Aid Dependence and the Quality of Governance: A Cross-Country Empirical Analysis

Abstract

Good governance-in the form of institutions that governance, as measured by indexes of bureaucratic establish predictable, impartial, and consistently enforced quality, corruption, and the rule of law.This negative rules for investors-is crucial for the sustained and rapid relationship strengthens when instruments for aid are growth of per capita incomes in poor countries.Aid used to correct for potential reverse causality.It is robust dependence can undermine institutional quality by to changes in the sample and to several alternative forms weakening accountability, encouraging rent seeking and of estimation.corruption, fomenting conflict over control of aid funds, Recent studies have concluded that aid's impact on siphoning off scarce talent from the bureaucracy, and economic growth and infant mortality is conditional on alleviating pressures to reform inefficient policies and policy and institutional gaps.Knack's results indicate that institutions.the size of the institutional gap itself increases with aid Knack's analyses of cross-country data provide levels.evidence that higher aid levels erode the quality of This paper-a product of Regulation and Competition Policy, Development Research Group-is part of a larger effort in the group to identify the determinants of good governance and institutions conducive to long-run economic development.