Development Aid - an Object for International Rent Seeking?

Proceedings of the University of Vaasa, Discussion Papers 204

19 Pages Posted: 11 Feb 1997

See all articles by Jerker Johnson

Jerker Johnson

Swedish School of Economics and Business Administr; University of Vaasa - Department of Accounting and Finance

Hans C. Blomqvist

Swedish School of Economics and Business Administration (Vasa)

Abstract

For many developing countries, development aid is a major source of funding. Eligibility for aid, in turn, is largely related to poverty, usually measured as the gross domestic product (GDP) per capita. This paper discusses the possibility that aid can be abused by manipulating the GDP figures. The starting point is in the theory of rent seeking, and the interplay between donor and recipient is interpreted according to theories on the principal-agent problem. The working hypothesis is that recipient governments may report an overly low estimate of the GDP in order to convey the message that the economy is in need of assistance. At the same time, an artificially high growth rate can also be displayed. A "predatory" government may then channel the aid proceeds into the pockets of the ruling elite. A simple quantitative analysis, taking into account a number of other variables correlating with the GDP, suggests that countries which are heavily dependent on aid do indeed tend to report a consistently lower GDP than that reported by other countries. While this result corroborates the hypothesis of this study, it is not conclusive proof, since there may be other reasons for the behaviour observed.

JEL Classification: D82, O29, 047

Suggested Citation

Johnson, Jerker and Blomqvist, Hans C., Development Aid - an Object for International Rent Seeking?. Proceedings of the University of Vaasa, Discussion Papers 204. Available at SSRN: https://ssrn.com/abstract=38049 or http://dx.doi.org/10.2139/ssrn.38049

Jerker Johnson

Swedish School of Economics and Business Administr ( email )

P.O. Box 287
FI-65100 Vasa
Finland

University of Vaasa - Department of Accounting and Finance

P.O. Box 700
R?skogsvagen 9
FIN-65101 Vaasa
Finland

Hans C. Blomqvist (Contact Author)

Swedish School of Economics and Business Administration (Vasa) ( email )

PO Box 287
Arkadiagatan 22
FI-65100 Vasa
Finland
6-3533734 (Phone)
6-3533703 (Fax)

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