Aid, Growth, and Devolution: Considering Aid Modality and Different Types of Decentralization

Christian Lessmann and Gunther Markwardt

World Development, 2016, vol. 84, issue C, 118-130

Abstract: In this paper, we provide further evidence on the relationship between decentralization and foreign aid effectiveness. Our previous work has shown that decentralization decreases aid effectiveness, i.e., the impact of aid on economic growth is negative in decentralized countries. However, our previous work has not taken different types of aid and different types of decentralization into account, which is at the heart of our current analysis. We consider different measures of decentralization, in particular measures of fiscal decentralization derived from government finance statistics and measures of political decentralization that are constructed based on countries’ constitutional rules. In addition, we take different types of aid into account: grants, loans, technical assistance, total net ODA; and we distinguish between multi-lateral and bi-lateral aid in order to consider differences in the donor structure. Our empirical analysis is based on panel data of up to 53 developing countries. In our growth regressions, we combine all types of decentralization with the different types of aid. We find important differences between different types of decentralization: (i) fiscal decentralization negatively affects aid effectiveness (in line with our previous work), (ii) employment decentralization may increase aid effectiveness, and (iii) political decentralization does not hamper aid effectiveness or may even have positive effects.

Keywords: foreign aid; growth; decentralization (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:wdevel:v:84:y:2016:i:c:p:118-130

DOI: 10.1016/j.worlddev.2016.03.018

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