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Aid dependence reconsidered

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Author Info

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

Abstract

When foreign aid undermines institutional development aid recipients can exhibit the symptoms of aid"dependence"- benefiting from aid in the short term but damaged by it in the long term. The authors find that one equilibrium outcome can be high aid and weak institutions, even when donors and recipients fully anticipate aid's effects on institutional development, but don't take the drastic steps needed to put the country on the path to independence. Another equilibrium outcome can be low aid and strong institutions. Their model encompasses such diverse experiences as those of Tanzania and the Republic of Korea. When the development community ignores aid's effect on institutions, the outcome depends greatly on initial conditions. Where institutions are initially weak (as in many Sub-Saharan African countries at independence), institutional capacity collapses and foreign aid eventually finances the whole public budget. Where they are initially stronger, the result can be close to the institutions-sensitive equilibrium. The results suggest that, even for countries with similar per capita income, the foreign aid strategy should be designed to suit the country's institutional capacity. In some cases a short-term reduction in aid may increase a country's chances of graduating from aid.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2144.

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Date of creation: 31 Jul 1999
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Handle: RePEc:wbk:wbrwps:2144

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Keywords: Development Economics&Aid Effectiveness; School Health; Gender and Development; Economic Theory&Research; Public Sector Economics&Finance; Poverty Assessment; Development Economics&Aid Effectiveness; Economic Theory&Research; School Health; National Governance;

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References

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  1. Kent P. Kimbrough, 1986. "Foreign Aid and Optimal Fiscal Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 35-61, February.
  2. Bruton, H.J., 1998. "A Reconsideration of Import Substitution," Center for Development Economics 156, Department of Economics, Williams College.
  3. Henry J. Bruton, 1998. "A Reconsideration of Import Substitution," Journal of Economic Literature, American Economic Association, vol. 36(2), pages 903-936, June.
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Citations

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Cited by:
  1. O'Connell, Stephen A. & Soludo, Charles C., 2001. "Aid Intensity in Africa," World Development, Elsevier, vol. 29(9), pages 1527-1552, September.
  2. Knack, Stephen, 2012. "When do donors trust recipient country systems ?," Policy Research Working Paper Series 6019, The World Bank.
  3. Hannes Öhler & Peter Nunnenkamp & Axel Dreher, 2010. "Does Conditionality Work? A Test for an Innovative US Aid Scheme," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 34, Courant Research Centre PEG.
  4. Knack, Stephen & Rahman, Aminur, 2007. "Donor fragmentation and bureaucratic quality in aid recipients," Journal of Development Economics, Elsevier, vol. 83(1), pages 176-197, May.
  5. Stephen A. O'Connell & Charles C. Soludo, 1999. "Aid intensity in Africa," CSAE Working Paper Series 1999-03, Centre for the Study of African Economies, University of Oxford.
  6. 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, vol. 30(3), pages 355-373, March.
  7. Knack, Stephen, 2013. "Aid and donor trust in recipient country systems," Journal of Development Economics, Elsevier, vol. 101(C), pages 316-329.
  8. Feeny, Simon, 2007. "Foreign Aid and Fiscal Governance in Melanesia," World Development, Elsevier, vol. 35(3), pages 439-453, March.
  9. Gnangnon, Sèna Kimm, 2014. "The Effect of Development Aid Unpredictability and Migrants’ Remittances on Fiscal Consolidation in Developing Countries," World Development, Elsevier, vol. 54(C), pages 168-190.
  10. 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.

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