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Aid dependence reconsidered

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  • Jean-Paul Azam
  • Shantayanan Devarajan
  • Stephen A. O'Connell

Abstract

If foreign aid undermines institutional development, aid recipients can exhibit the symptoms of “dependence”-a short-run benefit from aid, but increasing need for aid that is damaging in the long run. We show that this high-aid/weakinstitutions state can be an equilibrium outcome even when donors and recipients fully anticipate the effect of aid on institutional development. However, a lowaid/ strong-institutions outcome is also possible, so that the model encompasses the diverse foreign-aid experiences of countries like the Republic of Korea and Tanzania. When the development community ignores the effect of aid on institutions, the outcome depends strongly on initial conditions. Where institutions are already weak, institutional capacity collapses and foreign aid eventually finances the entire public budget. Where they are initially stronger, the result can be close to the institutionssensitive equilibrium. The results suggest that foreign aid strategies, even for countries with similar per capita incomes, should be differentiated according to their institutional capacity; and that a short-run reduction in aid may increase a country’s chances of graduating from aid.

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Bibliographic Info

Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 1999-05.

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Date of creation: 1999
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Handle: RePEc:csa:wpaper:1999-05

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  1. Kent P. Kimbrough, 1986. "Foreign Aid and Optimal Fiscal Policy," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 19(1), pages 35-61, February.
  2. Henry J. Bruton, 1998. "A Reconsideration of Import Substitution," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 36(2), pages 903-936, June.
  3. Bruton, H.J., 1998. "A Reconsideration of Import Substitution," Center for Development Economics, Department of Economics, Williams College 156, Department of Economics, Williams College.
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Cited by:
  1. Feeny, Simon, 2007. "Foreign Aid and Fiscal Governance in Melanesia," World Development, Elsevier, Elsevier, vol. 35(3), pages 439-453, March.
  2. Gnangnon, Sèna Kimm, 2014. "The Effect of Development Aid Unpredictability and Migrants’ Remittances on Fiscal Consolidation in Developing Countries," World Development, Elsevier, Elsevier, vol. 54(C), pages 168-190.
  3. Knack, Stephen, 2012. "When do donors trust recipient country systems ?," Policy Research Working Paper Series, The World Bank 6019, The World Bank.
  4. Bandeira, Pablo, 2009. "El desarrollo institucional en el contexto de la ineficacia de la ayuda: ¿qué podemos hacer?
    [Promoting institutional development in the context of actual aid ineffectiveness: what can we do?]
    ," MPRA Paper 13372, University Library of Munich, Germany.
  5. Hannes Öhler & Peter Nunnenkamp & Axel Dreher, 2010. "Does Conditionality Work? A Test for an Innovative US Aid Scheme," Kiel Working Papers, Kiel Institute for the World Economy 1630, Kiel Institute for the World Economy.
  6. Stephen A. O'Connell & Charles C. Soludo, 1999. "Aid intensity in Africa," CSAE Working Paper Series, Centre for the Study of African Economies, University of Oxford 1999-03, Centre for the Study of African Economies, University of Oxford.
  7. Knack, Stephen & Rahman, Aminur, 2004. "Donor fragmentation and bureaucratic quality in aid recipients," Policy Research Working Paper Series, The World Bank 3186, The World Bank.
  8. Knack, Stephen, 2013. "Aid and donor trust in recipient country systems," Journal of Development Economics, Elsevier, Elsevier, vol. 101(C), pages 316-329.
  9. Godfrey, Martin & Sophal, Chan & Kato, Toshiyasu & Vou Piseth, Long & Dorina, Pon & Saravy, Tep & Savora, Tia & Sovannarith, So, 2002. "Technical Assistance and Capacity Development in an Aid-dependent Economy: The Experience of Cambodia," World Development, Elsevier, Elsevier, vol. 30(3), pages 355-373, March.
  10. O'Connell, Stephen A. & Soludo, Charles C., 2001. "Aid Intensity in Africa," World Development, Elsevier, Elsevier, vol. 29(9), pages 1527-1552, September.

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