Are the planned increases in aid too much of a good thing?,” Working Papers 90

Donor countries have committed themselves to increase aid to developing countries by 60 percent over the next five years; and larger increases would be needed to meet the Millennium Development Goals (MDGs). But there are concerns that there may be a limit on the amount of aid that developing countries can absorb and use effectively—and that large aid flows might even be harmful. Could a large increase in aid be “too much of a good thing? ” This essay disentangles the seven possible reasons why additional aid might not be effective. These include microeconomic effects (e.g., transactions costs), macroeconomic effects (e.g., ‘Dutch Disease’) and the impact on political economy (e.g., the ‘Resource Curse’). The paper looks at each possible constraint in turn. The paper finds that there are indeed serious obstacles to effective use of increased aid, but that none is immutable. All of the constraints which limit the effective use of additional aid can be addressed by a relatively small set of practical improvements in the way that aid is provided and used. Donors have already committed themselves to a significant program of ai