Aid Dependence Reconsidered

J.P. Azam, S. Devarajan and O'Connell, S.A.

Working Papers Series from Centre for the Study of African Economies, University of Oxford

Abstract: 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 institutions-sensitive 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.

Keywords: FOREIGN; AID (search for similar items in EconPapers)
JEL-codes: F35 (search for similar items in EconPapers)
Date: 1999
View citations in EconPapers

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fth:oxesaf:99-5

Ordering information: This working paper can be ordered from
Publications Office Centre for the Study of African Economies Institute of Economics and Statistics University of Oxford St Cross Building Manor Road Oxford OX1 3UL
http://users.ox.ac.u ... s/workingp/main.html

Access Statistics for this paper

More papers in Working Papers Series from Centre for the Study of African Economies, University of Oxford
Address: Centre for the Study of African Economies Institute of Economics and Statistics University of Oxford St. Cross Building, Manor Road Oxford, OX1 3UL, UK.
Contact information at EDIRC.
Series data maintained by Thomas Krichel ().