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Aid dependence reconsidered

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  • Azam, Jean-Paul*Devarajan, Shantayanan*O'Connell

Abstract

When foreign aid undermines institutional development aid recipients can exhibit the symptoms of aid"dependence"- benefiting from aid in the short term but damaged by it in the long term. The authors find that one equilibrium outcome can be high aid and weak institutions, even when donors and recipients fully anticipate aid's effects on institutional development, but don't take the drastic steps needed to put the country on the path to independence. Another equilibrium outcome can be low aid and strong institutions. Their model encompasses such diverse experiences as those of Tanzania and the Republic of Korea. When the development community ignores aid's effect on institutions, the outcome depends greatly on initial conditions. Where institutions are initially weak (as in many Sub-Saharan African countries at independence), institutional capacity collapses and foreign aid eventually finances the whole public budget. Where they are initially stronger, the result can be close to the institutions-sensitive equilibrium. The results suggest that, even for countries with similar per capita income, the foreign aid strategy should be designed to suit the country's institutional capacity. In some cases a short-term reduction in aid may increase a country's chances of graduating from aid.

Suggested Citation

  • Azam, Jean-Paul*Devarajan, Shantayanan*O'Connell, 1999. "Aid dependence reconsidered," Policy Research Working Paper Series 2144, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2144
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    References listed on IDEAS

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    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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    Citations

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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. 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.
    3. 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.
    4. Rajan, Raghuram G. & Subramanian, Arvind, 2011. "Aid, Dutch disease, and manufacturing growth," Journal of Development Economics, Elsevier, vol. 94(1), pages 106-118, January.
    5. Feeny, Simon, 2007. "Foreign Aid and Fiscal Governance in Melanesia," World Development, Elsevier, vol. 35(3), pages 439-453, March.
    6. 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.
    7. 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.
    8. Knack, Stephen, 2012. "When do donors trust recipient country systems ?," Policy Research Working Paper Series 6019, The World Bank.
    9. 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.
    10. Knack, Stephen, 2013. "Aid and donor trust in recipient country systems," Journal of Development Economics, Elsevier, vol. 101(C), pages 316-329.
    11. 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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    Keywords

    Development Economics&Aid Effectiveness; Public Sector Economics; Poverty Assessment; Gender and Development; School Health; Economic Theory&Research; National Governance;

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