Aid Dependence Reconsidered

15 Pages Posted: 20 Apr 2016

See all articles by Jean-Paul Azam

Jean-Paul Azam

University of Toulouse I - Advanced Research in Quantitative Applied Development Economics (ARQADE)

Shantayanan Devarajan

World Bank Middle East and North Africa Region

Stephen A. O'Connell

Swarthmore College - Economics Department; University of Oxford - Centre for Study of African Economics

Date Written: July 1, 1999

Abstract

When foreign aid undermines institutions, countries can become aid-dependent - even if donors and recipients have the best intentions.

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. Azam, Devarajan, and O'Connell 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 incomes, 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.

This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to study the effects of foreign aid on the public sector.

Suggested Citation

Azam, Jean-Paul and Devarajan, Shantayanan and O'Connell, Stephen A., Aid Dependence Reconsidered (July 1, 1999). World Bank Policy Research Working Paper No. 2144. Available at SSRN: https://ssrn.com/abstract=620499

Jean-Paul Azam (Contact Author)

University of Toulouse I - Advanced Research in Quantitative Applied Development Economics (ARQADE) ( email )

21 Allee de Brienne
Toulouse, 31000
France

Shantayanan Devarajan

World Bank Middle East and North Africa Region ( email )

1818 H Street, NW
Washington, DC 20433
United States

Stephen A. O'Connell

Swarthmore College - Economics Department ( email )

Swarthmore, PA 19081
United States
610-328-8107 (Phone)
610-328-7352 (Fax)

HOME PAGE: http://www.swarthmore.edu/SocSci/soconne1/

University of Oxford - Centre for Study of African Economics

Wellington Square
Oxford OX1 3JP
United Kingdom

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