Handbook on the Economics of Foreign Aid
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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.
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Chapter 5: Samaritan’s dilemma, time-inconsistency and foreign aid: a review of theoretical models

Alok Kumar


The issue of foreign aid as a tool of development has been highly controversial. One view is that foreign aid can play a very important role in spurring development and reducing poverty in poor countries (Stern, 2002; Stiglitz, 2002; Sachs et al., 2004). The second view is that foreign aid has been harmful to poor countries as it reduces their incentives to mobilize their own resources and develop and adopt good policies and institutions and has led to aid-dependency (Bauer, 1972). Aid is largely wasted on unproductive expenditures and at best it has little effect on the economy of recipient countries (Easterly, 2003). The third view is that effectiveness of aid depends on the policy and institutional environment of the recipient countries. It is effective only in countries with good policy and institutional environment (Burnside and Dollar, 2000). Empirical studies provide a mixed evidence with regard to the effectiveness of foreign aid in achieving its stated goals. Some studies find that it has a significant positive effect on the growth of recipient countries with good policy environment (for example, Burnside and Dollar, 2000; Collier and Dollar, 2002). Other studies find that it has an insignificant effect on growth (Boone, 1996; Hansen and Tarp, 2001; Easterly, 2003; Rajan and Subramanian, 2008).

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