shocks in industrialized or rapidly growing countries can be transmitted to smaller countries less well-equipped to cope with them. The ripple effects of the East Asian and Russian crises of the late 1990s and the financial crisis of 2008-2009 demonstrated this all too well. Similarly, trade and aid can benefit poor countries, but unexpected drops in either—perhaps caused by economic decline in rich countries or new waves of protectionism—will have destabilizing effects on their economies. Such shocks could drag many poor countries back below the threshold of sustainable debt. Poor countries also suffer from migration barriers and credit constraints that keep unskilled labor from flowing out, while highly educated people exit freely and in large numbers.

Globalization brings other public ills. Among them is the damage that economic growth inflicts on the environment, both in developed and developing countries, particularly through greenhouse gas emissions. Breaches in security are also being felt as a global public bad, and the imbalance of global development has been blamed for it. It is certainly difficult to trace all international security problems directly to economic development issues, but the links are obvious in several instances: national conflicts spilling over to neighbors and forcing foreign intervention, and failed states threatening global stability.

# 2.6 Aid Effectiveness

Does aid promote development, and if so, under what circumstances? The large literature on these questions before the mid-1990s (which consisted mostly in cross-country regressionbased assessments of the role of aid) was particularly inconclusive: while some studies found no impact, others found that aid generally fostered growth. But since the late 1990s, empirical studies by researchers from the World Bank and elsewhere have laid out a more nuanced position. On average, aid spurs growth and poverty reduction in countries with better institutions and policies, but it is squandered in poor policy and institutional environments.

In 1998 the Bank published its influential Policy Research Report, _Assessing Aid_ , which developed this logic and argued that foreign aid would have a greater impact on poverty reduction if it were focused on poor countries with stronger economic institutions and policies. The recognition that the effects of aid depended heavily on the environment was a major step forward. While this empirical judgment has not gone unchallenged by other researchers, new studies also tend to find a beneficial effect of aid, differing primarily on how much the beneficial results depend on the environment. On this point, case-study evidence seems more consistent with the _Assessing Aid_ argument.

A second major advance has been the recognition that successful development assistance requires a conducive political economy in the recipient country. The failure of many structural adjustment programs in the 1980s, whether because of flawed design or poor implementation, underlined the country ownership of reforms. Empirical evidence suggested strongly that conditions on loans—that is, promises of future reforms—were far less reliable as guides to the borrower’s reform commitment than past actions. As a result, the extensive use of conditionality fell out of favor with development thinkers. New studies provided evidence that aid was highly fungible: foreign aid to one sector often had the effect of financing investments in another sector on the margin, because the recipient government could redeploy its own resources from the first sector to the second, undermining the intent of the donor. For development assistance to make a positive contribution, therefore, it was 10