This paper examines the contribution of institutions, social cohesion, and trade to development (per-capita income) with emphasis on fragile states in Africa. Results from GMM estimations suggest that political institutions, openness to trade, and social cohesion affect growth in fragile states via direct and indirect mechanisms. The results indicate that, beyond a certain level, openness to trade may actually be harmful to economic performance in fragile states, particularly in countries with high export concentration. Improvements in institutional quality, or more specifically in democratization, also may be harmful in the short run. On the other hand, social cohesion has a positive effect once a threshold level is reached. The results associated with the effects of political institutions and openness to trade seem to suggest the possibility of a ‘catch-22’, at least in the short run. If a fragile state tries to improve its political institutions or its openness to trade it may wind up with lower per-capita income. According to the formula used to allocate World Bank-IDA funds get more money, such country would get more aid. However, while obtaining more aid may be a good outcome lower income implies more poverty (assuming no changes in income distribution). Thus, aid may not lead to significant poverty reduction.
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Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number
24-2007.
Length: 29 pages Date of creation: Mar 2007 Date of revision: Handle: RePEc:icr:wpicer:24-2007
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Find related papers by JEL classification: E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination F35 - International Economics - - International Finance - - - Foreign Aid F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
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Craig Burnside & David Dollar, 2000.
"Aid, Policies, and Growth,"
American Economic Review,
American Economic Association, vol. 90(4), pages 847-868, September.
[Downloadable!] (restricted)
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Jac C. Heckelman & Stephen Knack, 2008.
"Foreign Aid and Market-Liberalizing Reform,"
Economica,
London School of Economics and Political Science, vol. 75(299), pages 524-548, 08.
[Downloadable!] (restricted)
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