Aid Dependence Reconsidered

19 Pages Posted: 10 Jan 2017

See all articles by Jean-Paul Azam

Jean-Paul Azam

University of Toulouse

Shantayanan Devarajan

World Bank Middle East and North Africa Region

Stephen O'Connell

University of Oxford - Centre for the Study of African Economies (CSAE)

Date Written: July 31, 1999

Abstract

When foreign aid undermines institutional development aid recipients can exhibit the symptoms of aid "dependence" - benefiting from aid in the short term but damaged by it in the long term. The authors find that one equilibrium outcome can be high aid and weak institutions, even when donors and recipients fully anticipate aid's effects on institutional development, but don' t take the drastic steps needed to put the country on the path to independence. Another equilibrium outcome can be low aid and strong institutions. Their model encompasses such diverse experiences as those of Tanzania and the Republic of Korea. When the development community ignores aid's effect on institutions, the outcome depends greatly on initial conditions. Where institutions are initially weak (as in many Sub-Saharan African countries at independence), institutional capacity collapses and foreign aid eventually finances the whole public budget. Where they are initially stronger, the result can be close to the institutions-sensitive equilibrium. The results suggest that, even for countries with similar per capita income, the foreign aid strategy should be designed to suit the country's institutional capacity. In some cases a short-term reduction in aid may increase a country's chances of graduating from aid.

Keywords: Development Economics & Aid Effectiveness, Public Sector Economics, Poverty Assessment, Gender and Development, School Health, Economic Theory & Research, National Governance

Suggested Citation

Azam, Jean-Paul and Devarajan, Shantayanan and O'Connell, Stephen, Aid Dependence Reconsidered (July 31, 1999). World Bank Policy Research Working Paper No. 2144. Available at SSRN: https://ssrn.com/abstract=2894626

Jean-Paul Azam (Contact Author)

University of Toulouse ( email )

41 Allées Jules Guesde - CS 61321
TOULOUSE
France

Shantayanan Devarajan

World Bank Middle East and North Africa Region ( email )

1818 H Street, NW
Washington, DC 20433
United States

Stephen O'Connell

University of Oxford - Centre for the Study of African Economies (CSAE) ( email )

Oxford OX1 3UL
United Kingdom

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