APPLIED MICRO: The Effect of Foreign Aid on Migration and Development: Global Micro Evidence from World Bank Projects; Professor Andre Groeger (Universitat Autònoma de Barcelona (UAB))

Abstract

Foreign aid is likely the most important policy instrument employed by high-income countries to foster human development in low- and middle-income countries. In response to surging immigration pressure in Europe and the USA, policymakers have started promoting foreign aid to address the "root causes" of migration. However, in contrast to this apparent political consensus that foreign aid is effective, the scientific evidence on the effect of aid on development and migration is incomplete and inconclusive. We provide first global micro evidence on these effects by combining exceptionally rich survey data from a sample of almost one million individuals across the entire developing world with newly geocoded data on World Bank project allocation at the sub-national level over the period 2008-2019 and migration and asylum seeker flow data from the developing world to high-income countries. Using two independent causal estimation strategies, we show that, in the short-term (up to 2 years after the start of the project), foreign aid improves people's aspirations about their life in aid recipient areas and leads to a decrease in individual migration preferences and asylum seeker flows. In the medium-term (3 to 5 years after), however, short-term "optimism" disappears and foreign aid then leads to improvements in individual welfare (measured by poverty and income) that translate into increasing regular migration flows to high-income countries. We provide extensive evidence on the heterogeneities of these effects, e.g., by world region, aid target sector, and individual characteristics. Our results confirm that foreign aid, on average, is effective in improving peoples' attitudes regarding local living conditions and individual welfare. The "root causes" effect of aid exists and unfolds mainly through lower asylum seeker flows. However, it is short-lived, and does not "work" in policymakers' target areas, i.e., in fragile development contexts. In contrast, foreign aid improves individual capabilities in the longer term which translates into increased regular migration as postulated by the "mobility transition" theory.