Aid Dependence and the Quality of Governance: Cross‐Country Empirical Tests

Abstract

Aid dependence can potentially undermine the quality of governance and public sector institutions by weakening accountability, encouraging rent‐seeking and corruption, fomenting conflict over control of aid funds, siphoning off scarce talent from the bureaucracy, and alleviating pressures to reform inefficient policies and institutions. Analyses of cross‐country data in this paper provide evidence that higher aid levels erode the quality of governance, as measured by indices of bureaucratic quality, corruption, and the rule of law. These findings support the need for donors to develop less costly and less intrusive ways of disseminating state‐of‐the‐art knowledge on public sector reform in developing countries.