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Blog post

A risky proposition? Australian aid loans and the Pacific

International relations Foreign aid Financial risks Australia Pacific Area

The Australian government is about to start lending money to the Pacific as part of a new aid initiative intended to help with infrastructure in the region. With Australia poised to start lending, the question needs to be asked: are the loans likely to work? Our analysis of the effectiveness of loans in the Pacific has led us to conclude Australia needs to proceed with considerable care.

Our analysis involved a global dataset of nearly 18,000 aid projects. The dataset covers a number of donors and has its origins Dan Honig’s impressive book Navigation by Judgement. (To learn about the data, see the note at the end of this post.) Each project in the dataset comes with a score of how effective it was. These scores come from donors’ project assessments (conducted by donor staff or external evaluators).

As Honig points out in his book, there’s an obvious problem with project assessments: owing to political and organisational incentives, donor staff and evaluators probably appraise projects too kindly. This is an issue, but as long as this inflation occurs roughly equally across projects, we can still use differences between projects to learn when, why and where projects are likely to succeed.

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