Why Do Some Countries Manage to Extract Growth from Foreign Aid?

35 Pages Posted: 12 Jan 2006

See all articles by Jean-François Ruhashyankiko

Jean-François Ruhashyankiko

International Monetary Fund (IMF); Abu Dhabi Investment Authority (ADIA); Harvard University

Date Written: March 2005

Abstract

Aid is primarily given to governments whereas the engine of sustained growth is the private sector. It is therefore illusory to investigate the impact of aid on growth without considering the impact of government interventions on the private sector. The model shows how these interventions improve capacity utilization and growth. However, distortionary interventions can also cause capacity underutilization and an increase in the informal economy, that is, the very market failures the interventions initially sought to address. Countries that fall into this trap are characterized by insufficient credibility in promoting the private sector, which translates into aid dependence and slower growth over time. The empirical evidence is supportive. This paper finds that aggregate aid has a positive impact on growth (even without diminishing returns) but the impact is substantially smaller for low-income countries.

Keywords: Aid, Growth, Capacity, Utilization, Informal Economy

JEL Classification: F35, O41, D24, E26

Suggested Citation

Ruhashyankiko, Jean-Francois, Why Do Some Countries Manage to Extract Growth from Foreign Aid? (March 2005). IMF Working Paper No. 05/53, Available at SSRN: https://ssrn.com/abstract=874275

Jean-Francois Ruhashyankiko (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Abu Dhabi Investment Authority (ADIA) ( email )

211 Corniche Road
Abu Dhabi, Abu Dhabi PO Box3600
United Arab Emirates

Harvard University ( email )

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Cambridge, MA 02138
United States

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