthening financial sectors and raising agricultural
productivity.
3. Promote greater investment in infrastructure. Of the additional US$25 billionof annual aid for Africa, the World Bank estimates that $6-9 billion should beallocated for infrastructure.
4. Support the participation of poor people in economic growth, including theempowerment of the poor and better social protection.
5. Facilitate absorptive capacity in recipient countries, though expanding
productive capacity, better management of resources, and soundmacroeconomic management.

2

A. BACKGROUND: THE TWO-WAY CAUSALITY BETWEEN GROWTH AND
HUMAN DEVELOPMENT
Growth, income poverty reduction and improvements in human development
outcomes go hand in hand.
Economic growth reduces income poverty.
1.
Achieving and maintaining sustainable economic growth should be a corebuilding block of any strategy to reduce poverty. There is clear evidence that higher
rates of economic growth are associated with greater poverty reduction. On average,
income growth of 1% reduced the poverty headcount by 2.5% during the 1980s and1990s.1 This means that poor people participate in growth. On average, theirincomes rise as fast, or almost as fast, as those of the non-poor. Historically, ifaverage incomes rose by 1%, the incomes of the poorest quintile also rose by 1%.2More recent evidence for the 1990s indicates that the incomes of people below thepoverty line rose by only 0.7% when average incomes rose by 1%:3
5.0%
ESV

VNM

A nnual change in RPP G

4.0%
BRA

IDN

3.0%

UGA

ZMB

GHA

BOL

2.0%

SEN
1.0%

BFA

IND

TUN

BGD
-4.0%

-3.0%

-2.0%

0.0%
-1.0%
0.0%
-1.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

-2.0%
ROM
-3.0%

Annual growth rate in the mean

Source: OPPG, 2005

2.
But there are big variations across countries. For example, the figure aboveshows that Tunisia and Indonesia had similar average growth rates (slightly above
2% a year) during the 1990s, but while the incomes of poor people rose by onlyaround 1% in Tunisia, they rose by more than 3% in Indonesia. Such differences
between countries can be explained by different initial conditions (such as the levelof inequality) and by different growth patterns.
3.
Even within countries, not everyone benefits equally. During the 1990s,
overall growth was driven by an improved performance of the non-agricultural
sectors (they grew six times faster than agriculture).4 This is part of the explanation
for why the incomes of poor people rose less than average incomes: they mostly
dedicate themselves to agricultural activities, which had lower growth rates. Poor3

people also faced significant constraints to participating in non-agricultural growth.
One such constraint was the lack of education, which is discussed later in this paper.
More generally, social exclusion can cause some people to remain poor even ingrowing economies. For example, the government in Vietnam estimates that by theend of this decade 90% of food poverty and 50% of overall poverty will beconcentrated in ethnic minority groups, who constitute just 10% of the population.5
This points to the need for special strategies to ensure that poor and excluded
households have equitable access to resources, markets and public services.
Countries with higher incomes tend to have better human development
4.
Economic growth is not just associated with reduced income poverty. Thereis also clear evidence on the positive association between economic and humandevelopment outcomes. This is evident from a cross plot of countries’ GDP per head(in 2002) and their score on the Human Development Index (HDI):

Human Development Index

1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0

10,00020,00030,000GDP per capita, 2004 PPP $40,000Source: World Development Indicators

5.
More specifically, higher GDP per head is associated with improved
outcomes of the Millennium Development Goals on health and education. This
association is the result of a two-way causality between improvements in economic
performance and in health and education outcomes. They will be discussed in turn.
6.
First, there is a clear positive association between higher GDP per head andbetter health indicators. The figures below show that under-five mortality rates andmaternal mortality rates are much lower in middle-income and high-income
countries than they are in low-income countries:

4

Under-five mortality (2002)

Maternal mortality (2002)
1,400
Deaths per 100,000 live births

Mortality per 1,000 live births

350
300
250
200
150
100
50

1,200
1,000
800
600
400
200
0

0
0

10,00020,00030,000GDP per capita, 2004 PPP $040,00010,00020,00030,000GDP per capita, 2004 PPP $40,000Source: World Development Indicators

Source: World Development Indicators

7.
In addition to lower child and maternal mortality rates, the disease burden isalso generally lower in wealthier countries. For example, the HIV prevalence rate is
3.2% for the least developed countries, 1.8% for low-income countries, 0.7% for
middle-income countries and 0.3% for high-income countries.6
8.
There is also a clear positive association between higher GDP per head andbetter education indicators. This is true for both primary and secondary school
enrolment rates:
Secondary education (2002)

Primary education (2002)
100

Secondary enrolment %Primary enrolment %

100
80
60
40
20

80
60
40
20
0

0
0

10,00020,00030,000GDP per capita, 2004 PPP $040,00010,00020,00030,000GDP per capita, 2004 PPP $40,000Source: World Development Indicators
Source: World Development Indicators

9.
Although not an MDG target, secondary education plays a key role in raising
future growth rates and in determining the extent to which poor people are able toparticipate in growth.7 Most notably, many of the jobs that are created throughgrowth are in the non-agricultural sectors and tend to go to people who have at least
some secondary education.8

510.
This cross-country evidence, showing that improved economic and humandevelopment outcomes go hand in hand can be illustrated by the experiences ofIndonesia and Chile between 1975 and around 2000. In Indonesia, GDP per headrose by around 4% a year, while life expectancy increased from 49 to 65 years andinfant mortality fell from 104 to 40 per 1000 live births. In Chile, GDP per head alsorose by 4% a year, while life expectancy increased from 63 to 75 years and infantmortality fell from 77 to 11.9
11.
But what about countries that have seen a lopsided development path –countries that achieved either good economic outcomes or good humandevelopment outcomes without making much progress on the other? The Human
Development Report 1996 reviews this question in detail.10 There are usually clear
reasons for such uneven development. For example, transition countries tend tohave human development indicators that are similar to those in countries with muchhigher GDP per head levels. This can be explained by the emphasis that theirgovernments placed on health and education over many decades, combined withlimited growth during the 1980s and a collapse in the early 1990s. Many resourcerich countries tend to exemplify the opposite pattern. Their human development
indicators are often much lower than those of other countries with similar GDP per
head levels. For them, human development investments were not a precondition for
future growth. This has resulted in highly unequal development that may not besustainable over the long run. Take Georgia and Angola as two examples. They
have similar GDP per head levels (around US$2,200 when corrected for purchasing
power parity), but vastly different human development indicators: while Georgia’s
health and education levels are almost as high as those of OECD countries,
Angola’s are among the worst in the world.11

6

Two-way causality between growth and improved human development
12.
Having established that economic and human development go hand in hand,
this section explores the main links between growth and human development. We
distinguish between macro- and micro-level evidence. The diagram below
summarises the four channels that will be discussed in turn. While the various links
are clear, we have much better empirical evidence on some than on others.12

The contribution of growth to improved human development outcomes.
¾ The ‘macro link’: growth increases a country’s tax base and therefore allows
for greater spending on health and education.
13.
Many health and education facilities depend on government funding. Not
surprisingly, the share of government budgets that is allocated to such humandevelopment spending can vary greatly across countries and over time. Even if thisshare remains unchanged over time, growth in GDP per head can significantly
increase the amount of government spending on human development. For example,
Kenya and Botswana had similar GDP per head in 1960 and spent approximately
9% of their GDP on health and education over the next three decades. However,
because Botswana grew by 6.5% a year while Kenya only grew by 1.6% a year,
Botswana spent five times as much on these sectors by 1990 as did Kenya.13

