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A risky proposition? Australian aid loans and the Pacific

By Terence Wood and Sabit Otor

The Australian government is about to start lending money to the Pacific as part of a new aid initiative intended to help with infrastructure in the region. With Australia poised to start lending, the question needs to be asked: are the loans likely to work? Our analysis of the effectiveness of loans in the Pacific has led us to conclude Australia needs to proceed with considerable care.

Our analysis involved a global dataset of nearly 18,000 aid projects. The dataset covers a number of donors and has its origins Dan Honig’s impressive book Navigation by Judgement. (To learn about the data, see the note at the end of this post.) Each project in the dataset comes with a score of how effective it was. These scores come from donors’ project assessments (conducted by donor staff or external evaluators).

As Honig points out in his book, there’s an obvious problem with project assessments: owing to political and organisational incentives, donor staff and evaluators probably appraise projects too kindly. This is an issue, but as long as this inflation occurs roughly equally across projects, we can still use differences between projects to learn when, why and where projects are likely to succeed.

Because we were interested in what more lending might mean for the Pacific, we conducted analysis focused on the loan-funded projects in the dataset (11,821 projects) and we compared average assessments between the Pacific and the rest of the developing world.

You can see the results of this comparison in the chart below. Assessments range from one to six, with higher being better.

Loan effectiveness: the Pacific and rest of developing world

The chart shows that, on average, the assessed outcomes of aid projects funded through loans are worse in the Pacific than they are elsewhere. The difference is statistically significant.

The average project in …read more

From:: Development Policy Centre – DEVPOLICY Blog

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