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Orlando Jos Penicela Jr.




ABSTRACT ......................................................................................................................................... 3
I. INTRODUCTION ...................................................................................................................... 4
II. THE RATIONALE: DOES AID STILL MAKE SENSE? ........................................................ 6
III. THE VIRTUES OF AID.......................................................................................................... 8
1. From Aid Politics to Household Savings: How is aid shielding Incomes? .................... 9
2. Laying the Foundations for Pro-Poor Growth: How is aid lowering the ladder for the
Poor? ............................................................................................................................................. 11
3. The efficiency gains of the new global aid Landscape ........................................................ 12
IV. AN INSIGHT INTO THE MALAISES OF AID ................................................................ 14
1. Corruption in Recipient Countries: how was the beast raised indoors? ...................... 14
2. Aid Mentality and Policy Proliferation ................................................................................. 15
3. Greedy Governments Consumption .................................................................................... 16
ASSISTANCE BE MORE EFFECTIVE? .................................................................................... 17
VI. BIBLIOGRAPHY .................................................................................................................. 19



This is an essay on the limits of foreign aid, its dual legacy and the lessons to be learnt. For more
than a half a century now, foreign development assistance has been a controversial narrative of
an unusual blend of frustrated expectations and renewed hopes. The polarized literature on aid
virtually reflects that ongoing and still contradictory and inconclusive debate where neither the
prosecution nor the defense will get the chance to strike the decisive knock-out. This
essay is based on the assumption that the aid debate is not a zero-sum game where one (either
the prosecution or the defense) takes it all.
Throughout the paper we resort to the poverty trap model and capitalize on counterfactual
analysis to argue and demonstrate how aid has been crucial in bridging the socio-economic
fractures and discontinuities that holdback self-help development efforts in several poverty-
stricken countries. Nevertheless, we afterwards move on to showcase that foreign assistance
hasnt entirely been epical. An overshadowing and not long-past background of complicity
or tolerance with inter alia corruption, dictatorships and empty democracies, can be partly
blamed for governance glitches that still haunt those aid-dependent nations today.
Based on this yin-yang pattern, we shall draw forward-looking extrapolations as we explore
the potential malaises of aid as well as its potential to play a game-changing role in the
development trajectory of those nations. Particularly worth mentioning is that the paper sheds
special focus on how aid has affected and can influence the most poor (who are often in rhetoric
its prime target). The idea of pro-poor aid is central in our discussion. Stemming from our
understanding that bad governance and poverty are actually path-dependent, it aims to
deconstruct right from the beginning (as we redefine our object), the so-called Good Policy Model
of Aid Effectiveness.
Deconstructing this model will render us a footboard from which to address the merits and
demerits of extending aid to countries whose own policies are proving ineffective to get them
off the grip of poverty.


These young women already have a foothold in the modern economyon the ladder out of extreme
poverty The very hardest part () is getting the first foothold on the ladder. Jeffrey Sachs (2005)
A little over one-six of humanity lives in a vicious circle of deprivation, most of them in Sub-
Saharan Africa, East Asia and South Asia (Sachs, 2005). This paper is about what foreign aid
means to those people. It is an attempt to understand how the crutches of development
assistance could be part of the cocktail that will transform those poverty-stricken societies
into self-helpful countries by helping them to break the vicious circle of not-having.
To properly discuss the virtues and demerits of aid, we start by briefly framing the
fundamentals of our discussion under the Poverty Trap model which is quite appealing for
giving a good insight into the fractures and discontinuities that hold back poor countries
growth efforts.
We then move on to showcase how aid is working itself out of a job by setting the
foundations for aid-independent growth and comprehensive development in Low Income
Countries (LICs). We also take a sharp look into the reality of development assistance until
today, to pinpoint why aid hasnt been and isnt all roses. An overshadowing and not long-past
background of complicity or tolerance with inter alia corruption, dictatorships and empty
democracies; still haunt its redemption efforts. Throughout the essay, we shall shed light on
those stains of aid.
Nevertheless, as will we argue and demonstrate, despite its many shortcomings, over the last
decades, aid has transformed itself into a functioning crutch that is providing an unprecedented
opportunity to poor countries to gradually get rid of dependence itself.
But unsurprisingly, not everyone is happy with aid. Not everyone agree that growth is possible
with aid either. This is precisely where the debate on merits and demerits of aid begins. In
fact, one of the central political and scholarly debate around aid has been deeply polarized
around two main extremes: (i) the most radical view claims that development aid should cease
quickly, as it interferes with growth by slackening the expansion of markets in the recipient
countries; (ii) a more widely held view argues that although they should be seen as temporary
commitments, development aid flows have to be in place for long enough to assist the
deepening and expansion of market forces in the recipient countries. As it expands, the market

