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Decentralization and Foreign Aid Effectiveness: Do Aid Modality and Federal Design Matter in Poverty Alleviation?

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  • Christian Lessmann
  • Gunther Markwardt

Abstract

This paper empirically studies the impact of decentralization on foreign aid effectiveness. For this purpose, we examine a commonly used empirical growth model, considering aid modality as well as different measures of political and fiscal decentralization. Our panel estimations reveal that fiscal decentralization negatively impacts aid effectiveness, while measures of political decentralization have no significant effect or even a positive one. This result is robust for grants and overall ODA, while the growth impact of other aid types is not generally conditional on decentralization. We therefore conclude that donor countries should carefully consider how both anti-poverty instruments - foreign assistance and decentralization - work together.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-04/cesifo1_wp3035.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3035.

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Date of creation: 2010
Date of revision:
Handle: RePEc:ces:ceswps:_3035

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Related research

Keywords: foreign aid; growth; decentralization;

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References

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  1. Chang, Charles C. & Fernandez-Arias, Eduardo & Serven, Luis, 1999. "Measuring aid flows : a new approach," Policy Research Working Paper Series 2050, The World Bank.
  2. Lessmann, Christian & Markwardt, Gunther, 2008. "One size fits all? Decentralization, corruption, and the monitoring of bureaucrats," Dresden Discussion Paper Series in Economics 14/08, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  3. Hristos Doucouliagos & Martin Paldam, 2005. "The Aid Effectiveness Literature. The Sad Result of 40 Years of Research," Economics Working Papers 2005-15, School of Economics and Management, University of Aarhus.
  4. Tao Zhang & Heng-fu Zou, 1996. "Fiscal decentralization, public spending, and economic growth in China," Policy Research Working Paper Series 1608, The World Bank.
  5. Iimi, Atsushi, 2005. "Decentralization and economic growth revisited: an empirical note," Journal of Urban Economics, Elsevier, vol. 57(3), pages 449-461, May.
  6. Muhammed Islam, 2005. "Regime changes, economic policies and the effect of aid on growth," Journal of Development Studies, Taylor & Francis Journals, vol. 41(8), pages 1467-1492.
  7. Gary Woller & Kerk Phillips, 1998. "Fiscal decentralisation and IDC economic growth: An empirical investigation," Journal of Development Studies, Taylor & Francis Journals, vol. 34(4), pages 139-148.
  8. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages F191-F216, 06.
  9. Hristos Doucouliagos & Martin Paldam, 2009. "Development Aid and Growth: An association converging to zero," Economics Working Papers 2009-17, School of Economics and Management, University of Aarhus.
  10. Pranab Bardhan, 2002. "Decentralization of Governance and Development," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 185-205, Fall.
  11. Mark McGillivray & Simon Feeny & Niels Hermes & Robert Lensink, 2006. "Controversies over the impact of development aid: it works; it doesn't; it can, but that depends …," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(7), pages 1031-1050.
  12. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June Cita.
  13. Annen Kurt & Kosempel Stephen, 2009. "Foreign Aid, Donor Fragmentation, and Economic Growth," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-32, August.
  14. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
  15. Jan K. Brueckner, 1999. "Fiscal Decentralization in Developing Countries: The Effects of Local Corruption and Tax Evasion," CEMA Working Papers 1, China Economics and Management Academy, Central University of Finance and Economics, revised Apr 2000.
  16. Swaroop, Vinaya & Jha, Shikha & Sunil Rajkumar, Andrew, 2000. "Fiscal effects of foreign aid in a federal system of governance: The case of India," Journal of Public Economics, Elsevier, vol. 77(3), pages 307-330, September.
  17. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  18. Fan, C. Simon & Lin, Chen & Treisman, Daniel, 2009. "Political decentralization and corruption: Evidence from around the world," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 14-34, February.
  19. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 17-41.
  20. George Economides & Sarantis Kalyvitis & Apostolis Philippopoulos, 2008. "Does foreign aid distort incentives and hurt growth? Theory and evidence from 75 aid-recipient countries," Public Choice, Springer, vol. 134(3), pages 463-488, March.
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Cited by:
  1. Christian Lessmann & Gunther Markwardt, 2009. "Aid, Growth and Devolution," CESifo Working Paper Series 2805, CESifo Group Munich.
  2. Axel Dreher & Silvia Marchesi, 2013. "Information transmission and ownership consolidation in aid programs," Working Papers 255, University of Milano-Bicocca, Department of Economics, revised Oct 2013.
  3. Ruerd RUBEN, 2012. "Dimensionner l'aide au développement : ce que nous enseigne l'évaluation. Dimensioning Development Aid: Some Lessons from Evaluation," Revue d’économie du développement, De Boeck Université, vol. 26(4), pages 95-123.

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