Aid and Regulation

In recent decades, one of the objectives of international development assistance has been to encourage developing country governments to reorient their economies from highly regulated and centrally controlled to deregulated and market-based. However, poor economic performance on its own might well n...

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Journal Title: The Quarterly Review of Economics and Finance Vol. 45; no. 2-3; pp. 325 - 45
Author: Christopher Kilby
Format: Article
Language: English
Published: 2005
November 2004
Online Access: Full Text
Summary: In recent decades, one of the objectives of international development assistance has been to encourage developing country governments to reorient their economies from highly regulated and centrally controlled to deregulated and market-based. However, poor economic performance on its own might well necessitate such a shift. Does aid from donors accelerate this process by providing additional incentives and critical resources (finance and advice)? Or do donor funds slow the retreat of the state by lessening financial crises and indirectly promoting state control (e.g., through state-run development projects)? This paper contributes to the empirical analysis of this question by examining the link between aid flows and regulatory burden. Using an instrumental variables method on panel data from 71 aid receiving countries from 1970 to 1995, estimation results support the first position. Donor funds favor more heavily regulated economies and successfully promoted deregulation. This apparent example of successful conditionality points to the importance of a more disaggregate analysis of the interaction of aid and policy in developing countries.
ISSN: 1062-9769
DOI: 10.1016/j.qref.2004.12.007