itself will determine the fall of development aid (Ridell, 1999). By then, its mission will actually
be complete.
The first view sums up the somewhat radical idea of jumping-out of aid and the latter
summarizes the gradualist logic according to which aid will progressively work itself out of a
job as countries grow-out of it. No leaps in dark.
As insinuated before, my own starting point and value judgment for this discussion is that
poverty-stricken countries should grow-out of aid-dependence by promoting continued
improvements of pro-poor social indicators which in turn, in the medium and long run, will
sustain GDP expansion, opening the doors to further new possibilities towards an aid-
independent growth.
In his highly publicized The End of Poverty, J. Sachs exposes himself too much to criticism for
his bold Big Aid, Big Results approach. Unsurprisingly, his passionate critics are now
boasting to be on the upper-hand, claiming that the aid debate is pass and that the case for aid
is lost (Easterly, 2014). Nevertheless, we intend to pursue that supposedly lost battle because
whilst most of the critics have been busy in attacking Sachs over-optimism regarding aid results,
his theoretical and analytical framework seems to survive. Exploring it with a revised sense
of optimism seems to be a promising venture.
For analytical purposes, it is worth redefining our object and theme before moving any further.
What exactly is meant by developing countries whose own self-help efforts are inadequate?
Aside from being quite vague and ambiguous, this categorization could be seen as being
politically diminishing, and potentially come to undermine stakeholders apathy with the
research results and its recommendations.
Let us begin with the assumption that inadequate self-help efforts reflect a countrys inability
to achieve and sustain development outcomes relying on its own resources. Assuming that
development outcomes are determined by policies and the latter reflect complex institutional
and political dynamics of governance (Pierre & Peters, 2000), then, inadequate self-help
efforts should in two words mean ineffective policies. Therefore, the whole discussion will
ultimately debouch on governance and policies.
In fact, a very extensive literature has argued that the link between aid and development
outcomes is defined by the quality of the recipient countries economic policies (e.g. Burnside &
Dollar, 2000; Ouattara & Strobl, 2008), leading to the influential Good Policy Model of Aid

effectiveness. The model claims that aid allows good economic policies to become better and the
bad ones to worse and, therefore, aid should be concentrated on countries with sound policies
(Ouatarra & Strobl, 2008). However, poverty bad governance path-dependence, turns the Good
Policy Model into a problematic option for general policy prescription, because the poorest
people tend to precisely live in countries that have been badly governed for a relevant part of its
history (Bourguignon & Platteau, 2012). Actually, if we take Colliers (2007) estimates, good
policies as an ex ante conditionality for aid would tend to exclude 76% of the worlds Bottom
Billion who live in poorly governed countries (with ineffective policies).
Now, admitting that turning-off the tap to countries with ineffective policies is not the way
to go, then its fairly plausible to wonder about the merits and demerits of extending aid to
them. What is interesting about this challenge is that unlike much of the scholarly debate, it
implies an explicit though tough attempt to bridge the gap between the prosecution and the
defence of aid.

Because growth is instrumental in achieving the final stated goal of foreign assistance (broad
human development), huge volumes of literature havent spared efforts in trying to understand
its dynamics. Two centuries of highly uneven
economic growth has generated two worlds
apart. One of prosperity and abundance. The other one, of poverty and deprivation. The
poignant historical and economic conditions behind this state of things, justify (at least to some
extent) why aid advocates have been, for more than half-a-century now, successful in making
the case for counteractive global efforts against those striking disparities.
Understanding those objective conditions and the subsequent concept of poverty as a trap, is
essential to avoid biased judgements on why these countries self-help efforts havent been that
much effective or why literally crippling poverty persists here. From the early days of the
economic growth theory, acclaimed economists had pioneered the idea that was later to be
brilliantly synthesized by Gunnar Myrdal: a circular constellation of forces tend to act and
react upon one another in such a way as to keep a poor country in a state of poverty (Myrdal,

Sachs (2005:30)

Fig 1: The low-level equilibrium trap (Poverty Trap)
Source: Author based on Myrdal (1957).

