How should donors give foreign aid? Project aid versus budget support
Izabela Jelovac and
Additional contact information
Frieda Vandeninden: MGSoG - Maastricht Graduate School of Governance - Maastricht University [Maastricht]
Post-Print from HAL
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)
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00293130
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8) Track citations by RSS feed
Published in 2008
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:hal:journl:halshs-00293130
Access Statistics for this paper
More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().