7

14.
The key link that is highlighted here relates to tax collection. Growth in thenational economy implies an increase in the country’s tax base. For example, a risein household incomes is likely to lead to increased government revenue from thecollection of income tax. Also, higher household incomes tend to be accompanied
by higher consumption, which raises the prospects for the collection of value-added
taxes. An increase in tax revenue opens the possibility of higher government
spending, including on health and education. A recent review of nine countries
showed that higher growth was indeed accompanied by bigger increases ingovernment budgets during the 1990s:14

government budget allocation

Annual per capita change in

0.1
0.08
0.06

UGA

BOL
BGD

0.04

IND

0.02
-0.03

ESV
TUN

0
-0.01
-0.02 0

-0.02

0.01

0.02

0.03

0.04

0.05

-0.04

Z MB
ROM

-0.06
-0.08

BRA

y = 2.1032x - 0.0206
R2 = 0.6023-0.1
A nnual per c apita c hange in GDP grow thSource: Wilhelm and Fiestas, forthcoming

15.
If wisely spent, the increase in the government’s budget for health andeducation can lead to improved human development outcomes. But there is mixed
evidence on the effectiveness of public spending in achieving such improvements.
The same study of nine countries showed that, on average, higher expenditure on
education and health did lead to improved outcomes in those two sectors. However,there was significant variation across countries, particularly for health outcomes. For
example, neither Bolivia nor Zambia increased their per-head health spending
during the 1990s. But while infant mortality fell by more than 5% a year in Bolivia, it
remained unchanged in Zambia.15 More generally, public policy faces important
challenges to ensure that spending is cost-effective and benefits the poor. In orderto reach the poor and avoid the high administration cost sometimes associated withtargeting, some basic services may best be provided universally.
16.
There are several reasons why we may observe only limited effectiveness ofgovernment spending on poor people’s human development indicators. In manycases, the benefits of public spending on social sectors accrue disproportionately tothe non-poor.16 There is also clear evidence that country-specific factors determine
the effectiveness and efficiency of government spending. For example, countries
with higher levels of urbanisation tend to have more efficient public spending.17
These issues are discussed in more detail in the health and education papers.
8

17.
Finally, there are complementarities between sector-specific spending.18 For
example, better access to basic infrastructure services (water and sanitation) plays
an important role in improving child health outcomes.19 Similarly, the construction ofrural roads is critical for access to education.20 In general, infrastructure
improvements are good for both growth and human development outcomes.
¾ The ‘micro link’: growth raises the incomes of poor people and thereby
increases their ability to pay for activities and goods that improve their health andeducation.
18.
This paper started out by showing that the incomes of poor people tend torise in countries with sustained economic growth. Households allocate thisadditional income to a variety of purposes, including health and education. In
particular, higher household incomes are more likely to translate into better humandevelopment outcomes if women's control over resources is increased. Women's
bargaining power in the household has a significantly positive impact on investment
in children's education, health and nutrition.21
19.
For many households, health and education spending constitutes very large
outlays, relative to other budget items. Moreover, such spending is often ‘lumpy’ – itrequires comparatively large single outlays (for school fees or hospital bills, forexample) as well as long-term commitment (for instance, today’s decision to send achild to school has financial implications that will last several years). Higher incomesmay be necessary to overcome such constraints and to reduce the opportunity costs
that arise when children contribute to household income.22 For example, the Bolsa
Escola programme in Brazil provides income subsidies to families with school-age
children in order to reduce dropout rates. It is estimated that the programme canresult in between one-third and half of all children from poor households to staying
in school.23
20.
The increased household-level spending on health and education tends to beaccompanied by improved human development outcomes. Take the period of 1993
to 1998 in Vietnam as an example. The high rate of growth (6% a year) led tosignificant increases in household incomes (7% a year). This resulted in an
increased demand for education: the average length of schooling rose from 7.5 to
8.1 years over the period, and enrolment rates in secondary schools increased byapproximately eight percentage points.24 In general, a growing economy tends toprovide greater job opportunities that lead to an increased demand for education(due to the higher expected returns).25
21.
Higher incomes can also reduce the volatility of education investments.
Taking children out of school is an unfortunate, but all too common, response to
adverse shocks.26 A maintained increase in household incomes is likely to reduce
the need for such coping strategies and to allow families to keep children in school.

9Better human development outcomes contribute to higher economic growth.
¾ The ‘macro link’: increased government spending on health and education
tends to enhance future growth.
22.
A healthy and well-educated population makes an economy more productive.
Changes in the size and skill level of a country’s labour force are a key factor in
determining economic growth rates. If a government’s spending on humandevelopment is effective, the labour force is increased and becomes moreproductive as fewer days are lost to illness, the available equipment is used more
efficiently and more modern technologies are adopted.
23.
Although not fully conclusive, cross-country evidence tends to show that
improved human capital outcomes lead to higher future growth (with clearer
evidence for the impact of education than of health).27 It has been estimated thatabout 22% of the average growth in income per head can be explained by
improvements in health indicators. Also, a 10% increase in health investment leads
to a 1% increase in the growth rate.28 Estimations for Tanzania and Zambia indicatethat a 15% increase in spending on education would raise the countries’ growth rate
by 0.1 percentage points a year.29
24.
Furthermore, a healthy and educated workforce helps to attract foreign direct
investment and facilitates its technological spillovers.30 This suggests that
improvements in education and health are important for reversing the outflows ofprivate capital from low-income countries, particularly Africa.
¾ The ‘micro link’: households reap the benefits from increased investments inhealth and education through higher future incomes.
25.
If a household invests more in health and education, its members are likely to
become more productive, whether they are self- or wage-employed. There isevidence that this higher productivity, in turn, increases future incomes. For example,
schooling leads to greater adoption of more productive technologies.31 These
effects can explain why education plays an important role in driving income growth.
In the case of urban areas in Bangladesh, for example, the incomes of people whocompleted secondary education rose three times as fast as those of people with noeducation during the 1990s:32

10

6Annualgrowth rate

5
4
3
2
1
0
Illiterate

Class-I-V

Class-VI-IX

SSC/ HSC/
Diploma

Degree andabove

Education status

Source: Sen, 2005

26.
Finally, there are not just direct productivity benefits from increased
household-level investments in health and education. Improved humandevelopment outcomes also have positive externalities that further enhance
productivity and growth. For example, an educated mother is more likely to send herchildren to school.33 Reducing gender inequalities in education and health also
reduces fertility levels, child mortality and under-nutrition, while increasing
educational investment in the next generation – all of which are likely to have apositive impact on growth.34

11B. THE CHALLENGES: CONDITIONS PROMOTING BOTH GROWTH AND
HUMAN DEVELOPMENT27.
The first part of this paper highlighted the links between growth and humandevelopment. It also indicated that these links are stronger in some countries than inothers. In this part of the paper, we will explore the conditions and policies that leadto higher rates of economic growth and better human development outcomes.35
Making these links effective requires a conscious strategy on the part of government.
The essential elements of such a strategy to drive growth and improvements inhuman development can be grouped under two pillars:36

Challenge 1 – Creation of a better investment climate to expand
productivity and job opportunities; andChallenge 2 – Empowerment of poor people to participate in a growing
and productive economy.
28.
These two conditions are widely recognised as being essential for bringing
about growth that reduces poverty.37 Investments in both pillars are necessary tobuild virtuous circles between growth and human development. Improvements in theinvestment climate stimulate entrepreneurship and expand the possibilities for firms
and people to be productive. Through better education and access to information,
empowerment enables people to negotiate, take opportunities and participate more
effectively in growth processes. What are some of the essential ingredients of thetwo pillars, and how might they be given greater focus?