Incipient levels of domestic savings determine shallow local financial markets, limiting the
room for domestic borrowing. Moreover, the volatility of these economies as well as poor
institutions, tend to exclude these countries from global financial markets, constraining
furthermore their borrowing capacity and making it harder for them compensate the shortage
of domestic savings (Cohen, Jacquet & Reisen, 2007). Can, they on their own escape this dead
Rosenstein-Rodans Big Push (1943), Myrdals Circular Cumulative Causation (1957) and
other prominent theories acknowledged the role of exogenous forces in breaking the downward
spiral of the poverty trap. The extensive literature on aid remains widely inconclusive and
contradictory on whether it has actually delivered on that goal. Meanwhile, aid in its diverse
modalities keeps flowing in an increasingly complex landscape. The once poor and aid-recipient
nations like Japan, South Korea and BRICS
are now reinforcing their position as major donors,
in what seems to be a renewed enthusiasm aimed at recreating their decisive Big Push and
miraculous Catching-up.

Brazil, Russia, India, China and South Africa

Low Savings Low Income


Low Capital
Low Growth

Our view is that, the continued presence of the traditional donors and the growing involvement
of the new donors wouldnt be the case if the objective economic conditions that justified aid
fifty years ago, were no longer in place today. Notwithstanding recent global trends of decrease,
development cooperation flows still account for 70% of overall financial flows to LICs (UN,
2012). This continued commitment by donors is in itself an acknowledgement that the problem
that brought us here is yet to be solved and we cant afford to simply ignoring it and the billion
people that wake-up every day to struggle simply to survive for the uncertain next morning. On
the other hand, while much heated controversy still lingers over the extent of impact vs the
amount of aid disbursed, a significant literature finds it hard not to recognize that aid has been
a key factor in the gradual weakening of the poverty trap in many parts of the developing
Bottom-line: Aid does make sense, it does work. Aid achievements clearly outweigh its risks
and shortcomings. The question that comes next is: how much and at what cost, which is in
turn, a question of effectiveness; a question of quality of aid, a vast debate which we
will only briefly refer to here.

On this section, the poverty trap model presented above will be instrumental as we try to
explore the virtues and merits of aid as a potential game-changer in the development trajectory
of the worlds poorest nations.
Despite the growing media coverage of the poverty drama in the developing world, its often by
travelling to a poverty-stricken country and witnessing it first-hand, that most people take the
mind-changing experience that transforms them from aid prosecutors to aid defence. From
ordinary tourists to acclaimed scholars, from rich philanthropists to show-biz celebrities, many
have found it hard not to be overwhelmed by a deep feeling of unfairness and inequality, which
has ultimately led them to engage in some sort of action or activism. In fact, from the
perspective of Public Expenditure theory, aid both from those individuals and Governments,
serves redistribution purposes with transfers of resources from rich to poor countries and could
be seen as an approach to the challenge of world income convergence. On this chapter, we try to
escape the vast orthodox often generalist literature and portray a picture which we hope will
amplify our understanding of how aid is working and touching millions.

1. From Aid Politics to Household Savings: How is aid shielding Incomes?
For the average citizen of an aid-dependent country, foreign assistance is hardly perceived to go
beyond the handshakes and camera flashes that episodically pop up on his TV screen. He often
ignores the impact of aid flows at the atomistic level. But truth is that when those handshakes
and camera flashes do not happen, he might have to tighten the belt.
On this section, I shall resort to a case-study to showcase the impact of aid flows as a crucial
factor of stability both for the macro and micro level of economic dynamics in countries where
Aid/GDP ratio (understood as a proxy for aid dependence) is considered high i.e. above 30%
(Lensink & White, 1999).

