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Aid dependence and the quality of governance : a cross-country empirical analysis, Volume 1
Author:Knack, Stephen; Date Stored:2000/08/26
Document Date:2000/07/31Document Type:Policy Research Working Paper
SubTopics:Gender and Development; Decentralization; Economic Theory & Research; Economic Policy, Institutions and Governance; National Governance; School Health; Governance Indicators; Development Economics & Aid EffectivenessLanguage:English
Report Number:WPS2396Sub Sectors:Macro/Non-Trade
Collection Title:Policy, Research working paper ; no. WPS 2396Volume No:1

Summary: Good governance -- in the form of institutions that establish predictable, impartial, and consistently enforced rules for investors -- is crucial for the sustained and rapid growth of per capita incomes in poor countries. Aid dependence can undermine institutional quality by weakening accountability, encouraging rent seeking and corruption, fomenting conflict over control of aid funds, siphoning off scarce talent from the bureaucracy, and alleviating pressures to reform inefficient policies and institutions. The author's analyses of cross-country data provide evidence that higher aid levels erode the quality of governance, as measured by indexes of bureaucratic quality, corruption, and the rule of law. This negative relationship strengthens when instruments for aid are used to correct for potential reverse causality. It is robust to changes in the sample and to several alternative forms of estimation. Recent studies have concluded that aid's impact on economic growth and infant mortality is conditional on policy and institutional gaps. The author's results indicate that the size of the institutional gap itself increases with aid levels.

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