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

Author

Listed:
  • Jean-François Ruhashyankiko
Abstract
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.

Suggested Citation

  • Jean-François Ruhashyankiko, 2005. "Why Do Some Countries Manage to Extract Growth from Foreign Aid?," IMF Working Papers 2005/053, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2005/053
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    References listed on IDEAS

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    Cited by:

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    2. Elsabé Loots, 2006. "Aid And Development In Africa: The Debate, The Challenges And The Way Forward," South African Journal of Economics, Economic Society of South Africa, vol. 74(3), pages 363-381, September.
    3. Strand, Jon, 2009. ""Revenue management"effects related to financial flows generated by climate policy," Policy Research Working Paper Series 5053, The World Bank.

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