In October 2009, Mozambique held its 3rd general elections, which gave a landslide victory to
FRELIMO (the ruling party) and its candidate Armando Guebuza. However, allegations that
the scrutiny had been overshadowed by striking irregularities brought to boiling level long-
standing donors dismay around several issues from electoral reform to corruption and justice
system (Hanlon, 2010a).
Faced with government resistance to give-in to these pressures, the Donor Community
announced the freezing/delaying of disbursements for General Budget Support and Sector
Program Support committed for 2010, demanding concessions to be made under the underlying
principles of the Programme Aid Partnership, which, some donors claimed, had been breached.
The news of the freezing of disbursements triggered an immediate quake on expectations. Fears
that the local market would run short of foreign exchange reserves took many consumers and
investors to hurry into buying the US Dollar and other main transactional currencies. However,
the supply couldnt cope with the demand because the inflow of US Dollar had already been
hardly hit, driving the exchange market into a shock that plunged the local currency into a 5-
year low in the first half of 2010. The donors strike was clearly pointed by officials as one of
the key reasons (Hanlon, 2010b).
It was after key political concessions were agreed by the government that disbursements started
to flow again from April. But Mozambique is a highly imports-dependent economy and by the
time the monies started to flow again, it was already too late to avoid the inflationary ricochet
effect of the exchange rate depreciation, which ultimately led to serious social unrest over high
food prices in September 2010.

The donors strike case in Mozambique is indeed a very particular situation. But, its lessons
might give us a glimpse into the short-term impact of aid as a source of foreign exchange
reserve with important stabilizing effect
on local markets for the most dependent countries in
the world. That has been the case for Mozambique, but it would still hold true in other
economies where similar patterns of income (per capita) and intensity of aid
are found.
In poor and largely imports-dependent economies, the impact of such slight shocks is far
from negligible first and foremost because food prices tend to be highly volatile with respect to
exchange rate variations but also because the bulk of households income is spent on basic daily
consumption (mostly imported food). Therefore, by helping in maintaining the exchange
market stable, foreign aid is actually providing essential stability to prices and to the whole
macroeconomic framework. Controlled levels of inflation, combined with uncertainty in
can affect households liquidity preference in favor of a higher marginal propensity
to save for precautionary motives, which could in turn boost domestic savings. It is though
worth noting that in LDC
, most of the families cant afford to stash that non-spent portion of
their income in Banks. They instead, keep the money running through informal networks of
savings and borrowing, which means that theres a large portion of savings that is not captured
neither by government figures nor by related studies. Nevertheless it is that money that allows
most of the low-income urban families and specially women to invest or reinvest in small
businesses, allowing them to get that critical first rung in the ladder out of poverty.
As pointed-out before, these income-related effects of aid are likely to occur in other LDCs
where similar patterns of income (per capita) and intensity of aid are found.
Furthermore, the case-study portrayed above, is also paradigmatic of another striking feature of
foreign aid. It has been instrumental in pushing for important reforms not just in politics, but
most importantly, in policies. Why policies? Let us find out.

We are not aware of any country where Aid inflows have led to particularly harmful and systematic appreciations
on local exchange rates, implying that it can hardly be blamed for Dutch disease effects. Therefore it is important
to stress that appropriate policy response measures have allowed aid to have a stabilizing effect on recipients
real exchange rates.
Intensity of Aid is measured by the ratio Aid/GNP and is widely used as a proxy for aid dependence.
High rates of unemployment, high informality of the economies as well as unpredictable and precarious job
conditions, are responsible for predominantly uncertain incomes in developing countries.
Least Developed Countries

2. Laying the Foundations for Pro-Poor Growth: How is aid lowering the ladder for the
In the early and mid 90s, models reviewing the direction of causality between savings and
growth, suggested that in most of the developing region (Sub-Saharan Africa in particular),
correlation between growth and saving is two-way, but the most dominant one was from
growth to savings rather than the contrary, implying that policies aimed at directly promoting
growth should be the prime focus of attention (Elbadawi & Mwega, 2000). But policies are by
themselves an output since they always reflect complex institutional and political dynamics of
governance (Pierre & Peters, 2000). Therefore, by influencing the institutional and political
dynamics of governance, a change either for good or bad is guaranteed in policy outcomes.
Simple as it sounds, it is this reasoning that explains western donors obsession with
governance reforms. Governments act and react through those tentacles called policies. Proper
government policies are needed for growth. But, for pro-poor growth they are absolutely
essential. Therefore, aid recipient governments commitment with pro-poor policies and
spending did not come of a void. In fact, following the Millennium Declaration in 2000, donors
have been actively involved in pushing for higher budget allocations to poverty-relevant social
sectors. But apart from human capital development, donors have been widely committed in
supporting a growthenabling environment (e.g. easing of business regulations). That
commitment has been reflected on the patterns of allocation of aid in developing countries,
where social sectors (including Education, Health and Sanitation) as well as institutional/infra-
structural economic reforms, emerge as the most benefited.

