Looking Ahead Optimally in Allocating Aid

SummaryThe Collier–Dollar approach to aid allocation among countries has been less than fully embraced by donors—even those focused on poverty reduction—partly because it conflicts with the approach to aid allocation implied by the Millennium Development Goals. These two approaches are shown to be special cases of a more general model of aid allocation, in which donors care about future as well as current poverty. This model is illustratively applied to data for developing regions. Adding a poverty decline adjustment to the allocation formulae used by donors could resolve the conflict between the two approaches.