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Aid dependence reconsidered


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


If foreign aid undermines institutional development, aid recipients can exhibit the symptoms of “dependence”-a short-run benefit from aid, but increasing need for aid that is damaging in the long run. We show that this high-aid/weak-institutions state can be an equilibrium outcome even when donors and recipients fully anticipate the effect of aid on institutional development. However, a low-aid/strong-institutions outcome is also possible, so that the model encompasses the diverse foreign-aid experiences of countries like the Republic of Korea and Tanzania. When the development community ignores the effect of aid on institutions, the outcome depends strongly on initial conditions. Where institutions are already weak, institutional capacity collapses and foreign aid eventually finances the entire public budget. Where they are initially stronger, the result can be close to the institutionssensitive equilibrium. The results suggest that foreign aid strategies, even for countries with similar per capita incomes, should be differentiated according to their institutional capacity; and that a short-run reduction in aid may increase a country’s chances of graduating from aid.

Suggested Citation

  • Jean-Paul Azam & Shantayanan Devarajan & Stephen A. O'Connell, 1999. "Aid dependence reconsidered," CSAE Working Paper Series 1999-05, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:1999-05

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    References listed on IDEAS

    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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    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. 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.
    3. Hermann D. Yohou & Michaël Goujon & Wautabouna Ouattara, 2016. "Heterogeneous Aid Effects on Tax Revenues: Accounting for Government Stability in WAEMU Countries," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 25(3), pages 468-498.
    4. Öhler, Hannes & Nunnenkamp, Peter & Dreher, Axel, 2012. "Does conditionality work? A test for an innovative US aid scheme," European Economic Review, Elsevier, vol. 56(1), pages 138-153.
    5. Rajan, Raghuram G. & Subramanian, Arvind, 2011. "Aid, Dutch disease, and manufacturing growth," Journal of Development Economics, Elsevier, vol. 94(1), pages 106-118, January.
    6. Feeny, Simon, 2007. "Foreign Aid and Fiscal Governance in Melanesia," World Development, Elsevier, vol. 35(3), pages 439-453, March.
    7. 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.
    8. 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.
    9. Knack, Stephen, 2012. "When do donors trust recipient country systems ?," Policy Research Working Paper Series 6019, The World Bank.
    10. 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.
    11. Knack, Stephen, 2013. "Aid and donor trust in recipient country systems," Journal of Development Economics, Elsevier, vol. 101(C), pages 316-329.
    12. 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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