How should donors give foreign aid? Project aid versus budget support
Izabela Jelovac () and
Frieda Vandeninden ()
Additional contact information
Frieda Vandeninden: MGSoG, Universiteit Maastricht
No 813, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon
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.
Keywords: conditionality; foreign aid; optimal contract (search for similar items in EconPapers)
JEL-codes: D82 F35 O19 (search for similar items in EconPapers)
Pages: 29 pages
New Economics Papers: this item is included in nep-dev and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
Working Paper: How should donors give foreign aid? Project aid versus budget support (2008)
Working Paper: How Should Donors Give Foreign Aid? Project Aidversus Budget Support (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:0813
Access Statistics for this paper
More papers in Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon Contact information at EDIRC.
Bibliographic data for series maintained by Nelly Wirth ().