Why Do Some Countries Manage to Extract Growth from Foreign Aid?

Author/Editor:

Jean-François Ruhashyankiko

Publication Date:

March 1, 2005

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Aid is primarily given to governments whereas the engine of sustained growth is the private sector. It is therefore illusory to investigate the impact of aid on growth without considering the impact of government interventions on the private sector. The model shows how these interventions improve capacity utilization and growth. However, distortionary interventions can also cause capacity underutilization and an increase in the informal economy, that is, the very market failures the interventions initially sought to address. Countries that fall into this trap are characterized by insufficient credibility in promoting the private sector, which translates into aid dependence and slower growth over time. The empirical evidence is supportive. This paper finds that aggregate aid has a positive impact on growth (even without diminishing returns) but the impact is substantially smaller for low-income countries.

Series:

Working Paper No. 05/53

Subject:

English

Publication Date:

March 1, 2005

ISBN/ISSN:

9781451860726/1018-5941

Stock No:

WPIEA2005053

Format:

Paper

Pages:

34

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