Decentralization and Foreign Aid Effectiveness: Do Aid Modality and Federal Design Matter in Poverty Alleviation?

27 Pages Posted: 5 May 2010

See all articles by Christian Lessmann

Christian Lessmann

Technology University of Braunschweig; Ifo Branch Dresden; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Gunther Markwardt

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: April 2010

Abstract

This paper empirically studies the impact of decentralization on foreign aid effectiveness. For this purpose, we examine a commonly used empirical growth model, considering aid modality as well as different measures of political and fiscal decentralization. Our panel estimations reveal that fiscal decentralization negatively impacts aid effectiveness, while measures of political decentralization have no significant effect or even a positive one. This result is robust for grants and overall ODA, while the growth impact of other aid types is not generally conditional on decentralization. We therefore conclude that donor countries should carefully consider how both anti-poverty instruments - foreign assistance and decentralization - work together.

Keywords: foreign aid, growth, decentralization

JEL Classification: O10, O20, O40, H70

Suggested Citation

Lessmann, Christian and Markwardt, Gunther, Decentralization and Foreign Aid Effectiveness: Do Aid Modality and Federal Design Matter in Poverty Alleviation? (April 2010). CESifo Working Paper Series No. 3035, Available at SSRN: https://ssrn.com/abstract=1599416

Christian Lessmann

Technology University of Braunschweig ( email )

Abt-Jerusalem-Str. 7
Braunschweig, D-38106
Germany

Ifo Branch Dresden ( email )

Poschinger Str. 5
Munich, 01069
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Gunther Markwardt (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
D-01062 Dresden, Saxony
Germany
++49 (0)351/463-33972 (Phone)

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