Does foreign aid distort incentives and hurt growth? Theory and evidence from 75 aid-recipient countries

Abstract

Foreign aid, Incentives, Growth, F35, D7, D9, H2,

Aid, Infrastructure, and FDI: Assessing the Transmission Channel with a New Index of Infrastructure

“…Positive effects can be expected to the extent that aid increases the productivity of private investment by improving the supply of complementary factors of production (Selaya and Sunesen 2012). In contrast, aid could have adverse effects on FDI inflows by encouraging rent-seeking (Economides et al 2008) and by crowding out private foreign activity in the tradable goods sector (Beladi and Oladi 2007).…”

The effect of foreign aid on income inequality: Evidence from panel cointegration

“…It is important to fill this gap in order to improve the allocation of aid and its effectiveness. Theoretical considerations show that aid may induce self-interested recipients to engage in rent-seeking activities aimed at appropriating resource windfalls (Svensson, 2000;Hodler, 2007;Economides et al, 2008). Moreover, donors may allocate aid in a way that deviates from the pro-poor growth rhetoric.…”

“…The latter may happen "either by means of direct appropriation (e.g., seizure of power) or manipulation of bureaucrats and politicians to implement favorable transfers, regulations or other redistributive policies" (Svensson,8 The effects of aid on rent seeking and corruption in the recipient countries figure prominently in more recent papers, too. However the focus is typically on adverse growth implications (e.g., Hodler, 2007;Economides et al, 2008;Angeles and Neanidis, 2009). 10 In the present context, it is important to note that local elites and rich population segments tend to get the upper hand in aid-induced rent-seeking contests.…”

“…Thereby, we also avoid serious measurement problems, e.g., with respect to rent-seeking activity (Economides et al, 2008).…”

Save the poor, shoot some bankers

“…7 Governments receiving ODA can avoid the you-pay-taxes-we-provide-services exchange with citizens, just as resource wealth-oil, diamonds-does (Mehlum et al 2006). Economides et al (2008) show that aid increases rent-seeking in countries with large public sectors. Chong et al (2009) show that aid can increase growth that favors the rich.…”