Aid dependence and the quality of governance : a cross-country empirical analysis

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Aid dependence and the quality of governance : a cross-country empirical analysis, Volume 1

Author:	Knack, Stephen;	Collection Title:	Policy, Research working paper ; no. WPS 2396
Date Stored:	2000/08/26	Document Date:	2000/07/31
Document Type:	Policy Research Working Paper	Language:	English
Report Number:	WPS2396	Sub Sectors:	Macro/Non-Trade
SubTopics:	Economic Policy, Institutions and Governance; Governance Indicators; Economic Theory & Research; School Health; National Governance; Gender and Development; Decentralization; Development Economics & Aid Effectiveness	Volume 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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