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Budget Support Versus Project Aid: A Theoretical Appraisal

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  • Tito Cordella
  • Giovanni Dell'Ariccia

Abstract

Should donors interested in the effectiveness of developmental programmes rely on conditional budget support or on project aid? To answer this question, we present a model in which only a subset of developmental expenditures can be subject to conditionality. We show that budget support is preferable to project aid when the preferences of donors and recipients are aligned, and when assistance is small relative to the recipients' own resources. Furthermore, when donors cannot observe the recipient's type, they may impose higher levels of conditionality to separate committed governments from uncommitted ones. Copyright International Monetary Fund. Journal compilation Royal Economic Society 2007.

Suggested Citation

  • Tito Cordella & Giovanni Dell'Ariccia, 2007. "Budget Support Versus Project Aid: A Theoretical Appraisal," Economic Journal, Royal Economic Society, vol. 117(523), pages 1260-1279, October.
  • Handle: RePEc:ecj:econjl:v:117:y:2007:i:523:p:1260-1279
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    Citations

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    Cited by:

    1. Alok Kumar, 2014. "Foreign Aid, Incentives and Efficiency: Can Foreign Aid Lead to Efficient Level of Investment?," Department Discussion Papers 1406, Department of Economics, University of Victoria.
    2. Axel Dreher & Vera Eichenauer & Kai Gehring, 2013. "Geopolitics, Aid and Growth," CESifo Working Paper Series 4299, CESifo Group Munich.
    3. Paul Clist & Alessia Isopi & Oliver Morrissey, 2012. "Selectivity on aid modality: Determinants of budget support from multilateral donors," The Review of International Organizations, Springer, vol. 7(3), pages 267-284, September.
    4. Axel Dreher & Sarah Langlotz & Silvia Marchesi, 2017. "Information Transmission And Ownership Consolidation In Aid Programs," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1671-1688, October.
    5. Morrissey, Oliver, 2015. "Aid and Government Fiscal Behavior: Assessing Recent Evidence," World Development, Elsevier, vol. 69(C), pages 98-105.
    6. Philip Michael Kargbo & Kunal Sen, 2014. "Aid Categories that Foster Pro-Poor Growth: The Case of Sierra Leone," African Development Review, African Development Bank, vol. 26(2), pages 416-429, June.
    7. Furukawa, Mitsuaki & Mikami, Satoru, 2014. "Is Country-system-based Aid Really Better than Project-based Aid? Evidence from Rural Water Supply Management in Uganda," Working Papers 64, JICA Research Institute.
    8. Dreher, Axel & Minasyan, Anna & Nunnenkamp, Peter, 2015. "Government ideology in donor and recipient countries: Does ideological proximity matter for the effectiveness of aid?," European Economic Review, Elsevier, vol. 79(C), pages 80-92.
    9. Temple, Jonathan R.W., 2010. "Aid and Conditionality," Handbook of Development Economics, Elsevier.
    10. Fielding, David & Mavrotas, George, 2005. "The Volatility of Aid," WIDER Working Paper Series DP2005/06, World Institute for Development Economic Research (UNU-WIDER).
    11. Almuth Scholl, 2013. "Debt Relief for Poor Countries: Conditionality and Effectiveness," Working Paper Series of the Department of Economics, University of Konstanz 2013-23, Department of Economics, University of Konstanz.
    12. Reinsberg, Bernhard, 2015. "Foreign Aid Responses to Political Liberalization," World Development, Elsevier, vol. 75(C), pages 46-61.
    13. repec:bla:devpol:v:35:y:2017:i:4:p:455-473 is not listed on IDEAS
    14. Fink, Fabian & Scholl, Almuth, 2016. "A quantitative model of sovereign debt, bailouts and conditionality," Journal of International Economics, Elsevier, vol. 98(C), pages 176-190.
    15. repec:bla:devpol:v:35:y:2017:i:3:p:373-395 is not listed on IDEAS
    16. Cordella, Tito & Missale, Alessandro, 2013. "To give or to forgive? Aid versus debt relief," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 504-528.
    17. repec:bla:rdevec:v:21:y:2017:i:3:p:678-697 is not listed on IDEAS
    18. Nordtveit, Ingvild, 2014. "Does better governance and commitment to development attract general budget support?," Working Papers in Economics 02/14, University of Bergen, Department of Economics.
    19. Izabela Jelovac & Frieda Vandeninden, 2008. "How should donors give foreign aid? Project aid versus budget support," Post-Print halshs-00293130, HAL.
    20. Bah, El-hadj M. & Ward, Jeremy, 2011. "Effectiveness of foreign aid in Small Island Developing States," MPRA Paper 32062, University Library of Munich, Germany.
    21. Furukawa, Mitsuaki & Takahata, Junichiro, 2013. "Is GBS Still a Preferable Aid Modality?," Working Papers 50, JICA Research Institute.
    22. Winters, Matthew S. & Martinez, Gina, 2015. "The Role of Governance in Determining Foreign Aid Flow Composition," World Development, Elsevier, vol. 66(C), pages 516-531.
    23. Paul Clist, "undated". "25 Years of Aid Allocation Practice: Comparing Donors and Eras," Discussion Papers 09/11, University of Nottingham, CREDIT.

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