Foreign Aid Allocation and Impact: A Sub-National Analysis of Malawi

Abstract

This project estimates the first sub-national model of foreign aid allocation and impact. Newly geocoded aid project data from Malawi is used in combination with multiple rounds of living standards data to predict the allocation of health aid, water aid, and education aid. In addition, the impacts of the three aid categories are detected using both instrumentation and propensity score matching methods to adjust for aid being allocated non-randomly. The three allocation models varied greatly with respect to the significant predictive covariates of diarrhea incidence, geographic region, and rural setting, but other aid allocation was a positive predictor in all three models such that areas receiving health aid were likely to also receive substantial water aid and education aid. A significant, positive effect of health aid on decreasing disease severity and a significant, positive effect of water aid on decreasing diarrhea incidence were found through both instrumentation and propensity score matching. An appropriate instrument for education aid could not be determined, but propensity score matching methods found a positive effect of education aid on school enrollment. These results suggest that foreign aid plays a useful role in poverty alleviation in Malawi and that governments should use information about local disease severity, diarrhea incidence, and school enrollment to allocate different aid types more efficiently.