Foreign Aid Allocation, Governance, and Economic Growth

Foreign Aid Allocation, Governance, and Economic Growth

Foreign Aid Allocation, Governance, and Economic Growth

Foreign Aid Allocation, Governance, and Economic Growth

Synopsis

How important is foreign aid in fostering economic growth in developing countries? Does it help recipient countries, hurt them, or have little effect either way? Foreign Aid Allocation, Governance, and Economic Growth investigates this issue by looking at foreign aid by sector rather than treating it as an aggregate amount. Aid can be allocated to a recipient's production sectors (such as agriculture, manufacturing, or mining), economic infrastructure (such as transport, storage, or communications networks or power generation facilities), or social sectors (such as education or healthcare). This book differentiates among various channels through which each of these three categories of foreign aid affects economic growth.

The findings suggest that economic aid, including aid to production sectors and economic infrastructure, contributes to economic growth by increasing domestic investment. Aid to social sectors, however, does not appear to have a significant impact on human capital (measured by school enrollment) and economic growth. This study also assesses the degree to which the quality of democratic governance in a recipient country influences foreign aid's effectiveness and finds that democracy is no guarantee of aid effectiveness. In fact, economic aid to less democratic countries can lead to better economic growth, at least initially, provided the aid recipients secure property rights and allow capital accumulation. Although further research into the question is necessary, Foreign Aid Allocation, Governance, and Economic Growth suggests that aid targeted to increasing domestic investment might be an effective means of fostering economic growth in less developed countries.

Excerpt

Both bilateral and multilateral donors have increased their official development assistance (ODA) from its levels at the start of the twenty-first century. The combined effect of these aid increases has been to raise ODA by nearly 80 percent in real terms since 2000, and total net ODA flows reached about US$ 130 billion in 2010—the highest real ODA level in history. Although development outcomes are largely determined by the less developed countries themselves, foreign development assistance can provide such countries with additional resources to enhance their development prospects and promote economic growth and poverty reduction. The existing empirical literature is ambiguous as to whether foreign aid promotes economic growth in recipient countries, however, and it provides widely divergent estimates of the cross-country relationship between foreign aid flows and economic growth rates. This book by Kamiljon Akramov contributes to the literature by examining whether sectoral aid allocation patterns impact ODA’s effectiveness in promoting economic growth in aid-recipient countries.

The author concludes that historical factors such as colonial links and language traits, donors’ geopolitical and commercial interests, and the relative size of the recipient play important roles in determining the amount of aid allocated.

Using various econometric models, the study further concludes that aid for economic uses—including aid to production sectors and economic infrastructure —promotes long-term economic growth in aid-recipient countries due to a positive impact on domestic investment. The findings also suggest that this impact is not conditional on how democratic the recipient government is. These findings are particularly significant given that donors have been allocating less aid (measured both in real dollar value and as a share of total ODA) for economic uses since the 1990s. In particular, aid to the production sectors (including agriculture, industry, and trade) decreased by about threefold, dropping from a high of about 28–29 percent in the early 1980s to less than 10 percent in the 2000s.

Shenggen Fan Director General, International Food Policy Research Institute . . .

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.