Aid Effectiveness and Capacity Development: Implications for Economic Growth in Developing Countries

Abstract

In this paper, we present a stylized model for understanding the relationship between capacity strengthening and eco-nomic growth in an endogenous growth framework. Endogenous growth theory provides a novel starting point for combining individual, organizational, and enabling environmental issues as part of attaining the capacity-strengthening goal. Our results indicate that although donors can play an important role in aiding countries to develop their existing capacities or to generate new ones, under certain conditions, the potential also exists for uncoordinated and fragmented donor activities to erode country capacities. From the policy exercises, we demonstrate that improving economy-wide learning unambiguously increases the rate of growth of output, technology, capital stock, and capacity. Moreover, a donor’s intervention has the maximum impact on the above variables when the economy’s capacity is relatively low. In contrast, donor intervention can lead to “crowding-out effects” when the economy’s capacity is moderately high. Under such a situation, the economy never reaches a new steady state. Our results not only lend support to diminishing returns to aid but also to an S model of development aid and country capacity relationship.

Share and Cite:

P. Sanyal and S. Babu, "Aid Effectiveness and Capacity Development: Implications for Economic Growth in Developing Countries," Modern Economy, Vol. 3 No. 5, 2012, pp. 567-577. doi: 10.4236/me.2012.35075.

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1] Canadian International Development Agency (CIDA), “Capacity Development: Why, What and How,” CIDA Pol- icy Branch, Vol. 1, No.1, 2000, pp. 1-8.
[2] Organization for Economic Cooperation and Develop- ment (OECD), “The Challenge of Capacity Development: Working towards Good Practice (DAC Network on Gov- ernance),” OECD, Paris, 2006.
[3] P. Mor-gan, “Capacity and Capacity Development: Some Strategies,” CIDA Policy Branch, Gatineau, 1998.
[4] P. Morgan, “The Idea and Practice of Systems Thinking and Their Relevance for Capacity Development,” Euro- pean Centre for Development Policy Management (ECDPM), 2005. http://lencd.com/data/docs/118-The%20idea%20and%20pra-tice%20of%20systems%20thinking%20and%20their%20rele.pdf
[5] C. Gunnarson, “Capacity Building, Institutional Crisis and the Issue of Recurrent Costs: Synthesis Report,” Almkvist & Wiksell International, Stockholm, 2001.
[6] S. Choritz, “Li-terature Review of Evaluative Evidence on the Three Drivers of Effective Development: Ownership, Policy and Capacity De-velopment,” United Nations De- velopment Programme (UNDP), New York, 2002.
[7] E. J. Berg, “Rethinking Technical Cooperation: Reforms for Capacity Building in Africa,” United Nations, New York, 1993.
[8] M. S. Grindle and M. Hilderbrand, “Building Sustainable Capacity in the Public Sector: What Can be Done?” Pub- lic Administration and Development, Vol. 15, No.5, 1995, pp. 441-463. doi:10.1002/pad.4230150502
[9] S. Fukuda-Parr, “UNDP Human Development Report 2003,” Oxford University Press, New York, 2003.
[10] J. J. Dethier, “Aid Effectiveness: What Can We Know? What should We Do? What May We Hope?” Paper pre- sented at the International Food Policy Research Institute (IFPRI), Washington, DC, 2008.
[11] World Bank, “Global Monitoring Report,” World Bank, Washington DC, 2007.
[12] World Bank, “Capacity Building in Africa: An OED Evaluation of World Bank Support,” World Bank, Washington DC, 2005.
[13] M. Wubneh, “Building Capacity in Africa: The Impact of Institutional, Policy and Resource Factors,” African De- velopment Review, Vol. 15, No. 2-3, 2003, pp. 165-198. doi:10.1111/j.1467-8268.2003.00070.x
[14] P. M. Romer, “Endogenous Technological Change,” Jour- nal of Political Economy, Vol. 98, No. 5, 1990, pp. S71- S102. doi:10.1086/261725
[15] D. H. C. Chen and H. L. Kee, “A Model on Knowledge and Endogenous Growth,” World Bank Policy Research Work- ing Paper No. 3539, March 2005.
[16] Y. Feng, J. Kugler and P. J. Zak, “The Politics of Fertility and Economic Development,” International Studies Quar- terly, Vol. 44, No. 4, 2000, pp. 667-693. doi:10.1111/0020-8833.00176
[17] G. Mavrotas, “Which Types of Aid Have the Most Im- pact,” UNU-WIDER Working Paper No. 2003/85, De- cember 2003.
[18] E. L. Glaeser, D. I. Laibson and B. I. Sacerdote, “The Economic Approach to Social Capital,” Economic Jour- nal, Vol. 112, No. 483, 2002, pp. F437-F458. doi:10.1111/1468-0297.00078
[19] M. Nkusu, “Aid and the Dutch Disease in Low-Income Countries: Informed Diagnoses for Prudent Prognoses,” International Monetary Fund (IMF) Working Paper No. 04/49, Washington DC, 2004.
[20] H. Doucouliagos and M. Paldam, “The Aid Effectiveness Literature: The Sad Result of 40 Years of Research,” Uni- versity of Aarhus Working Paper No. 2005-15, Aarhus, October 2007.
[21] B. Abegaz, “Multilateral Development Aid for Africa,” Economic Systems, Vol. 29, No. 4, 2005, pp. 433-454. doi:10.1016/j.ecosys.2005.06.005
[22] S. Devarajan, D. R. Dollar, and T. Holmgren, “Aid and Reform in Africa,” World Bank, Washington DC, 2001.

Copyright © 2024 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.