Challenge 1 – Investment climate improvements
29.
The investment climate can be defined as: ‘the policy, institutional, andbehavioural environment, present and projected, that influences the perceived
returns and risks associated with investment’.38 Hence, investment is about morethan increasing the capital stock. It is also about enhancing the productive activities
of enterprises – be they small or large, domestic or foreign. The better theinvestment climate, the more investment will take place.
30.
Many factors contribute to a good investment climate, including: macroeconomic and trade policies, infrastructure, and governance and institutions. The
fundamentals of a good climate for private investment are essentially the same forall countries. Considerable evidence from firm-level surveys and the analysis of
growth episodes around the world have demonstrated the positive links between agood investment climate and growth.39
31.
Among East Asian countries, where growth has been rapid over many years,
several common factors can be identified as having been influential. These include:•

maintaining external and internal political stability;

12

•
•
•
•
•
•

implementing prudent and stable macroeconomic policies;
investing in education and building a highly skilled but low-wage labour force;
maintaining competent and investor-friendly institutions;
implementing export-oriented trade policies;
fostering a strong entrepreneurial culture; andencouraging investment by small and medium-scale enterprises.

32.
The World Development Report 2005 focused on investment climate issues.
It stressed the following key issues, which were also highlighted in the report of theCommission for Africa:40

•
•
•
•
•
•
•

establishing peace, security and stability;
addressing policy uncertainty, inconsistency and instability (for instance,
prudent fiscal and monetary policies should deliver low inflation, moderatetaxes and competitive exchange rates);
investing in better governance and stronger institutions (such as protection ofproperty rights, enforcement of contracts, absence of corruption and rentseeking, and removal of unnecessary bureaucracy);
strengthening financial markets (such as standardisation of financial regulation
and broader coverage of financial services);
removing barriers to competition;
investing in more and better-managed infrastructure (for instance, better
provision of transport, communications, power and water can drive down
investors’ risks and costs); andimplementing measures to address shortages of domestic capital, the lack ofskilled workers, and the limited size of national markets.

33.
The financial sector plays a crucial role in stimulating investment in physicaland human capital. It underpins private-sector development, promotes technologicalprogress, and encourages productivity growth.41 The inflow of private capital andremittances depends on the robustness of the financial sector. Access to financial
services can also reduce poverty and promote human development. There are clear
linkages between financial sector development, child labour and education
patterns.42 Poor households exposed to high income volatility diversify their income
sources by sending children to work rather than to school. Access to financial
services helps families to adjust to unexpected changes, to reduce child labour andto increase school attendance.
34.
The remainder of this section focuses on two key elements of the investment
climate, namely infrastructure, and governance and institutions.

Good infrastructure is a key element of a good investment climate.
35.
Good infrastructure is important for both growth and poverty reduction, andplays a key role in facilitating the two-way causality between growth and humandevelopment.43,44 Investments in infrastructure are critical for meeting the MDGs.
13

For example, better road links improve access to schooling (MDG 2), a dependable
and good-quality water source reduces under-five mortality (MDG 4), and better
sanitation improves girls’ participation in schools (MDG 3).45
36.
According to some estimates, increasing the stock of infrastructure by 1%
could add 1% to the level of GDP.46 In some cases, such as Mozambique, theimpact is known to have been much higher: the Mozal investment, an aluminium
smelter that came into operation in 2000, doubled the country’s exports, added 7%
to annual GDP and created a large number of jobs.47 Good infrastructure enables
firms to break into competitive world markets. It also helps to offset thedisadvantages resulting from geographic location and small domestic markets. The
significance of good transport infrastructure cannot be overemphasised in the caseof landlocked countries. For example, high transport costs add the equivalent of an
80% tax on clothing exports in Uganda.48 Investment in infrastructure also offers
enormous potential for creating additional employment.49
37.
Despite these evident benefits, the share of resources allocated toinfrastructure fell in many poor countries during the 1990s. In Africa, infrastructure
spending fell from more than 4% of GDP around 1980 to less than 2% around2000.50 The lack of capacity in developing countries becomes clear when comparedwith developed countries. Australia and Ethiopia have similar degrees of climatic
variability, but whereas Australia has 5,000 cubic metres of water storage perperson, Ethiopia has just 45 cubic metres. Hydropower provides another example:
the United States and Nepal have roughly equivalent economically exploitablehydropower potential, but whereas installed hydropower capacity in the UnitedStates is about 70,000 MW, in Nepal it is less than 600MW.51
38.
The lack of investment in developing countries has led to a substantial
backlog, which won’t be easy to overcome. While the private sector will have to playa key role in the provision of infrastructure, there is now renewed recognition of theimportance of public investment.52 Infrastructure requirements vary from region toregion, reflecting different investment rates in the past and varied urban andindustrial development patterns. In Africa, where the deficit is regarded as being thegreatest, the list of requirements is long, including rural feeder roads, rail, irrigation,energy, ports, slum upgrading, water and sanitation, and information andcommunications technology (ICT).
39.
Estimates of needs over and above current expenditures vary, but there is no
doubt that they are very large. While it is difficult to quantify such investment needs,
recent estimates indicate that the costs of maintaining existing infrastructure andfilling gaps in terms of access and quality will amount to approximately $550650 billion per year, or 6.5-7.7% of the GDP of developing countries.53 The
Commission for Africa estimated that sub-Saharan Africa needs to spend around
5% of its GDP on infrastructure between 2005 and 2015, and a further 4% on
operations and maintenance.54 This will mean additional annual expenditure in theorder of $10 billion by 2010 and up to $20 billion by 2015, equivalent to a doubling14

of current expenditure on infrastructure.55 The World Bank’s Africa Action Plan
estimates that of the additional $25 billion of annual aid to Africa by 2010, $6-9
billion should be allocated to infrastructure.56

Better governance and institutions permit the two-way causality to work better.
40.
Unnecessary bureaucracy and corruption can stifle business activity bycreating uncertainty, introducing unwelcome delays, increasing operating costs andlimiting competition. Surveys of firms show that these costs can be substantial,
amounting to over 25% of sales – or more than three times what is typically paid intaxes.57 Registering a new business, for example, can take two days in Australia,
but more than 200 days in Haiti.58 The effect of red tape and corruption is to reduceinvestment. Although a poor regulatory environment affects all firms, it is the small
and medium-sized businesses that are least able to afford the additional costs.
41.
The significance of governance and institutions goes beyond issues ofregulation, taxation and licensing. They affect people’s interactions in many different
ways. The governance and institutional framework shapes incentives of businesses
and individuals and determines the effectiveness with which people participate inmarkets and interact with government. There is also increasing evidence –summarised in the World Development Report 2004 – that social and humandevelopment outcomes are better where there are strong relations of accountability
between service providers, government agencies and clients (in other words, there
will be better access to public services and healthier and better-educated people).59
Finally, productivity differences between firms tend to be much smaller in countries
that are able to maintain competitive markets. For example, while productivity
differentials between firms in the electronic industry are two-fold in Korea, they canbe as high as five times in India.60
42.
Relations between firms and governments shape the business environmentand determine, for example:•••

the degree of competition and the ease with which firms can enter and exit
markets;
the application of legal arrangements, especially with regard to property,
contracts and taxation; andthe enforcement of rules for the public interest, especially in respect of fairness,health and safety.

