Foreign Aid and Recurrent Cost: Donor Competition, Aid Proliferation, and Budget Support

• DOI: http://doi.org/10.1111/j.1467-9361.2008.00486.x
• Author: Hisaki Kono,Yutaka Arimoto
• Date: 01 May 2009
• Published date: 01 May 2009

Foreign Aid and Recurrent Cost: Donor

Competition, Aid Proliferation, and Budget Support

Yutaka Arimoto and Hisaki Kono*

Abstract

Recent empirical studies reveal that effectiveness of aid on growth is ambiguous.The authors consider aid

proliferation—excess aid investment relative to recurrent cost—as a potential cause that undermines aid

effectiveness,because aid projects can only produce sustainable benefits when sufficient recurrent costs are

disbursed.They consider the donor’s budget support as a device to supplement the shortage of the recipient’s

recurrent cost and to alleviate the misallocation of inputs. However, when donors have self-interested

preferences for the success of their own projects over those conducted by others, they provide insufficient

budget support relative to aid, which results in aid proliferation. Moreover,aid proliferation is shown to be

worsened by the presence of more donors.

1. Introduction

There is a growing debate on whether aid is effective for development and growth

(World Bank, 1998; Bourguignon and Sundberg, 2007). Numerous empirical studies

using cross-country panel data has been conducted, but aid effectiveness is found to be

not robust (Rajan and Subramanian, 2005a; Roodman, 2007). Why is aid not so effec-

tive as expected? A well-known but recently criticized thesis is that lack of good policy

undermines aid effectiveness. The World Bank (1998) and Burnside and Dollar (2000)

argue that aid promotes growth only when it is associated with good policy.However,

their empirical evidence, based on cross-country growth regression analysis, has been

found to be fragile (Easterly et al., 2004; Roodman, 2007).

An alternative possible cause of aid ineffectiveness is aid proliferation and fragmen-

tation, that is, too many donors and aid projects relative to recipients’ absorption

capacity (Morss, 1984; World Bank, 2001).1There are several channels in which aid

proliferation can harm aid effectiveness. Recent studies indicate that aid proliferation

increases transaction costs and depreciates the real amount of aid (Acharya et al.,

2006). Aid proliferation can also induce a version of“tragedy of the commons”: donors

compete and scramble for a common-pool resource of “complementary domestic

resources” (Cassen, 1994:176) such as recurrent costs or foreign exchange (Bräutigam,

2000; Bräutigam and Knack, 2004; Svensson, 2005; Knack and Rahman, 2007). Kimura

et al. (2007) includes a donor-concentration index as an explanatory variable in the

cross-country aid-growth regression and finds that aid proliferation involves a negative

effect on economic growth.

* Arimoto: University of Tokyo, Department of Agricultural and Resource Economics,1-1-1 Yayoi, Bunkyo-

ku,Tokyo 113-8657, Japan.Tel:+81 (3)5841-5328; E-mail: arimotoy@mail.ecc.u-tokyo.ac.jp. Kono: Institute of

Developing Economies, 3-2-2 Wakaba, Mihama-ku, Chiba 261-8545, Japan.Tel: +81 (43) 299-9606; E-mail:

Hisaki-Kono@ide.go.jp.This research is part of the project “Economics of Foreign Aid”undertaken at the

Research Institute of Economy,Trade and Industry (RIETI). The authors would like to thank RIETI for

generous financial support to the project. Theauthors are grateful to Yasuyuki Sawada, Motoki Takahashi,

and other members of the project, and an anonymous referee for useful comments and suggestions. The

opinions expressed and arguments employed in this paper are the sole responsibility of the authors and do

not necessarily reflect those of RIETI or the Ministry of Economy,Trade and Industry of Japan.

Review of Development Economics, 13(2), 276–287, 2009

DOI:10.1111/j.1467-9361.2008.00486.x

© 2009 The Authors

Journalcompilation © 2009 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford, OX42DQ, UK and 350 Main St, Malden, MA,02148, USA