Suchergebnisse

Good governance and political corruption should be considered when aid flows to governments.

The literature on aid effectiveness has focused more on recipient policies than the determinants of aid allocation yet a consistent result is that political allies obtain more aid from donors than non-allies. This paper shows that aid allocated to political allies is ineffective for growth, whereas aid extended to countries that are not allies is highly effective. The result appears to be robust across different specifications and estimation techniques. In particular, new methods are employed to control for endogeneity. The paper suggests that aid allocation should be scrutinized carefully to make aid as effective as possible.

This paper analyzes optimal foreign aid policy in a neoclassical framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modelled as a limited enforceable contract. We define conditional aid policy to be self-enforcing if, at any point in time, the conditions imposed on aid funds are supportable by the threat of a permanent aid cutoff from then onward. Quantitative results show that the effectiveness of unconditional aid is low while self-enforcing conditional aid strongly stimulates the economy. However, increasing the welfare of the poor comes at high cost: to ensure aid effectiveness, less democratic political regimes receive permanently larger aid funds.

AbstractCan sanctions against foreign aid donors enhance the credibility of conditional aid policies? If such policies suffer from time inconsistency, the answer is positive. This paper proposes a mechanism to overcome the lack of credibility of conditional aid donations to developing countries. A scheme of policy-dependent transfers to the donor country is shown to achieve an optimal commitment outcome by improving the credibility of conditional aid programs. The scheme is devised to cover situations in which the cost of structural reforms is information privately owned by the recipient government.