43.
While identifying the interactions between individuals, firms and governments
may be relatively straightforward, changing them to strengthen governance andinstitutions is immensely complicated and a drawn-out process. But this should not
detract from the importance of understanding these issues. Good governance andsound institutions are crucial if the two-way causal relationship between growth andhuman development is to work to maximum effect. Individuals’ empowerment and15

ability to participate in growth depend on it. Similarly, a conducive investment
climate depends on a favourable regulatory and institutional environment.

Challenge 2 – empowering and investing in people
44.
The capability of poor people to participate productively in the economy
depends on enhancing their health, education and security. Increasing capabilities,
therefore, requires empowering and investing in people. Tools such as ‘pro-poor
budgeting’ (when government and civil society jointly analyse who benefits frompublic expenditure) can have a positive effect on investment in the human capital ofpoor people. A good example comes from Uganda, where the publication of budget
allocations to district schools led to greater demands from parents for information on
the expenditure of schools attended by their children.
45.
Interventions to address social exclusion also enhance the capacity of thepoor to participate in growth. In many countries, human development and poverty
indicators remain particularly severe for socially excluded groups while nonexcluded groups are lifted out of poverty by general economic progress. In Nepal,
average life expectancy for the Dalit population is almost 20 years less than thenational average. In Brazil, the black population accounts for over 70% of thepoorest and only 10% of the richest households.61
46.
Addressing gender discrimination and promoting the empowerment of
women may be particularly effective at promoting growth with human development.
Gender inequalities in education and employment reduce economic growth. They
limit human capital in society and the pool of talent from which employers can draw.
Many East Asian countries have been able to be competitive on world markets
through the use of female-intensive export-oriented manufacturing industries. Highlevels of female education and few barriers to their employment in such sectors
made this possible. Gender inequality in access to productive assets in agriculture isinefficient since it reduces the productivity of female workers. Evidence from
Bangladesh supports the role that credit directed to women can play in reducing
poverty by strengthening their productive roles. Policies that promote greater female
political participation (for example, reservation of seats for women in local
government in India) tend to correlate with higher levels of investment in timesaving
infrastructure and human capital.62

Social protection contributes to growth and human development
46.
Effective public policy on social protection, through both social insurance andsocial assistance measures, can stimulate growth. It does so by encouraging poor
households in possession of productive assets to engage in riskier activities thanthey would otherwise.63 With a minimum income to fall back on, poor people are
more likely to invest and take on higher levels of risks that offer the prospect ofhigher returns. In the longer term, social transfers can promote growth by16

encouraging poor people to invest in the health and education of their children,which enables them to become more productive members of society.64
47.
During a crisis or shock (caused by natural disaster, economic downturn orsevere illness) poor people may be forced into selling their productive assets, andnutrition may fall significantly, creating a 'poverty trap'. Policies and interventions
which support the poor in dealing with risk and cope with shocks remove a
constraint on broad-based growth by reducing the need for the poor to deplete their
human, physical and social capital in times of crisis.65
48.
Social transfers (financed from tax revenues or increased aid flows) can havea major impact on human development outcomes. Social transfers in the form of
regular and predictable grants to poor and vulnerable households can help toaddress gender imbalances and expand access to education. For example, theCash for Education programme in Bangladesh has helped to achieve gender parity
in primary education. Social transfers can also strengthen health outcomes byimproving nutrition and enhancing the ability of poor people to gain access to healthservices and pay for medicines and other costs. In Namibia, for example,
pensioners spend 13.8% of the cash they receive on health care.
49.
Currently only small fractions of national budgets are dedicated to reach thepoor through social transfers. However, evidence shows that even small allocations
can have a positive impact.

17

C. INCREASING AID AND MAKING IT MORE EFFECTIVE
The need for, and impact of, higher aid flows
50.
Earlier sections of this paper stressed the need to consider development as aprocess that entails promoting both growth and human development. An unduly
strong emphasis on developing one sector while neglecting the wider imperatives of
economic growth will be unsustainable and distorting. In low-income countries,
economic growth is also necessary if a long-term dependence on aid resources is to
be avoided. Aid is not a permanent solution. However, as we indicate below, forsome low-income countries it is only by increasing the flow of external concessional
resources that prospects for growth and human development can improve in the
short-to-medium term.
51.
In this section, we focus on the capacity of recipient countries to absorb
increased aid flows. Based on a consideration of the evidence, we argue thatabsorptive capacity should not be seen as a reason for delaying the scaling up ofaid. While absorptive capacity is unlimited in one sense – countries can potentiallyuse funds to finance a large range of projects and programmes – in practice,productive absorption of large inflows could cause concerns in the short-to-medium
term and requires attention to issues of timing and coordination.
52.
Development agencies can take many actions to enhance absorptive
capacity. This requires careful consideration of three issues:• conditions in partner countries, especially quality of policies and institutions;• the allocation of resources across countries; and• the timing and quality of aid.
53.
Improvements in these factors can increase the amount and rate ofabsorption. As we indicate below, the adoption of complementary policies, coupledwith key investments in infrastructure, can also facilitate the absorption of aid
increases. For example, policies to liberalise imports can limit the distortionary
effects of additional currency inflows on the domestic economy.
54.
There has been much recent interest in the likely effectiveness of scaling up,leading to the articulation of a variety of views.66 The recent Commission for Africa
report and the report by Sachs et al for the UN’s World Summit, provide arguments
and evidence in favour of scaling up and ‘frontloading’ aid rapidly.67
55.
There has also been significant interest in whether aid leads to more growth.
Most recently, two IMF studies found no positive association between aid flows andgrowth. This was attributed to the negative impact of an appreciation of the realexchange rate, the so-called ‘Dutch Disease’ effect (see paragraph 69 for a fuller
discussion of this). Note, however, that the validity of this conclusion and theunderlying econometric methodology are hotly debated. Other studies provide clear

18

evidence that aid can increase growth, but that its impact depends significantly on
the quality of the policy environment and the type of aid provided. In environmentswith good or improving policies, increasing aid by one percentage point (relative toGDP) increases the rate of economic growth by 0.6 percentage points per year. In
average policy environments, such an increase in aid can generate 0.4% of extra
economic growth. In bad policy environments, the impact is even weaker as theextra aid would only generate an additional 0.2% of growth.68
56.
Recent analysis has also shown that different types of aid vary in terms of
their effectiveness in increasing economic growth.69 The growth-enhancing effects
of some types of assistance (‘short-impact aid’) are much higher than of other formsof aid (such as long-term technical assistance). ‘Short-impact aid’ is aid where theeffects on growth materialise over four or five years and includes balance of
payments and budget support as well as aid investments in public utilities, roads,
transport, finance, energy, agriculture and industry.