ODA by sector since 1990 (as a percentage of total ODA, 3-year average commitments)
Source: OECD, Aid at a Glance (2013).

This pattern of allocation is in part a legacy of the East-Asian Catching-up, as well as the recent
successes in South Asia, where earlier efforts on social sectors and particularly in qualifying the
labor force, have been paying-off brilliantly.
But the Asian Tigers are no longer a particularly startling example. More recently, Vietnam was
quite successful in allocating aid resources to human capital development. Now, this qualified
labor force has become one of the critical comparative advantages of this country among other
developing nations competing for Foreign Direct Investment (Wang & Balasubramanyam, 2011).
In this case, grants consumed in social sectors have been developmental in the sense that for
instance, qualified workforce has allowed the FDI-driven growth to be inclusive and to trickle
down to wider segments of society. From this perspective, aid is contributing to self-sustaining
societies in the medium and long run.

3. The efficiency gains of the new global aid Landscape
The emergence of the BRICS, the growth of MINT
as well as the challenges facing most of the
Western economies, are altogether prompting changes in the global aidscape. However, the
envelope of aid from OECD DAC donors, is still undoubtedly incomparable to that from non-
DAC cooperation groupings such as BRICS and South-South Cooperation.

Total official and private Development Aid flows to LDC (Net disbursements in 10^6 US Dollars)
Source: Author based on OECD Data

Mexico, Indonesia, Nigeria and Turkey.

Regardless of this abysmal gap in volumes though, contributions of emerging economies to
international development are appreciated and well-received by host countries (Besharati, 2013).
The appeal seems to lie on the Eastern donors focus on infrastructure with multiplying effect.
Amongst western donors, only Germany spent more than 15% of its aid on infrastructure in
2009-10, while South Korea and Japan both spent over 40%, and China 60% (Glennie, 2012).
This pro-investment bias of Eastern donors has been critical in harnessing the linkages of the
productive tissue allowing the economies to move further and faster off the stagnation track.
Eastern aid has predominantly been directly pro-growth.
Meanwhile, the bulk of traditional western aid has been directly targeted with some degree of
success on anti-poverty social indicators linked to the MDGs, allowing recipient governments to
provide basic goods and services. Western aid has been predominantly pro-poor.
None of these approaches outshines the other, though controversy around their impact rages on.
Our stance is that those different perceptions on the impact of each of these approaches derive
from the time lag between inputs and impact. Investments (e.g. roads) and their impact are
more easily perceived because they a have less diffuse impact chain. On other the hand, it takes
much more to track the value for the money that was spent in printing and handing out free
school books to first grade kids.
But comparisons between western and eastern aid has also been around the problem of
conditionalities. Whereas western governance conditionalities are quite well known, Eastern
donors are less explicit and they have been quite adamant in proclaiming that they come for
genuine friendship. However, over the last 15 years or so, reality as made it clear again that
there is no such thing as free lunches [neither in the West, nor in the East].
Therefore, this diversified supply should not prompt more and more appetite (demand) for aid
but it must instead level-up recipient governments selectivity to opt for aid that best responds
to their objectives today, without sacrificing tomorrow needs. While many politicians tend to
pick aid that best responds to their quest for visibility and political survival, making smart
choices on aid sources, means weighing the alternatives available against inter alia issues of
natural resources sustainability, State sovereignty and State capacity.
The new global aidscape is for the first time in history providing the aid-recipient countries
the possibility of choosing and its up to them to make the right choices.


