IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Aid, Growth and Devolution

  • Lessmann, Christian
  • Markwardt, Gunther

This paper examines whether the degree of fiscal decentralization in aid-receiving countries matters in explaining aid effectiveness. The decentralization theorem predicts that the devolution of powers should increase aid effectiveness, since local decision-makers are better informed about local needs. Thereby decentralization may also have reverse effects, e.g., through coordination problems, excessive regulation, administrative costs, and local capture. We use panel data for up to 60 countries and find that aid contributes to economic growth in centralized developing economies. Whereas it is less effective or even harmful in decentralized countries. The cases of Indonesia, the Philippines, and Uganda support our findings. Our results imply that donor countries should carefully consider how the two development instruments—foreign aid and decentralization—interact.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0305750X12000939
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal World Development.

Volume (Year): 40 (2012)
Issue (Month): 9 ()
Pages: 1723-1749

as
in new window

Handle: RePEc:eee:wdevel:v:40:y:2012:i:9:p:1723-1749
Contact details of provider: Web page: http://www.elsevier.com/locate/worlddev

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Papanek, Gustav F, 1972. "The Effect of Aid and other Resource Transfers on Savings and Growth in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 82(327), pages 934-50, September.
  2. Fan, C. Simon & Lin, Chen & Treisman, Daniel, 2009. "Political decentralization and corruption: Evidence from around the world," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 14-34, February.
  3. Alberto Alesina & Arnaud Devleeschauwer & William Easterly & Sergio Kurlat & Romain Wacziarg, 2003. "Fractionalization," NBER Working Papers 9411, National Bureau of Economic Research, Inc.
  4. Alberto Alesina & Beatrice Weder, 1999. "Do Corrupt Governments Receive Less Foreign Aid?," NBER Working Papers 7108, National Bureau of Economic Research, Inc.
  5. Reinikka, Ritva & Svensson, Jakob, 2001. "Explaining Leakage of Public Funds," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. Yakita, Akira, 2003. "Taxation and growth with overlapping generations," Journal of Public Economics, Elsevier, vol. 87(3-4), pages 467-487, March.
  7. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  8. Pranab Bardhan & Dilip Mookherjee, 2006. "Decentralisation and Accountability in Infrastructure Delivery in Developing Countries," Economic Journal, Royal Economic Society, vol. 116(508), pages 101-127, 01.
  9. Francis, Paul & James, Robert, 2003. "Balancing Rural Poverty Reduction and Citizen Participation: The Contradictions of Uganda's Decentralization Program," World Development, Elsevier, vol. 31(2), pages 325-337, February.
  10. Jan K. Brueckner, 2000. "Fiscal Decentralization in Developing Countries: The Effects of Local Corruption and Tax Evasion," Annals of Economics and Finance, Society for AEF, vol. 1(1), pages 1-18, May.
  11. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  12. Charles C. Chang & Eduardo Fernández-Arias & Luis Servén, 1998. "Measuring Aid Flows: A New Approach," IDB Publications (Working Papers) 6447, Inter-American Development Bank.
  13. Christian Lessmann & Gunther Markwardt, 2009. "One Size Fits All? Decentralization, Corruption, and the Monitoring of Bureaucrats," CESifo Working Paper Series 2662, CESifo Group Munich.
  14. Ulrich Thießen, 2003. "Fiscal Decentralisation and Economic Growth in High-Income OECD Countries," Fiscal Studies, Institute for Fiscal Studies, vol. 24(3), pages 237-274, September.
  15. Thornton, John, 2007. "Fiscal decentralization and economic growth reconsidered," Journal of Urban Economics, Elsevier, vol. 61(1), pages 64-70, January.
  16. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 66-92.
  17. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 17-41.
  18. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
  19. Gary Woller & Kerk Phillips, 1998. "Fiscal decentralisation and IDC economic growth: An empirical investigation," Journal of Development Studies, Taylor & Francis Journals, vol. 34(4), pages 139-148.
  20. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, vol. 79(1), pages 99-106, April.
  21. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development.
  22. Collier, Paul & Dollar, David, 2002. "Aid allocation and poverty reduction," European Economic Review, Elsevier, vol. 46(8), pages 1475-1500, September.
  23. David Roodman, 2004. "The Anarchy of Numbers: Aid, Development, and Cross-country Empirics," Development and Comp Systems 0412003, EconWPA.
  24. Angeles, Luis & Neanidis, Kyriakos C., 2009. "Aid effectiveness: the role of the local elite," Journal of Development Economics, Elsevier, vol. 90(1), pages 120-134, September.
  25. Raghuram Rajan & Arvind Subramanian, 2005. "Aid and Growth; What Does the Cross-Country Evidence Really Show?," IMF Working Papers 05/127, International Monetary Fund.
  26. Jin, Hehui & Qian, Yingyi & Weingast, Barry R., 2005. "Regional decentralization and fiscal incentives: Federalism, Chinese style," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1719-1742, September.
  27. Abdiweli Ali & Hodan Isse, 2005. "An Empirical Analysis of the Effect of Aid on Growth," International Advances in Economic Research, International Atlantic Economic Society, vol. 11(1), pages 1-11, March.
  28. Kourtellos, Andros & Tan, Chih Ming & Zhang, Xiaobo, 2007. "Is the relationship between aid and economic growth nonlinear?," Journal of Macroeconomics, Elsevier, vol. 29(3), pages 515-540, September.