Private sources of domestic finance will lead growth in developing countries.
57.
In large parts of the developing world, the finance required for growth anddevelopment is generated domestically and is provided as some combination ofprivate and government finance. But many countries also rely heavily on externalfinancing. As the figures below show, the financial inflows to developing countries
are predominantly private, taking the form of foreign direct investment (FDI),
remittances and equity. Measured in absolute amounts and as a share of GDP,
official development assistance (ODA) is much smaller than private flows. Although
there has been much emphasis on FDI inflows, they accounted for only
approximately 13% of gross fixed capital formation in 2000.70 For least-developed
countries, the comparable amount was even lower at 6% (and as little as 1% for
Africa, where it was concentrated in the extractive industries).71
Financial Flows to developing regions
Average for 1994-2003 (US$ billions)
60.0
50.0

East Asia & Pacific40.0

Latin America & Caribbean

30.0

Middle East & North Africa

20.0South Asia

10.0

Sub-Saharan Africa

D
A
ne
tO

Fl
ow
ol
io

et
D
N

Po
rtf

eb
tF

lo
w

s

s

I
et
FD
N

R
em
itt

an
ce
s

0.0

19

Financial Flows to developing regions
Average for 1994-2003 (% of GDP)
6.00%
5.00%

East Asia & Pacific

4.00%

Latin America & Caribbean

3.00%

Middle East & North Africa

2.00%South Asia

1.00%

Sub-Saharan Africa

D
A

Fl
ow

ne
tO

s

s
ol
io

et
D
N

Po
rtf

eb
tF

lo
w

D
I
et
F
N

R
em
i tt
an
ce
s

0.00%

Source: World Bank; World Development Indicators

58.
While true for most of the developing world, the relative strength of private
financing is less evident for sub-Saharan Africa. As the figures show, net ODA flows
to Africa accounted for approximately 5% of average GDP over a ten-year period(1994-2003), but for less than 1% in other regions. This stark geographic contrast in
the pattern of net ODA flows suggests that increasing aid to most parts of the worldis unlikely to raise significant concerns about absorptive capacity, but needs carefulplanning and management for highly aided countries (in terms of shares of aid toGDP), especially in sub-Saharan Africa. The key challenge there is to ensure that
aid is used productively. This requires that it is allocated to those places where: (a)other sources of finance are relatively unavailable for investment; (b) the policy andinstitutional environment is most conducive for growth and human development; and(c) accountability arrangements are sufficiently good to induce predictable flows in
the future.

In sub-Saharan Africa, frontloaded aid is key for growth and development.
59.
The recent Commission for Africa report considers the continent’s externalfinancing requirements and makes four propositions:••

Although private finance is crucial for growth and sustained poverty reduction, its
full power in the African context is unlikely to be fulfilled if it is not led byincreases in ‘frontloaded’ and sustained aid. While private finance will in timeplay its part, kick-starting the growth process requires taxes to remain at modest
levels. As the formal economy expands and a robust domestic tax base is built,
domestically raised revenues should gradually come to replace aid.
Aid to Africa should be doubled in value, and increased by $25 billion a year
over the next three to five years, commensurate with improvements in the qualityof governance and institutions and the quality of aid.

20

•
•

The capacity to absorb aid should be considered dynamically. As economic andinstitutional capacity expand, and the quality of governance and the investment
climate continue to improve, the capacity to absorb more resources will increase.
The essential issue regarding absorptive capacity is not whether constraints canbe lifted, but how this can be done most productively. Clear strategies need to beworked out at the country level, and donors need to improve the quality of theiraid. This can be done, and significant improvements have been observed incountry-level policies and the way aid is provided (see below).

Issues concerning the productive absorption of additional aid in highly aided
countries, especially in sub-Saharan Africa
60.

•

Current knowledge indicates that aid works best if:
it is targeted to suit circumstance, reduce poverty, meet specific needs and:i.

promote peace and security and deliver essential services to communities
emerging from conflict and/or years of neglect; andii. support countries where governance and public accountability aredemonstrably getting better;•its quality is improved by:iii. reducing recipient countries’ burden in managing aid relationships;
iv. advancing alignment with national priorities and supporting the upgradingof existing systems; andv. improving predictability and flexibility to enable resource-constrained
governments to advance key reforms and raise public expenditure; and•it is provided to support change by:vi. enabling recipient governments to implement reforms that improvegovernance and accountability systems; andvii. encouraging investment and reducing business risks, promoting humandevelopment and increasing poverty-reducing public expenditure.

61.
But even high-quality aid that meets these conditions will face constraints.72
Despite glaring needs, there is a limit to the number of roads, dams, schools, andclinics that can be built and serviced effectively in any one year. For example, therequired number of technical experts and managers to plan and budget extra
finance may not be available to make productive use of the resources. Moregenerally, increases in aid will yield diminishing returns as the limits of capacity
constraints make their effects felt. The extent to which resources can beproductively absorbed is circumscribed by macroeconomic, institutional, physical,
human, social, cultural and political factors. As shown in the table below, theirinteraction could either constrain or reduce resource absorption.73

21

Constraints to absorption of additional external resources
Macro

Institutional

Physical/humanSocial/cultural/ political

Macro/national
government

Fiscal and debt
sustainability,competitiveness,
Dutch disease.

Monetary andfiscal policy
instruments.
Exchange rate
management.

Administrative,
management, andplanning skills,
trained technicians,
sector specialists.

Stable national politicalinstitutions, powersharing mechanisms,
social stability.

Allocative
instruments andmechanisms

Intergovernmental
fiscal relations.

Public expenditure
management.
Administrative
capacity. Legalframework.

Sectormanagement skills.
Connectivity andcommunications
networks.

Power sharing
mechanisms, andinstitutions.

Local government
institutions, private
sector capacity.

Road accessibility,
water control,
geography. Local
government skills
and capacity.

Cultural norms, ethnic,
caste, class, andhousehold demand.
Local power structures.

Servicedelivery/ local
government

Source: Reproduced from World Bank, 2004:25

The quality of policies and institutions affect aid absorption.
62. Country conditions affect the prospects of using aid well. As discussed above,
absorption of larger quantities of aid is more likely where policy environments are
better and/or improving. The figure below maps the link between the amount of aid
provided in three countries that successfully implemented reforms: Vietnam, Ghana
and Uganda.74 It shows that when country conditions are weaker, donors tend toprovide fewer resources. Once reforms get under way, external assistance rises andserves to demonstrate to citizens the benefits of implementing reforms.
63.
In many African countries, sharply scaled-up programmatic assistance often
followed periods in which relatively little aid had been provided in the form oftechnical assistance and policy advice. A rapid rise in assistance in the form ofsector and general programme aid and budget support only became possible once
governments committed themselves to implementing reform programmes. In
countries where governance and public accountability are weak, where there might
be differences in policy perspectives, and where conditions are less propitious forreceiving large amounts of programmatic aid, donors can nonetheless increase aid
and provide it in ways that promote sustainable development (see below).

22

Relationship between policy and institutional environment and aid

Source: Collier and Dollar, 2004

How donors supply aid affects aid absorption and effectiveness.
64.
The terms and conditions by which donors provide aid makes a big difference
to how well aid is absorbed and used. As indicated above, better-quality aid is: (a)aligned to country policies and strategies for reducing poverty; (b) making use of,and supports, national systems; (c) coordinated and harmonised with other donors;(d) provided predictably over the longer term, and (e) not disruptive of annual
budgeting practices.
65.
Relative to other regions, sub-Saharan Africa receives much lower-quality aid
and has done so for almost 30 years. If the quality of aid to Africa were to improve tolevels common in other developing regions (a step improvement of 24%), per head
GDP growth in sub-Saharan Africa would rise by about 1.8% a year. Enhanced
absorption of aid would be possible if better-quality aid reduced the burden oftransaction costs on governments, lowered significantly levels of public debt,
provided flexible on-budget programme resources and substituted for technicalassistance.75
66.
Donors also need to deliver aid more predictably, allowing recipients to planand manage financial flows much better. Given that external concessionary
resources account for a large part of the budgetary income of many Africancountries, it will not be possible for governments to scale up social sector
expenditure without regular and assured disbursements from donors.
67.
Good practice guidelines on aid effectiveness produced by the OECD
therefore recommend donors should: (a) reduce the burden of transactions theyplace on already stretched governments; (b) channel assistance in ways that don’t

23

undermine public decision-making; (c) strengthen local systems, and; (d) conductbusiness so that government accountability to citizens is promoted.
68.
Recent estimates show the tying of aid raises average costs to recipients by
15-30%, and more than 40% in the case of food aid. The OECD estimates that tiedaid reduced the actual value of bilateral ODA to Africa by $ 0.7-1.3 billion in 2002.
This is a conservative approximation, as the indirect costs of aid tying are notconsidered, for instance those arising from higher transactions costs throughparallel procurement, monitoring and evaluation procedures stipulated by donors.