1. Corruption in Recipient Countries: how was the beast raised indoors?
Despite donors stated aim of tackling corruption, there is overwhelming evidence that they do
partner with corrupt governments in some countries (Pradhan et al, 2000; Svensson, 2000;
Alesina & Weder, 1999). Yet, another author has gone even further to suggest that in some cases,
donors could actually be at the origin of the problem (Hanlon, 2004).
A considerable number of countries among the top ODA recipients do have a recent history of
socialist central planned economies (e.g. Mozambique, Vietnam, Tanzania, Ethiopia and India),
some of them with leaderships previously reputed for their strong integrity. Based on evidence
from former socialist economies of Eastern Europe, a World Bank study
pointed out that ruling
Communist Parties were quite effective in controlling the behaviour of its public officials, and
then, maintaining corruption under control. But, the donor-led transition to market-friendly
economies somehow opened a Pandora Box that brought out the evils of savage capitalism.
Based on the Mozambican trajectory of transition, Hanlon (2004), gives a poignant and heartfelt
testimony of how donors policies and modus operandis have directly and consistently
supported/rewarded a corrupt local elite in exchange for liberalization policies. As long as the
governing elite agreed with the neoliberal mantras of getting the prices right, privatizing and
liberalizing, donors were implicitly willingly to turn a blind eye and a deaf ear to glaring cases
of corruption, like the particularly remarkable episode in the early 2000s involving around 45%
of the whole General Budget Support
. Let alone the hundreds of NGOs that were eager to do
anything to have things eased in its dealings in the country.
Such direct and indirect rewards which were taken by the donor community as a way of
stimulating the emergence of an entrepreneurial class in the context of privatizations, did also
have a disruptive effect on the democratic political game by strengthening the possibilities of
political survival for the ruling elite and undermining the chances of democratic change of

Pradhan et al (2000)


Interestingly according to Hanlon (2004), in its Good Governance and Anti-Corruption Action
Plan, the Norwegian Aid Agency (NORAD) has explicitly justified its lenient attitude towards
corruption referring that:
Investigation and prosecution of corruption cases require large personnel and other resources, which
implies costs well above what poor developing countries can afford. Strong emphasis must therefore be
placed on preventing corruption, by raising public awareness, and by reducing the scope for corrupt
And because it derives from a plan that is not particularly country-specific, theres nothing to
make us believe that this pernicious laissez-passer attitude is not replicated elsewhere.
Moreover, this non-specificity makes this case relevant the analysis of aid in a wider context of
aid-dependent countries.
As he finds little evidence of a genuine commitment from both parts (i.e. donors and
government) to prioritize fighting corruption, Hanlon (2004) concludes that, a symbiotic
relationship has grown up between the Mozambican predatory elite and the donors to maintain the myth
of the Mozambican success story.
Donors might have been naive at believing this carte blanche would only stand for a limited
period. In fact it will still cast its shadow for as long as it takes to deconstruct the now
crystallized behaviours and perceptions. It is not surprising that despite being increasingly
vocal against corruption and setting ex ante conditionalities strongly linked to evidence of
breakthrough in this field, donors are now finding it hard to tame the beast they once
tolerated. Containing it now, surely will require much resources and time, even if genuine
political will is ever found.

2. Aid Mentality and Policy Proliferation
Notwithstanding the usual and strong rhetoric for ownership following the Paris Declaration
(2003), Donors dont seem to have completely forgotten the prescriptive philosophy learnt from
the Washington Consensus. While on the one hand donors emphasize the need to listen to
country governments and civil society, which is acknowledged as vital for policies to work, on
the other they make clear that certain policy options are out of bounds (Glennie, 2011). In fact,
donors stance towards government policy initiatives hasnt really been an encouraging one,
particularly when it comes to bold proposals that present a potential Big Push impact. The

overwhelming influence of donors in the conception of the Poverty Reduction Strategy Papers
(PRSPs) for instance, only mounted to fears that governments focus in satisfying donor
demands as a way of maximizing aid inflows is undermining country incentives to reflect, set
up and implement their own self-reliant development policies. Linked to that, policy
proliferation is commonplace in many aid recipient countries particularly in sub-Saharan Africa,
in part because governments are willingly to chart policies that allow them alignment and
eligibility to as much aid as possible, from as much sources they can, which gives rise to the
thesis of Aid Maximizing Strategies. Policies designed to maximize aid inflows havent
necessarily targeted internal demands and objective conditions but they have instead focused at
aligning to potential donors requisites. Therefore, rather than supporting country policy
initiatives, aid is in some cases overriding or replacing them.
Aid maximizing strategies are an indication that there are for some segments, individual
and/or institutional incentives to maximize aid-related benefits that are likely to have slackened
commitment to exit strategies over the last decades. A well-known defect associated to policies
designed as aid maximizing strategies or with excessive donors interference is that they tend to
be myopic by focusing too much on immediate gains which do not necessarily reflect positively
on the longer run and in a wider spectrum.

