Are the planned increases in aid too much of a good thing?
AbstractDonor countries have committed themselves to increase aid to developing countries by 60 percent over the next five years; and larger increases would be needed to meet the Millennium Development Goals (MDGs). But there are concerns that there may be a limit on the amount of aid that developing countries can absorb and use effectively—and that large aid flows might even be harmful. Could a large increase in aid be “too much of a good thing?” This essay disentangles the seven possible reasons why additional aid might not be effective. These include microeconomic effects (e.g., transactions costs), macroeconomic effects (e.g., ‘Dutch Disease’) and the impact on political economy (e.g., the ‘Resource Curse’). The paper looks at each possible constraint in turn. The paper finds that there are indeed serious obstacles to effective use of increased aid, but that none is immutable. All of the constraints which limit the effective use of additional aid can be addressed by a relatively small set of practical improvements in the way that aid is provided and used. Donors have already committed themselves to a significant program of aid reform. If the measures to which donors are committed were consistently implemented, the seven constraints to effective aid absorption could be relaxed. The paper concludes that, provided increased aid is accompanied by reforms to the way aid is delivered, the capacity of developing countries to absorb and use aid should not be presented as a barrier to the increases in aid which would be needed to meet the MDGs.
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Bibliographic InfoPaper provided by Center for Global Development in its series Working Papers with number 90.
Length: 32 pages
Date of creation: Jul 2006
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Web page: http://www.cgdev.org
Foreign aid; dutch disease; absorption; millenium development goals; transaction costs; resource curse; aid reform;
Find related papers by JEL classification:
- E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- O0 - Economic Development, Technological Change, and Growth - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-08-19 (All new papers)
- NEP-DEV-2006-08-19 (Development)
- NEP-MAC-2006-08-19 (Macroeconomics)
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- Bernard Walters, 2007. "The Fiscal Implications of Scaling up ODA to Deal with the HIV/AIDS Pandemic," Conference Paper 3, International Policy Centre for Inclusive Growth.
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