Working Paper: NBER ID: w14690
Authors: Angus S. Deaton
Abstract: There is currently much debate about the effectiveness of foreign aid and about what kind of projects can engender economic development. There is skepticism about the ability of econometric analysis to resolve these issues, or of development agencies to learn from their own experience. In response, there is movement in development economics towards the use of randomized controlled trials (RCTs) to accumulate credible knowledge of what works, without over-reliance on questionable theory or statistical methods. When RCTs are not possible, this movement advocates quasi-randomization through instrumental variable (IV) techniques or natural experiments. I argue that many of these applications are unlikely to recover quantities that are useful for policy or understanding: two key issues are the misunderstanding of exogeneity, and the handling of heterogeneity. I illustrate from the literature on aid and growth. Actual randomization faces similar problems as quasi-randomization, notwithstanding rhetoric to the contrary. I argue that experiments have no special ability to produce more credible knowledge than other methods, and that actual experiments are frequently subject to practical problems that undermine any claims to statistical or epistemic superiority. I illustrate using prominent experiments in development. As with IV methods, RCT-based evaluation of projects is unlikely to lead to scientific progress in the understanding of economic development. I welcome recent trends in development experimentation away from the evaluation of projects and towards the evaluation of theoretical mechanisms.
Keywords: Foreign Aid; Economic Development; Randomized Controlled Trials; Instrumental Variables
JEL Codes: C21; C31; C9; C93; O11; O12; O19; O22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign aid (F35) | economic growth (O49) |
| economic performance (P17) | amount of aid received (F35) |
| instruments (population size, country dummies) (C80) | exogeneity (C51) |
| average treatment effect from RCTs (C90) | complete picture of causal mechanisms (C90) |
| RCTs (C90) | credible knowledge (D80) |