Better management of aid inflows and improved relationships between donors andrecipients are crucial.
69.
While higher aid flows would undoubtedly bring many benefits to aid-recipient
countries, the impact could be undermined if authorities do not manage the impactof the inflows very well. A common problem arising from higher aid inflows is theappreciation of the real exchange rate. Recent evidence indicates that the economic
effects of an aid-induced appreciation in the real exchange rate can be managed
well. Additional aid will require complementary trade and exchange rate
management policies. To ensure that aid does not cause macroeconomic problems,
governments should invest it to expand productive capacity. Monetary authorities
should intervene to help stabilise the volatility stemming from short-term exchange
rate and interest rate fluctuations.76 The more aid is used for purchasing imports,
and/or for boosting foreign reserves (as and when necessary), the smaller will be its
impact in appreciating the real exchange rate.77 As investments in better
infrastructure increase, it should be possible for firms’ production and distribution
costs to be lowered, which will improve export competitiveness and facilitate further
economic growth.
70.
To increase absorptive capacity, governments should use aid to improve theefficiency of the public sector, ensuring that appropriate investments are madetowards training mangers, building technical expertise, and expanding the quantityand quality of infrastructure. Investing in the people today (and intensifying efforts tocombat the incidence of HIV and AIDS and the impact of tropical diseases) will
expand future capacity to accelerate development. Developing countries will havemore skilled people to design and build the necessary infrastructure, to deliver
services, and to provide the managerial know-how for planning, organising, andimplementing activities.

The challenge of scaling up aid in fragile states.
71.
Donors are paying increasing attention to the challenges of delivering aid infragile states in recognition of the fact that without greater attention to suchcountries, poverty reduction and collective security goals will not be achieved
OECD/DAC Ministers concluded that the risk of inaction was far greater than donors
taking action when they met in London recently (14 – 15 January 2005). At this24

meeting, Draft Principles of Good International Engagement were adopted. These
include:a. ensuring transparent information on aid flows to countries regarded as having
fragile states and or governments;
b. making aid more effective at reducing conflict, improving the understanding
and analysis of risk factors, and being willing to provide better responses torisk, for example by addressing issues of inequality and human security;c. sustaining a commitment to reducing poverty in difficult environments anddeveloping more innovative ways of being effective;d. engaging in countries over the longer term, and providing less volatile andmore predictable funding, even when threatened by temporary setbacks;
e. increasing funding by about 40%, which should be possible without
damaging the norms of efficient aid allocation;78 andf. investing in those interventions that can help countries with weaker and lessstable institutions to experience rapid turnaround. The benefits of theseinterventions can be as high $80 billion.79

Better absorption will require attention to the workings of labour markets.
72.
An important concern about absorptive capacity relates to the effect of extra
aid on labour markets, particularly if the emphasis is on improvements in humandevelopment outcomes. Education and health services are labour-intensive
activities, relying on skilled staff that are often in short supply. Low pay, lowmotivation and poor working conditions are key problems that lead to absenteeism
and migration to OECD countries.80
73.
The impact of increased aid flows for health and education can beconstrained by thin labour markets in these sectors. While higher wages can attract
more people into those sectors in the medium and long term, they can have adverse
short-term effects as teachers and health workers may be taken away from existing
providers. These issues are reviewed in detail in the accompanying papers on
health and education.

25

D. PLAN OF ACTION
74. Economic growth is crucial for making sustained progress towards the MDGs.
This paper outlined the causal links between growth and human development. An
excessive emphasis on improving one or two sectoral outcomes while neglecting
broader development issues is unlikely to be sustainable. Increased aid is required
both for stimulating growth and for raising levels of public expenditure on health andeducation. While private resources drive development efforts in many parts of thedeveloping world, sustained flows of predictable aid are required to accelerate
progress in low-income countries, particularly in Africa.
75.
Given the linkages between growth and human development, what should bedone to ensure that additional resources are directed to productive uses? Below, wesuggest five areas for action:
1. Economic growth and poverty reduction are closely linked. Higher rates of
economic growth will improve health and education outcomes and vice versa.
This means that development strategies to improve health and education
outcomes should also be concerned with the role of economic growth
and the conditions necessary for enhancing economic growth. The current
poverty reduction strategy (PRS) approach provides a good foundation for
doing so. This implies that donors need to pay more attention to issues ofpolicy coherence that goes beyond achieving improved sector outcomes. For
many partner countries, accelerating growth and development calls for
significant resource increases. While aid can provide some of theseresources, clear strategies are needed for raising domestic revenues over the
medium-to-long term.
2. Higher rates of economic growth require action to overcome the main
country-level constraints and to strengthen the drivers of growth. Sustainableeconomic growth depends on a dynamic private sector. This requires a goodinvestment climate, which does not distort incentives and avoids onerous
and unnecessary bureaucracy. The World Bank’s Africa Action Plan also
proposes creating an export push, to support regional integration and to build
the skills necessary for economic growth, particularly through expanding
post-primary education.81 Other priorities include: support for trade andregional integration, strengthening of financial sectors (including throughmicrofinance) and raising agricultural productivity (including through improved
science and technology).
3. Good infrastructure is important for both growth and poverty reduction. It
plays a key role in facilitating the two-way causality between growth andhuman development. Greater investment in infrastructure is critical.
i. Many countries are not dedicating sufficient resources to infrastructure
investments (see paragraph 39 for estimates of the required spending).

26

The private sector can make an important contribution; models thatcombine private and public resources can help to meet essential needs.
But in many low-income countries, donors can play an important role infilling the investment gaps. The World Bank’s Africa Action Plan estimatesthat of the additional $25 billion of annual aid to Africa by 2010, $69 billion should be allocated to infrastructure.82
ii. Improved infrastructure also requires integrated planning across thevarious components and sectors at the country level. This is essential toensure that limited resources are used to best effect. It is also important tobalance investments by paying attention to the complementarities
between interventions, say in electricity and water. A new regional
mechanism is the Africa Infrastructure Consortium, which brings together
key African institutions and donors. It will focus on reducing constraints toinfrastructure development and ensure that funding is matched withprioritised infrastructure projects.
4. We also need a better understanding of how we can support theparticipation of poor people in economic growth. This calls for policies toempower poor people, and women in particular, in ways that go beyond
improving access to health and education services. For example, increasedsocial protection is a crucial element of a growth and human development
strategy even in very low-income countries, and not an extravagance that
only rich countries can afford.
5. There is also a need to facilitate absorptive capacity in recipient
countries. This includes channelling aid towards expanding productive
capacity and managing resource inflows well. Trade policies should facilitate
imports and reduce export disincentives to mitigate the appreciating impact ofincreased aid flows on real exchange rates. Better monetary management by
central banks should seek to manage exchange rate volatility, avoid highinflation, and not crowd out private investment. Increased investments ininfrastructure, human development and professional skills training should
help to ensure that aid is used productively and expands existing capacities.

