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

Abstract

Recent empirical studies reveal that effectiveness of aid on growth is ambiguous. This paper considers 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. We 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 over the success of their own projects to 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.

Less aid proliferation and more donor coordination? The wide gap between words and deeds

“…Based on a model that incorporates aid and recurrent costs to produce aid project outcome, Arimoto and Kono (2009) conclude that with an increasing number of aid projects the amount of recurrent cost allocated to each project will be reduced. This tends to lower aid productivity because aid projects can only produce sustained benefits if there is no shortage of recurrent costs.…”

Aid Fragmentation or Aid Pluralism? The Effect of Multiple Donors on Child Survival in Developing Countries, 1990–2010

“…Failure to solve collective action problems can have a number of consequences. First, donors may decide to prioritize support for individual projects that provide opportunities for claiming credit in the short-term and neglect activities that strengthen governmental capabilities, such as budget support, which are likely to have a stronger long-term impact, but for which political credit will be diluted among many donors (Arimoto & Kono, 2009). Second, if donors have less of a stake in the recipient's overall policy effectiveness, they will be more interested in the success of their own individual projects and "poach" the most qualified managers from the recipient's bureaucracy, which worsens the quality of the latter (Knack & Rahman, 2007).…”

Economics of Official Development Assistance: Views from Japan and East Asia

“…Recently, rigorous studies addressing the issue of aid proliferation have emerged, such as Acharya et al (2006), Knack and Rahman (2007), Roodman (2006aRoodman ( , 2006b), Arimoto and Kono (2007), Kimura, Mori, and Sawada (2012), and Rahman and Sawada (2010). Aid proliferation induces competition for local experts or the available local matching funds for aid and thus decreases the average bureaucratic quality and effectiveness of aid projects, respectively, in aid recipient countries (Knack and Rahman, 2007;Arimoto and Kono, 2007). Roodman (2006a) presents theoretical arguments regarding the proliferation of aid projects and the associated administrative burden for recipients.…”