Will this time be different? Financial crises and aid collapses over the last 30 years.

What impact do financial crises in rich countries have on their aid budgets? You would probably expect them to lead to a big bank bailout, producing a debt burden and a fiscal hangover, triggering bouts of cabinet infighting over public spending with aid coming off worst (after all, aid beneficiaries aren’t voters, at least in the donor country). Now some World Bank researchers have run the numbers from past financial crises and unfortunately (for aid), they agree.

‘This paper estimates how donor-country banking crises have affected aid flows in the past, using panel data from 24 donor countries between 1977 and 2007. The analysis finds that banking crises in donor countries are associated with a substantial additional fall in aid flows, beyond any income-related effects, perhaps because of the high fiscal costs of crisis and the debt hangover in the post-crisis periods. In most specifications, aid flows from crisis-affected countries fall by an average of 20 to 25 percent (relative to the counterfactual) and bottom out only about a decade after the banking crisis hits.’aid flows after a banking crisis 1977-2007

Here’s what the typical aid trajectory post crisis looks like. On average, aid keeps rising for 2-3 years after the start of the crisis, then goes into freefall for a decade and doesn’t recover its pre-crisis levels until 17 years after the start of the crisis.

In the UK at least, the good news is that both major parties have pledged to stick to ambitious targets for increasing aid despite the crisis. But governments everywhere will need plenty of scrutiny and public pressure if we’re to prove that (as they used to say during the boom years), ‘this time is different’.

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2 Responses to “Will this time be different? Financial crises and aid collapses over the last 30 years.”
  1. Jiesheng

    I think aid flows are more associated with political patterns along side economic boom and bust. But to counter, With the economic bubble in the 1990s, aid flows were instead substantially falling (with the US being the biggest culprit).

    As you noted, the UK political parties are standing by their 0.7% GNI promise. But the UK along with mainly Nordic donor countries may be the only ones willing to still aid to the aid levels. In European countries and especially the US the story is much different. Us politics have always hampered aid flows unless they are more foreign policy objectives.

  2. Cities at the eye of the storm

    The impact of the crisis is often taken from quite a macro level, looking at GDP etc. However the world association of local government (UCLG) undertook a survey of local government in 2009 to look at more local experiences.

    With regional studies and analysis, the report indicates a wide variation in the degree and types of impacts locally. For many countries however, weak decentralisation of powers is impacting local government’s ability to respond to the additional pressures created by the downturn. General conclusions include:

    Local stimulation role – when local government is given the means and the possibility of managing their resources, in keeping with local priorities, they are effective partners in combating the crisis, leveraging economic activity and job growth.

    Enabling local government – the crisis demonstrates failures in decentralisation processes. The weak level of local government control over their own resources and a strong degree of dependence on state transfers makes them vulnerable in times of crisis. This is because national governments are reducing, slowing or simply eliminating the amounts allocated for local government. Thus, under the pretext of crisis, developing countries especially and those in Africa particularly, are finding a regression in decentralisation processes.

    Sustained support – Local authorities feel that the crisis will take time to overcome. This observation leads the local government sector to redouble our efforts to advocate in favour of decentralisation.

    Link to report: http://bit.ly/agsyVV

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