  29. George Economides & Sarantis Kalyvitis & Apostolis Philippopoulos, 2008. "Does foreign aid distort incentives and hurt growth? Theory and evidence from 75 aid-recipient countries," Public Choice, Springer, vol. 134(3), pages 463-488, March.
  30. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
  31. Jan K. Brueckner, 2005. "Fiscal Federalism and Economic Growth," Working Papers 050612, University of California-Irvine, Department of Economics.
  32. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
  33. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  34. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
  35. Iimi, Atsushi, 2005. "Decentralization and economic growth revisited: an empirical note," Journal of Urban Economics, Elsevier, vol. 57(3), pages 449-461, May.
  36. Omar Azfar & Tugrul Gurgur, 2008. "Does corruption affect health outcomes in the Philippines?," Economics of Governance, Springer, vol. 9(3), pages 197-244, July.
  37. Enikolopov, Ruben & Zhuravskaya, Ekaterina, 2007. "Decentralization and political institutions," Journal of Public Economics, Elsevier, vol. 91(11-12), pages 2261-2290, December.
  38. Levy, Victor, 1988. "Aid and growth in Sub-Saharan Africa: The recent experience," European Economic Review, Elsevier, vol. 32(9), pages 1777-1795, November.
  39. Eskander Alvi & Debasri Mukherjee & Elias Kedir Shukralla, 2008. "Aid, Policies, and Growth in Developing Countries: A New Look at the Empirics," Southern Economic Journal, Southern Economic Association, vol. 74(3), pages 693-706, January.
  40. Pranab Bardhan, 2002. "Decentralization of Governance and Development," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 185-205, Fall.
  41. Zhang, Tao & Zou, Heng-fu, 1998. "Fiscal decentralization, public spending, and economic growth in China," Journal of Public Economics, Elsevier, vol. 67(2), pages 221-240, February.
  42. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
  43. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  44. Voivodas, Constantin S., 1973. "Exports, foreign capital inflow and economic growth," Journal of International Economics, Elsevier, vol. 3(4), pages 337-349, November.
  45. Susan Steiner, 2006. "Decentralisation in Uganda: Exploring the Constraints for Poverty Reduction," GIGA Working Paper Series 31, GIGA German Institute of Global and Area Studies.
  46. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  47. Araral Jr., Eduardo, 2009. "What Explains Collective Action in the Commons? Theory and Evidence from the Philippines," World Development, Elsevier, vol. 37(3), pages 687-697, March.
  48. Papanek, Gustav F, 1973. "Aid, Foreign Private Investment, Savings, and Growth in Less Developed Countries," Journal of Political Economy, University of Chicago Press, vol. 81(1), pages 120-30, Jan.-Feb..
  49. Gibson, Clark C. & Andersson, Krister & Ostrom, The late Elinor & Shivakumar, Sujai, 2005. "The Samaritan's Dilemma: The Political Economy of Development Aid," OUP Catalogue, Oxford University Press, number 9780199278855, March.
  50. World Bank, 2009. "World Development Indicators 2009," World Bank Publications, The World Bank, number 4367.
  51. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
  52. Mark McGillivray & Simon Feeny & Niels Hermes & Robert Lensink, 2006. "Controversies over the impact of development aid: it works; it doesn't; it can, but that depends …," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(7), pages 1031-1050.
  53. Davoodi, Hamid & Zou, Heng-fu, 1998. "Fiscal Decentralization and Economic Growth: A Cross-Country Study," Journal of Urban Economics, Elsevier, vol. 43(2), pages 244-257, March.
  54. Weingast, Barry R, 1995. "The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development," Journal of Law, Economics and Organization, Oxford University Press, vol. 11(1), pages 1-31, April.
  55. Bazoumana Ouattara & Eric Strobl, 2008. "Aid, Policy and Growth: Does Aid Modality Matter?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 144(2), pages 347-365, July.
  56. Christian Lessmann & Gunther Markwardt, 2010. "Decentralization and Foreign Aid Effectiveness: Do Aid Modality and Federal Design Matter in Poverty Alleviation?," CESifo Working Paper Series 3035, CESifo Group Munich.
  57. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
  58. J. Svensson, 1999. "Aid, Growth and Democracy," Economics and Politics, Wiley Blackwell, vol. 11(3), pages 275-297, November.
  59. Oecd, 2002. "Aid volume, channels and allocations for poverty reduction," OECD Journal on Development, OECD Publishing, vol. 3(3), pages 33-46.
  60. Swaroop, Vinaya & Jha, Shikha & Sunil Rajkumar, Andrew, 2000. "Fiscal effects of foreign aid in a federal system of governance: The case of India," Journal of Public Economics, Elsevier, vol. 77(3), pages 307-330, September.
  61. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  62. Jonas Dovern & Peter Nunnenkamp, 2007. "Aid and Growth Accelerations: An Alternative Approach to Assessing the Effectiveness of Aid," Kyklos, Wiley Blackwell, vol. 60(3), pages 359-383, 08.
  63. Craig Burnside & David Dollar, 2004. "Aid, Policies, and Growth: Reply," American Economic Review, American Economic Association, vol. 94(3), pages 781-784, June.
  64. Dan Stegarescu, 2005. "Public sector decentralisation: measurement concepts and recent international trends," Fiscal Studies, Institute for Fiscal Studies, vol. 26(3), pages 301-333, September.
  65. Muhammed Islam, 2005. "Regime changes, economic policies and the effect of aid on growth," Journal of Development Studies, Taylor & Francis Journals, vol. 41(8), pages 1467-1492.
  66. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December.
  67. R. Lensink & H. White, 2001. "Are There Negative Returns to Aid?," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 42-65.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:wdevel:v:40:y:2012:i:9:p:1723-1749. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.