Foreign Aid, Political Instability, and Economic Growth
AbstractRelying on a simple endogenous growth model, this paper highlights a political instability effect as a potential explanation for why foreign aid is frequently ineffective with respect to economic performance. In the present framework, the role of the state is to fund institutions allowing for ongoing technology adoption and hence long-run growth. However, providing a self-interested government with additional resources to fill a possible ”financing gap” may not result in better institutions. More money in the hands of the regime fuels conflict over the distribution of the funds - and decreases the incumbent regime’s time horizon in office. With a shorter time horizon, it is less attractive to finance good institutions whose returns mainly accrue in the future. Panel data evidence points indeed to a sizable causal effect of foreign aid on political instability in the 1980s and 1990s.
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Bibliographic InfoPaper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 310.
Date of creation: Nov 2006
Date of revision:
Foreign aid; Economic growth; Political Instability; Institutions;
Find related papers by JEL classification:
- F35 - International Economics - - International Finance - - - Foreign Aid
- O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General
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