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Aid, Growth and Devolution

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  • Lessmann, Christian
  • Markwardt, Gunther

Abstract

This paper examines whether the degree of fiscal decentralization in aid-receiving countries matters in explaining aid effectiveness. The decentralization theorem predicts that the devolution of powers should increase aid effectiveness, since local decision-makers are better informed about local needs. Thereby decentralization may also have reverse effects, e.g., through coordination problems, excessive regulation, administrative costs, and local capture. We use panel data for up to 60 countries and find that aid contributes to economic growth in centralized developing economies. Whereas it is less effective or even harmful in decentralized countries. The cases of Indonesia, the Philippines, and Uganda support our findings. Our results imply that donor countries should carefully consider how the two development instruments—foreign aid and decentralization—interact.

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Bibliographic Info

Article provided by Elsevier in its journal World Development.

Volume (Year): 40 (2012)
Issue (Month): 9 ()
Pages: 1723-1749

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Handle: RePEc:eee:wdevel:v:40:y:2012:i:9:p:1723-1749

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Web page: http://www.elsevier.com/locate/worlddev

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Keywords: foreign aid; growth; decentralization;

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Cited by:
  1. Aurore Gary & Mathilde Maurel, 2013. "The effect of donors' policy coherence on growth," Documents de travail du Centre d'Economie de la Sorbonne 13046, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Aurore Gary & Mathilde Maurel, 2013. "The effect of donors' policy coherence on growth," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00825816, HAL.
  3. Lessmann, Christian & Markwardt, Gunther, 2010. "Fiscal federalism and foreign transfers: does inter-jurisdictional competition increase foreign aid effectiveness?," Dresden Discussion Paper Series in Economics 10/10, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.

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