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Aid, Poverty Reduction and the ‘New Conditionality’*


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     This work was carried out under a DFID research programme (R 7617) on ‘Maximising the poverty leverage of aid’. The research assistance of Jennifer Mbabazi and especially Karuna Gomanee was vital, and many thanks are due to them for help with computation and data collection. Thanks are due to Adriaan Kalwij for helpful comments.


The paper examines the effect of aid on poverty, rather than on economic growth. We devise a ‘pro-poor (public) expenditure index’, and present evidence that, together with inequality and corruption, this is a key determinant of the aid's poverty leverage. After presenting empirical evidence which suggests a positive leverage of aid donors on pro-poor expenditure, we argue for the development of conditionality in a new form, which gives greater flexibility to donors in punishing slippage on previous commitments, and keys aid disbursements to performance in respect of policy variables which governments can influence in a pro-poor direction.