Aid and the Millennium Development Goal poverty target: How much is required and how should it be allocated?

This paper uses econometric estimates of the link between aid and economic growth to ask how much additional aid is required to meet the Millennium Development Goal of halving global poverty by 2015, and how this aid should be allocated across countries. It first shows that a large increase in existing aid levels can be justified to halve $1-a-day poverty by 2015, on a country-by-country basis, under the econometric estimates obtained by Hansen & Tarp (2001 Hansen, H. and Tarp, F. 2001. Aid and growth regressions. Journal of Development Economics, 64: 547–570. , Journal of Development Economics, 64, pp. 547–570) and Lensink & White (2001 Lensink, R. and White, H. 2001. Are there negative returns to aid?. Journal of Development Studies, 37: 42–65. , Journal of Development Studies, 37, pp. 42–65), but not those of Collier & Dollar (2002 Collier, P. and Dollar, D. 2002. Aid allocation and poverty reduction. European Economic Review, 46: 1475–1500. , European Economic Review, 46, pp. 1475–1500). The paper then shows that, even where an increase in existing aid levels can be justified, a much larger number of people—up to around 70 million—could be lifted out of poverty by 2015 if aid was instead allocated on a poverty-efficient basis. This cautions against the use of a country-by-country target approach when allocating aid across recipient countries.