How should donors give foreign aid? Project aid versus budget support
We develop a theoretical model to compare the two major foreign aid modalities: project aid and budget support. These two modalities have a different impact on the production of ‘developmental goods’. Firstly, conditionality can be associated with budget support, but only a subset of the developmental expenses – the observable ones – can be subject to conditionality. Secondly, when using project aid, the donors control the overall allocation of the aid resources. However, we consider that, because of limited harmonisation and coordination, project aid can be associated with a cost of imperfect fit. We develop a unified framework to compare these two modalities where we allow the simultaneous utilisation of both instruments. We show that all the aid should be given via budget support, no matter whether conditionality is used or not. Furthermore, we show that the optimal use of conditionality depends on the recipient’s developmental preferences, the productivity of the inputs and the level of aid compared to the recipient’s budget: when these parameters are relatively high, conditionality should be enforced. Otherwise, the optimal aid allocation is such that all the aid is given through unconditional budget support. We conclude that conditionality does not always improve the aid effectiveness.
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: 93, chemin des Mouilles - B.P.167 69131 - Ecully cedex|
Phone: 33(0)472 29 30 89
Fax: 33(0)47229 30 90
Web page: http://www.gate.cnrs.fr/
More information through EDIRC
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.:
- Hansen, Henrik & Tarp, Finn, 2000.
"Aid and Growth Regressions,"
62288, University Library of Munich, Germany.
- Torsvik, Gaute, 2005. "Foreign economic aid; should donors cooperate?," Journal of Development Economics, Elsevier, vol. 77(2), pages 503-515, August.
- Hefeker, Carsten, 2005.
"Project Aid or Budget Aid? The Interests of Governments and Financial Institutions,"
Proceedings of the German Development Economics Conference, Kiel 2005
19, Verein für Socialpolitik, Research Committee Development Economics.
- Carsten Hefeker, 2006. "Project Aid or Budget Aid? The Interests of Governments and Financial Institutions," Review of Development Economics, Wiley Blackwell, vol. 10(2), pages 241-252, 05.
- Hefeker, Carsten, 2004. "Project Aid or Budget Aid? The Interests of Governments and Financial Institutions," HWWA Discussion Papers 309, Hamburg Institute of International Economics (HWWA).
- Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
- Alberto Alesina & David Dollar, 1998.
"Who Gives Foreign Aid to Whom and Why?,"
NBER Working Papers
6612, National Bureau of Economic Research, Inc.
- Tarp, Finn, 2006.
"Aid and Development,"
13171, University Library of Munich, Germany.
- 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.
- Arvind Subramanian & Raghuram Rajan, 2005.
"What Undermines Aidâ€™s Impact on Growth?,"
IMF Working Papers
05/126, International Monetary Fund.
- Svensson, Jakob, 2003. "Why conditional aid does not work and what can be done about it?," Journal of Development Economics, Elsevier, vol. 70(2), pages 381-402, April.
- Collier, Paul & Dollar, David, 1999.
"Aid allocation and poverty reduction,"
Policy Research Working Paper Series
2041, The World Bank.
- Azam, Jean-Paul & Laffont, Jean-Jacques, 2003. "Contracting for aid," Journal of Development Economics, Elsevier, vol. 70(1), pages 25-58, February.
- David Dollar & Craig Burnside, 2000.
"Aid, Policies, and Growth,"
American Economic Review,
American Economic Association, vol. 90(4), pages 847-868, September.
- William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
- Raghuram G. Rajan & Arvind Subramanian, 2005. "What Undermines Aid's Impact on Growth?," NBER Working Papers 11657, National Bureau of Economic Research, Inc.
- Svensson, Jakob, 1998.
"Foreign aid and rent-seeking,"
Policy Research Working Paper Series
1880, The World Bank.
When requesting a correction, please mention this item's handle: RePEc:gat:wpaper:0813. 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: (Nelly Wirth)
If references are entirely missing, you can add them using this form.