3. Greedy Governments Consumption
The defence has been widely criticised for advocating a scaling-up in the volume of aid as a
panacea that will somehow fulfil those frustrated expectations around aid. In fact, they seem to
ignore the fact that recipient countries are rife with problems, from crippling bureaucracy in
projects approval to sluggish procurement processes, that considerably limit their absorptive
capacity, casting doubts over their Big Aid, Big Results approach. This is clearly a simplistic
approach that risks failing for partly isolating a crucial variable of the chain impact: recipients
fiscal response. Analyzing the fiscal response allows us to determine if aid has had a fully
additive effect or a substitutive effect on domestically-mobilized revenues
. More importantly

There has been a huge debate on that. But convincing factual evidence (including in highly dependent countries)
seems to suggest that aid has not crowded-out domestic revenue mobilization efforts whatsoever. Fiscal ratios
have increased significantly in recent years (e.g. In Mozambique it went from 13.4 per cent in 2005 to 22.9 in
2012). Similar trends have also been observed in Uganda, Ethiopia, etc.

for our intended analytic focus, fiscal response is also about how aid affects the patterns of
spending allocations. The prosecution has claimed that Big Aid has only prompted Big
Consumption. Moss et. al (2006) agreed with them after reviewing an extensive literature,
which allowed him to conclude that aid generates the impression of an increase in incomes
leading to expansion in expenditure not financed by corresponding real rises in revenue.
But, it is worth mentioning that most poor aid-dependent economies are still spending far less
than they actually need in order to properly deliver the most basic goods and services, to the
point that sliming the Leviathan (i.e. the government size) is almost an irrelevant debate both
for politicians and academia in those countries. Therefore, what is disturbing is not the obvious
fact that aid-recipient governments consumption is scaling-up, but the items of expenditure
that are on the rise. Independent Budget Monitoring and Evaluation organizations, are
increasingly worried at the fact that recurrent expenditures inter alia travels, subsidies, official
ceremonies and government officials houses expenses, are increasingly swelling at disturbing
rate. This trend could reflect a growing fungibility of aid, because by financing the bulk of social
sectors it allows government resources to be released to other needs. At the end of the day the
question is: who gets the lion share of Budget?


Though acknowledging that aid has played an important role, more and more voices within the
aid recipient countries are calling for a gradual yet steadfast move out of dependency. This
domestic aid fatigue is playing an important role in pushing for exit strategies. But, what does
it take for aid to effectively work itself out of a job?
1. Both demand side (recipients) and the supply side (donors) of aid, will have to make
sure that the growing anxiety for immediate and SMART results does not shift attention
from pro-poor social sectors because in fact, aid only does make sense when it targets
those that need it the most.
2. The different sources of aid emerging in the new global aidscape are tending to
specialise in different types of intervention and competences regarding the way they

approach growth and poverty reduction. It is up to recipient governments to explore the
strategic opportunities stemming from this scenario.
3. If aid is to keep flowing to governments, it is critical for donors to maintain and improve
the conditionality mechanism. For the case of western donors, conditionalities have to
be country-specific rather than general policies applied everywhere. Recipient countries
and governments across the world are far from being a homogenous group.
4. Scaling-up Real aid aid not tied purchases of goods and services (including hiring
personnel) in donor country, which would imply double-counting.


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7108. National Bureau of Economic Research, Cambridge, MA, Available at
http://www.nber.org/papers/w7108. Accessed on 14 December 2013.
Besharati, N (2013). Common Goals and Differential Commitments: The role of emerging
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African Institute for International Affairs.
Bourguignon F; Platteau, Jean-Philippe. (2012). Aid Effectiveness Revisited: The Trade-off
between Needs and Governance.
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