Ghost of the financing gap: an overlooked aspect of the aid debate

In the decades-old intense debate on foreign aid, a great deal has been said about qualitative aspects of aid and aid-effectiveness (i.e. fungibility, among other things). The latest landmark in the debate was the World Bank publication Assessing Aid: What Works, What Doesn't, and Why, which generated a new wave of controversy about foreign aid and policy conditionality. Much of the recent debate has focused on the qualitative aspects of the aid-growth relationship and the role of 'good' policies. However, little attention had been paid so far to some important quantitative aspects. The present study draws attention to this often overlooked aspect of the aid debate to demonstrate that the level of aid requirements of a country is an equally important and integral part of aid and aid-effectiveness. Estimation of the magnitude of external assistance requirements of countries used by international financial institutions is compared with an alternative model, the so-called 'Balance of Payments Constrained Growth Model' (based on the Harrod trade multiplier). It is revealed that the latter is not a real alternative as it is an incomplete model. More importantly, it is shown that international financial institutions use these quantitative frameworks in a very flexible and pragmatic way to carry on a meaningful policy dialogue with both donors and recipient countries, which has an important bearing on overall aid and aid-effectiveness. Copyright © 2004 John Wiley & Sons, Ltd.