27

1

Ravallion, M (2001), ‘Growth, inequality and poverty: looking beyond the averages’, World Development, Vol.
29 (11), pp. 1803-1815
2
Dollar, D and A Kraay (2001), ‘Growth is good for the poor’, World Bank Research Group, Washington, DC,mimeo
3Operationalising Pro-Poor Growth (OPPG) Programme (2005), ‘Pro-Poor Growth in the 1990s: lessons andinsights from 14 countries’, a joint research initiative of Agence Francaise de Developpement, German
Development Policy, UK Department for International Development and the World Bank, Washington, DC
4
Operationalising Pro-Poor Growth (OPPG) Programme (2005), ‘Pro-Poor Growth in the 1990s: lessons andinsights from 14 countries’, a joint research initiative of Agence Francaise de Developpement, German
Development Policy, UK Department for International Development and the World Bank, Washington, DC
5
DFID (2005), ‘In and Up: How to reduce poverty by tackling social exclusion’, DFID’s draft position paper; thispaper takes the following definition of social exclusion: 'social exclusion describes the experience of groups
whoa re systematically disadvantaged because they are discriminated against on the basis of their race, religion,
gender, caste, age disability, sexual orientation, health or social status, migrant status or where they live.'
6
UNDP (2004), ‘Human Development Report 2004’, United Nations Development Programme, New York
7
Lustig, N, O Arias and J Rigolini (2002), ‘Poverty reduction and growth: a two-way causality’, Sustainable
Development Department, Technical Paper Series, Inter-American Development Bank, Washington, DC;
Operationalising Pro-Poor Growth (OPPG) Programme (2005), ‘Pro-Poor Growth in the 1990s: lessons andinsights from 14 countries’, a joint research initiative of Agence Francaise de Developpement, German
Development Policy, UK Department for International Development and the World Bank, Washington, DC
8Operationalising Pro-Poor Growth (OPPG) Programme (2005), ‘Pro-Poor Growth in the 1990s: lessons andinsights from 14 countries’, a joint research initiative of Agence Francaise de Developpement, German
Development Policy, UK Department for International Development and the World Bank, Washington, DC
9
UNDP (2000), ‘Human Development Report 2000’, United Nations Development Programme, New York
10
UNDP (1996), ‘Human Development Report 1996’, United Nations Development Programme, New York
11
UNDP (2004), ‘Human Development Report 2004’, United Nations Development Programme, New York
12
Lustig, N, O Arias and J Rigolini (2002), ‘Poverty reduction and growth: a two-way causality’, Sustainable
Development Department, Technical Paper Series, Inter-American Development Bank, Washington, DC
13
UNDP (1996), ‘Human Development Report 1996’, United Nations Development Programme, New York
14
Wilhelm, V and I Fiestas (forthcoming), ‘Exploring the link between public spending and poverty reduction:
lessons from the 1990s’, World Bank Institute, Washington, DC
15
Wilhelm, V and I Fiestas (forthcoming), ‘Exploring the link between public spending and poverty reduction:
lessons from the 1990s’, World Bank Institute, Washington, DC
16
See Wilhelm, V and I Fiestas (forthcoming), ‘Exploring the link between public spending and poverty
reduction: lessons from the 1990s’, World Bank Institute, Washington, DC for a summary of the evidence.
17
Herrera and Pang (2004) Efficiency of Public Spending in Developing Countries: An Efficiency Frontier
Approach, World Bank Policy Research Working Paper No. 3645, World Bank, Washington, DC
18
Wilhelm, V and I Fiestas (forthcoming), ‘Exploring the link between public spending and poverty reduction:
lessons from the 1990s’, World Bank Institute, Washington, DC
19
Leipziger et al., (2003) Achieving the Millennium Development Goals: The Role of Infrastructure, World Bank
Policy Research Working Paper No. 3163, World Bank, Washington, DC
20
Van de Walle, (2000) Are Returns to Investment Lower for the Poor? Human and Physical Capital Interactions
in Rural Vietnam, World Bank Policy Research Working Paper No. 2425, World Bank, Washington, DC
21
Klasen (2005) Pro Poor Growth and Gender: What can we learn from the Literature and the OPPG Case
Studies? Paper prepared for the Operationalising Pro-Poor Growth (OPPG) Programme, a joint research
initiative of Agence Francaise de Developpement, German Development Policy, UK Department for International
Development and the World Bank, Washington, DC
22
Lustig, N, O Arias and J Rigolini (2002), ‘Poverty reduction and growth: a two-way causality’, Sustainable
Development Department, Technical Paper Series, Inter-American Development Bank, Washington, DC
23
Bourguignon, Ferreira and Leite, (2002) Ex-Ante Evaluation of Conditional Cash Transfer Programs: The
Case of Bolsa Escola, World Bank Policy Research Working Paper No. 2916, World Bank, Washington, DC assummarised in Wilhelm and Fiestas, forthcoming
24
Glewwe, P and H G Jacoby (2004), ‘Economic growth and the demand for education: is there a wealtheffect?’, Journal of Development Economics, Vol. 74, pp. 33-51
25
UNDP (1996), ‘Human Development Report 1996’, United Nations Development Programme, New York
26
Jacoby and Skoufias, (1997) Risk, Financial Markets and Human Capital in a Developing Country, Review of
Economic Studies. Vol 64 (3) pp. 311-335.
27
Wilhelm, V and I Fiestas (forthcoming), ‘Exploring the link between public spending and poverty reduction:
lessons from the 1990s’, World Bank Institute, Washington, DC

