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

Understanding the role of foreign aid in poverty alleviation is one of the central inquiries for development economics. To augment past crosscountry studies and randomized evaluations, 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 and impact of health aid, water aid, and education aid. Both instrumentation and propensity score matching methods are used in the impact models to adjust for aid being allocated non-randomly. Aid types are positively correlated, but other covariates of diarrhea incidence, geographic region, and rural setting, differed in their relationships with aid allocation. A significant, positive effect of health aid on decreasing disease severity and a significant, positive effect of water aid on decreasing diarrhea incidence were estimated through both instrumentation and propensity score matching. An appropriate instrument for education aid could not be determined, but propensity score matching methods estimated 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. JEL classification: F35; O12; I15; I25; I32