Table of Contents

Handbook on the Economics of Foreign Aid

Handbook on the Economics of Foreign Aid

Edited by B. Mak Arvin and Byron Lew

It would be fair to say that foreign aid today is one of the most important factors in international relations and in the national economy of many countries – as well as one of the most researched fields in economics. Although much has been written on the subject of foreign aid, this book contributes by taking stock of knowledge in the field, with chapters summarizing long-standing debates as well as the latest advances. Several contributions provide new analytical insights or empirical evidence on different aspects of aid. As a whole, the book demonstrate how researchers have dealt with increasingly complex issues over time – both theoretical and empirical – on the allocation, impact, and efficacy of aid, with aid policies placed at the center of the discussion.

Chapter 18: Aid and corruption: an incentive problem

Alessia Isopi

Subjects: development studies, development economics, economics and finance, development economics, politics and public policy, international relations


Corruption is a very serious problem, particularly widespread in developing countries. According to the 2013 Corruption Perception Index (Transparency International, 2013) almost three-quarters of the countries (including all low-income countries and all but three African states) score below five and 71 countries (nearly half) score below three. It aggravates poverty by having a significant and detrimental impact on the lives of the poor; it reduces their net income and wrecks the programs related to their basic needs. In societies where corruption and clientelism are pervasive, competition is severely distorted and, in the long run, corruption not only affects the distribution of resources, but also the process of economic growth, encouraging people to apply their skills and energies in non-productive ways (see, for example, Mauro, 1995). Last but not least, the phenomenon of corruption is also capable of frustrating the efforts of aid agencies in their fight against poverty and underdevelopment in both donor and recipient countries, such that without countering corruption, aid is in danger of not achieving its goals, failing to reach the poor or just reaching them partially. Regardless of the general agreement on the relevance of this issue, and despite the many declarations of intent, do donors actually take the problem of corruption into account in their development policies?

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