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Foreign Aid, Political Instability, and Economic Growth

Author

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  • Manuel Oechslin

Abstract

Relying on a simple endogenous growth model, this paper highlights a political instability effect as a potential explanation for why foreign aid is frequently ineffective with respect to economic performance. In the present framework, the role of the state is to fund institutions allowing for ongoing technology adoption and hence long-run growth. However, providing a self-interested government with additional resources to fill a possible �financing gap� may not result in better institutions. More money in the hands of the regime fuels conflict over the distribution of the funds - and decreases the incumbent regime�s time horizon in office. With a shorter time horizon, it is less attractive to finance good institutions whose returns mainly accrue in the future. Panel data evidence points indeed to a sizable causal effect of foreign aid on political instability in the 1980s and 1990s.

Suggested Citation

  • Manuel Oechslin, 2006. "Foreign Aid, Political Instability, and Economic Growth," IEW - Working Papers 310, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:310
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    File URL: http://www.econ.uzh.ch/static/wp_iew/iewwp310.pdf
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    References listed on IDEAS

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    1. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 643-665, November.
    2. Svensson, Jakob, 2000. "When is foreign aid policy credible? Aid dependence and conditionality," Journal of Development Economics, Elsevier, vol. 61(1), pages 61-84, February.
    3. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 173-222.
    4. 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.
    5. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages 191-216, June.
    6. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Unbreen Qayyum, 2013. "Institutional Quality, Conflict and Aid Dependency," PIDE-Working Papers 2013:94, Pakistan Institute of Development Economics.
    2. Jac C. Heckelman & Stephen Knack, 2008. "Foreign Aid and Market-Liberalizing Reform," Economica, London School of Economics and Political Science, vol. 75(299), pages 524-548, August.

    More about this item

    Keywords

    Foreign aid; Economic growth; Political Instability; Institutions;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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