Table of Contents

Handbook on the Economics of Foreign Aid

Handbook on the Economics of Foreign Aid

Edited by B. Mak Arvin and Byron Lew

It would be fair to say that foreign aid today is one of the most important factors in international relations and in the national economy of many countries – as well as one of the most researched fields in economics. Although much has been written on the subject of foreign aid, this book contributes by taking stock of knowledge in the field, with chapters summarizing long-standing debates as well as the latest advances. Several contributions provide new analytical insights or empirical evidence on different aspects of aid. As a whole, the book demonstrate how researchers have dealt with increasingly complex issues over time – both theoretical and empirical – on the allocation, impact, and efficacy of aid, with aid policies placed at the center of the discussion.

Chapter 30: The rise of multi-bi aid and the proliferation of trust funds

Bernhard Reinsberg, Katharina Michaelowa and Vera Z. Eichenauer

Subjects: development studies, development economics, economics and finance, development economics, politics and public policy, international relations


Since the end of the Cold War, development assistance has been transformed in various ways. The aid allocation and the aid effectiveness literature intensively discuss the qualitative reorientation from geopolitical towards actual poverty reduction objectives and the donors’ related geographical and sector choices. The introduction of the Millennium Development Goals (MDGs), the World Bank’s poverty reduction strategies (PRS), and the new principles for aid developed in the context of the Paris Declaration have all triggered important dynamics that also found a corresponding reflection in the literature. In parallel, there has been a much more silent revolution of funding mechanisms, widely discussed within aid agencies, but so far without any significant analysis in the academic literature. While donor countries traditionally face a binary choice between two channels for official development assistance (ODA), namely, the bilateral and the multilateral channel, they now increasingly opt for a combination of the two, generally called ‘multi-bi’ aid. In this context, they channel funds to an international development organization (IDO), a multilateral agency that implements development activities, but without providing the IDO with the authority to spend these funds at its own discretion. Owing to this earmarking to specific areas in which the funds may be used, multi-bi aid differs substantially from traditional core funding to multilaterals. A further difference consists in the voluntary nature of multi-bi contributions that provide much more flexibility to the donor government.