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Are the planned increases in aid too much of a good thing?

Author

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  • Owen Barder
Abstract
Donor countries have committed themselves to increase aid to developing countries by 60 percent over the next five years; and larger increases would be needed to meet the Millennium Development Goals (MDGs). But there are concerns that there may be a limit on the amount of aid that developing countries can absorb and use effectively—and that large aid flows might even be harmful. Could a large increase in aid be “too much of a good thing?” This essay disentangles the seven possible reasons why additional aid might not be effective. These include microeconomic effects (e.g., transactions costs), macroeconomic effects (e.g., ‘Dutch Disease’) and the impact on political economy (e.g., the ‘Resource Curse’). The paper looks at each possible constraint in turn. The paper finds that there are indeed serious obstacles to effective use of increased aid, but that none is immutable. All of the constraints which limit the effective use of additional aid can be addressed by a relatively small set of practical improvements in the way that aid is provided and used. Donors have already committed themselves to a significant program of aid reform. If the measures to which donors are committed were consistently implemented, the seven constraints to effective aid absorption could be relaxed. The paper concludes that, provided increased aid is accompanied by reforms to the way aid is delivered, the capacity of developing countries to absorb and use aid should not be presented as a barrier to the increases in aid which would be needed to meet the MDGs.

Suggested Citation

  • Owen Barder, 2006. "Are the planned increases in aid too much of a good thing?," Working Papers 90, Center for Global Development.
    • Handle: RePEc:cgd:wpaper:90
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    File URL: http://www.cgdev.org/content/publications/detail/8633
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    Cited by:

    1. Waśniewski, Krzysztof, 2014. "The future of aid is in building legitimation," MPRA Paper 60071, University Library of Munich, Germany.
    2. Twimukye, Evarist P. & Matovu, John Mary & Levine, Sebastian & Birungi, Patrick, 2010. "Sectoral and welfare effects of the global economic crisis on Uganda: a recursive dynamic CGE analysis," Research Series 113619, Economic Policy Research Centre (EPRC).

    More about this item

    Keywords

    Foreign aid; dutch disease; absorption; millenium development goals; transaction costs; resource curse; aid reform;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General

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