Abstract:
The relationship between foreign aid and economic development has been
investigated extensively with the use of cross-country macro data, but the findings
have remained inconclusive. The literature points to a number of problems with crosscountry
studies, such as a lack of reliable and comparable data. Using micro-data, this
study revisits the above relationship in a context of Sri Lanka depending markedly on
foreign aid to pursue economic development. Specifically, it examines the impact of a
foreign aid funded development project. This particular projecthas been in operation
for over eight years in selected DS Divisions in the Kandy, Kegalle, Nuwara Eliya,
and Monaragala Districts, and has assisted beneficiaries through a number of
interventions such as tea and rubber outgrowing, entrepreneurship development, and
social capital formation. In its analysis, this study triangulated evidence from different
sources, namely a household survey, in-depth and key-informant discussions—
covering both beneficiary and non-beneficiary households—and project monitoring
and evaluation records. In particular, the study employed a quasi-experimental design
based on the Propensity Score Matching approach. Results indicate that the average
household per capita consumption and income, for both beneficiary and nonbeneficiary
households, had significantly improved during the project period 2008-
2016. More importantly, per capita consumption and income of the project
beneficiary households had increased much faster than that of the non-beneficiary
households. In addition, beneficiary households had significantly improved their
housing conditions, household assets, and access to basic facilities when compared
with non-beneficiary households. Moreover, results indicate differential impacts
across different districts and intervention types. Nevertheless, evidence suggests that
the project had failed to achieve its intended development objectives to their
maximum level. In other words, the project failed to achieve the rate of return
expected at the beginning of the project, thereby highlighting the existence of suboptimal
utilization of foreign funds.
