Natural Experiments with Foreign Aid

Here is an interesting paper on the rebuilding of Somaliland in the absence of any aid programme. One of the biggest problems we discussed about evaluating the impact of aid is that of omitted variables and reverse causality: is Aid going into poorer, more dysfunctional, or more promising countries/regions to begin with? Also, it is hard to think about a counterfactual: what would have happened to this country in the absence of Aid? We want this counterfactual to be determined exogenously though...if the reason why the country is not receiving Aid is because it has an illuminated, proactive leadership that is trying to show that the country can stand on its own two feet, then it is likely that these governance characteristics play a huge role in growth and development outcomes anyway, regardless of Aid.
While the take-away point from the Somaliland's example should not necessarily be to stop all forms of aid - this may be politically and ethically untenable - it does call out our attention on how to think about mitigating the perverse incentives created by foreign aid, about how much of it is needed, about where can it have the biggest impact, about when it should replace a failed government and when it should just create an enabling environment for the government and its people to thrive.