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Theoretical Analysis Of Foreign Aid, Policies And State Institutions

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  • Xayavong, Vilaphonh
  • Gounder, Rukmani
  • Obben, James

Abstract

This paper re-examines the theoretical aid-growth nexus by expounding on the issues relating to policies designed for aid delivery and the lack of aid recipient's state institutional capability to enforce policy conditionality. Two propositions have been demonstrated to explain why policy conditionality attached to aid might not always promote sustainable economic growth in Least Developed Countries. First, the model has simulated that a stable aid flow contributes to economic growth even when aid is fungible. Second, the model has also simulated that unstable aid inflow impairs the favourable effect of stable aid inflow. It is suggested that the contribution of aid to economic growth depends not only on the ability of aid to increase investment in the recipient country but also the quality of policy conditionality and the state and institutional capability of the recipient country to implement policy conditionality.

Suggested Citation

  • Xayavong, Vilaphonh & Gounder, Rukmani & Obben, James, 2005. "Theoretical Analysis Of Foreign Aid, Policies And State Institutions," Discussion Papers 23704, Massey University, Department of Applied and International Economics.
  • Handle: RePEc:ags:masddp:23704
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign Aid; Economic Growth; Policies; State Institutions; Food Security and Poverty; D72; D9; F35; H30;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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