28

28

Gyimah-Brempong and Wilson, (2004) Health Human Capital and Economic Growth: A Comparative Study,
Quarterly Review of Economics and Finance, Vol 44 (2), pp. 296-320
29
Jung and Thorbecke, (2001) The Impact of Public Education Expenditure on Human Capital, Growth, andPoverty in Tanzania and Zambia: A General Equilibrium Approach, International Monetary Fund Working Papers
No. 01/106, International Monetary Fund, Washington, DC
30
Noorbakhsh, F, A Paloni and A Youssef (2001), ‘Human Capital and FDI inflows in developing countries: newempirical evidence’, World Development, Vol. 29 (9), pp. 1593-1610
31
Lustig, N, O Arias and J Rigolini (2002), ‘Poverty reduction and growth: a two-way causality’, Sustainable
Development Department, Technical Paper Series, Inter-American Development Bank, Washington, DC
32
Sen, B (2005), ‘Operationalising Pro-Poor Growth: Bangladesh Case Study’, see endnote 2.
33
Lustig, N, O Arias and J Rigolini (2002), ‘Poverty reduction and growth: a two-way causality’, Sustainable
Development Department, Technical Paper Series, Inter-American Development Bank, Washington, DC
34
Klasen, S (2005), Operationalsing Pro-Poor Growth: Background Paper on Gender’, see endnote 2.
35
The Human Development Report 1996 (UNDP, 1996) discusses necessary conditions in detail.
36
This framework is based on Stern, Dethier, and Rogers (2005), ‘Growth and Empowerment: Making
Development Happen’, MIT Press, Cambridge
37
World Bank (2001), ‘Strategic Framework’,
http://siteresources.worldbank.org/EXTABOUTUS/Resources/strategic.pdf; OECD, 2005; DFID, 2004
38
Stern, Dethier, and Rogers (2005), ‘Growth and Empowerment: Making Development Happen’, MIT Press,
Cambridge
39
See World Development Report 2005 (World Bank, 2004) for an overview.
40
World Bank, 2004 (WDR 2005 draws on surveys of over 30,000 firms in 53 countries)
41
For example, see Levine, R (1997) Financial development and economic growth: Views and agenda. Journalof Economic Literature, Jun97, Vol. 35 Issue 2, pp.688-729.
42e.g. Child Labor: The Role of Financial Development and Income Variability across Countries. By: Dehejia,
Rajeev H.; Gatti, Roberta. Economic Development & Cultural Change, Jul2005, Vol. 53 Issue 4, p913-932, 20p;
(AN 17484897); Beegle, Kathleen, Dehejia, Rajeev H. and Gatti, Roberta (2003) Child Labor, Crop Shocks, andCredit Constraints. NBER Working Paper No. W10088.[online] Available at: http://ssrn.com/abstract=467556
43World Bank (2004a) World Development Report 2005: A better Investment Climate for All, Washington DC
44
Ndulu, B. (2004) The Challenges for Improving Access to Infrastructure Services in Africa, Background paper
prepared for the Commission for Africa; World Bank (2004b) Doing Business in 2004 Understanding
Regulations, Oxford: Oxford University Press; African Development Bank (1999) African Development Bank
Report 1999: Infrastructure Development in Africa, New York: Oxford
45
Willoughby, C (2004) Infrastructure and the Millennium Development Goals. Paper commissioned by DFID
for the DAC POVNET Task Force on Infrastructure for Poverty Reduction, London: DFID
46
Commission for Africa (2005) Going for Growth and Poverty Reduction. Chapter 7, p.233 in: Our Common
Interest: Report of the Commission for Africa, London: Commission for Africa
47
Commission for Africa (2005) Going for Growth and Poverty Reduction. Chapter 7, p.23 in: Our Common
Interest: Report of the Commission for Africa, London: Commission for Africa
48
Milner, C, O Morrisey and N Rudaheranwa (2000) Policy and Non-Policy Barriers to Trade and Implicit
Taxation of Exports in Uganda, Journal of Development Studies, 37(2):pp.67-90.
49
ILO (2003) Thematic evaluation report: employment-intensive investment and poverty alleviation, Committee
on Technical Cooperation, Geneva: ILO.
50
Operationalising Pro-Poor Growth (OPPG) Programme (2005), ‘Pro-Poor Growth in the 1990s: lessons andinsights from 14 countries’, a joint research initiative of Agence Francaise de Developpement, German
Development Policy, UK Department for International Development and the World Bank, Washington, DC
51
World Bank Water Resources Sector Strategy, 2004
52
Much of the underinvestment is the result of the mistaken belief in the 1980s and 1990s that infrastructure
requirements would largely be met by investments by the private sector. Evidence for Africa shows that theprivate sector is unlikely to be responsible for providing more than a 25 per cent of the major infrastructure
investment requirements (Estache and Ypes, 2004).
53
Briceno-Garmendia C, A Etsache and N Shafik (2004), ‘Infrastructure Services in Developing Countries:
Access, Quality, Costs and Policy Reform’, World Bank Policy Research Paper 3468, December
54
Commission for Africa (2005), ‘Our Common Interest: Report of the Commission for Africa’, London
55
Estache, A and T Yepes (2004) What’s the State of Africa’s Infrastructure? Quantitative Snapshots, World
Bank, Background Paper, prepared for Commission for Africa, OECD-POVNET Infrastructure Task Force andnd
2 World Bank-IMF Global Monitoring Report; Absorbing this amount would stretch capacity. US$10 billion ayear, while still ambitious, would be more feasible. This should cover not only expenditure in new investment,
but also important operational and maintenance costs. Past neglect of the recurrent cost requirements ofinfrastructure has left potentially valuable projects in a useless state of disrepair.

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World Bank (2005), ‘Strengthening the development partnership for achieving the MDGs: An Africa Action
Plan’, Washington DC
57
World Bank (2004), ‘World Development Report 2005’, Washington DC
58
World Bank (2004), ‘World Development Report 2005’, Washington DC
59
World Bank (2003), ‘World Development Report 2004’, Washington DC
60
Stern, Dethier, and Rogers (2005), ‘Growth and Empowerment: Making Development Happen’, MIT Press,
Cambridge, p. 138.
61
DFID draft position paper on Social Exclusion
62
Klasen, S (2005), Operationalsing Pro-Poor Growth: Background Paper on Gender’, see endnote 2.
63
Stefan Dercon, Oxford University, Presentation at the DFID Economist’s Retreat July 2005. See also Dercon,
Stephan 2004 Risk, Poverty and Public Action
64
Tackling Chronic Poverty: the Role of Social Transfers DFIF Position Paper Draft 6 July 200565
Stefan Dercon, Oxford University, Presentation at the DFID Economist’s Retreat July 2005. See also Dercon,
Stephan 2004 Risk, Poverty and Public Action
66
See the wealth of information contained in the two volumes by Foster, M (2003) “The Case for Increased Aid”,
DFID Final Report, London.
67
See Commission for Africa (2005:307-311, 316-323)
68
Collier, P and D Dollar (2002) “Aid Allocation and Poverty Reduction”, European Economic Review, Vol.46 (8),pp.1475-1500.
69
Clemens, M A, S Radelet and R Bhavnani (2004) “Counting chickens when they hatch: The short-term effectof aid on growth”, Working Paper Nr. 44, July 2004, Centre for Global Development, Washington DC.
70
The true figures are likely to be even smaller as domestic investment is notoriously underreported, e.g. it does
not include investment carried out by enterprises in the informal sector.
71
The Africa Centre website, ‘Mobilising External Resources for Domestic Investment in Africa’; see also
Commission for Africa Report (2005: 302-304)
72
See for example the June 2004 edition of the Economic Journal, of which a large part is dedicated to aid
effectiveness issues.
73
World Bank (2004) “Aid Effectiveness and Financing Modalities”, Annual Meetings Paper for discussion by
the Development Committee, October 2, The World Bank, Washington, DC
74
Collier, P and D Dollar (2004) “Development Effectiveness: What have we learnt?” Economic Journal, vol.
114 (June), pp. 244-271.
75
Elbadawi, I and A Gelb (2003) “Financing Africa's Development: Towards a Business Plan?” in Vande Walle,
N, N Ball and V Ramachandran, “Beyond Structural Adjustment – The Institutional Context of African
Development”, Palgrave, Macmillan.
76
See for example Adam, C and D Bevan (2004), “Aid and the Supply Side: Public Investment, Export
Performance and Dutch Disease in Low Income Countries”, Department of Economics, Discussion Paper Series
No.201, University of Oxford, Oxford. Also Nkusu, M (2004), “Financing Uganda’s Poverty Reduction Strategy:
Is Aid Causing more Pain than Gain?”, IMF Working Paper 04/170, IMF, Washington DC.
77
For if fewer units of foreign currency are sold and converted into domestic currency, it will dampen the
demand created for goods and services produced locally. In turn, given tight domestic supplies in the short run,this will put less pressure on prices to rise.
78
OECD/DAC (2005) CHAIR'S SUMMARY: SENIOR LEVEL FORUM ON DEVELOPMENT EFFECTIVENESSIN FRAGILE STATES, 13-14 January, London
79
Chauvet, L and P Collier (2005) Development effectiveness in Fragile States: Spillovers and Turnarounds.
Background paper prepared for the OECD/DAC Senior Level Forum on Development Effectiveness in Fragile
States, 13-14 January, London
80
Martínez, J and Martineau, T (1998) Re-thinking human resources: an agenda forthe millennium, Health Policy and Planning 13(4), pp.345-358.; Bach, 2000
81
World Bank (2005), ‘Strengthening the development partnership for achieving the MDGs: An Africa Action
Plan’, Washington DC
82
World Bank (2005), ‘Strengthening the development partnership for achieving the MDGs: An Africa Action
Plan’, Washington DC

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