Abstract
Based on a model in which redistributive politics determines the allocation of foreign aid under different heads of expenditure and the extent of corruption, the chapter shows, under certain conditions, that the result that more foreign aid raises the extent of corruption in a poorer country and promotes honesty in a richer country as derived earlier in Marjit and Mukherjee (2007) is robust also for economies where the corruption proceeds leak out of the country. Thereby, it attempts to explain the conflicting empirical findings in the literature that we obtain on the direction in which the aid influences the level of corruption in the large number of developing countries, where leakage is a reality. The result also may help us to understand the pattern of corruption and income divergence that emerges among different states in a federal democracy like India, where the states receive untied grants from the central government and fight elections at the state level.
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Notes
- 1.
See Abuzeid (2009) for a detailed review.
- 2.
In a recent chapter using African data, Asongu and Mohamed (2013) have shown that the foreign aid channeled through NGOs reduces corruption in the economies.
- 3.
Kar and Freitas (2012) estimate that in the period 2001–2010 the illicit financial outflow from developing countries of the world had been around US$ 859 billion. They found that 61.2 % of this outflow had been from Asian countries except the Middle East (five of the ten countries with largest outflow, China, Malaysia, the Philippines, India and Indonesia, are in Asia). The growth of illicit financial outflow, however, was the highest in the Middle East and North Africa region at 26.3 % per annum on average, followed by Africa at 23.8 % and Asia at 7.8 %.
- 4.
- 5.
Boone (1995) used similar specification of the government’s objective function.
- 6.
The higher value of I may promise employment in the future. However, we assume there is a severe commitment problem on the part of the government, as no one believes in this promise. Typically, the effects of a long-run project unfold themselves gradually in the future with contraction of some of the sectors and expansion of some other sectors. Even if the overall expansionary effect dominates the contractionary effect, the common people suffer from uncertainty about the future in the sense that they cannot see perfectly on which side they will be when the project is implemented. See Fernandez and Rodrik (1991) for similar argument. See Robinson and Torvik (2004) for a treatment of the government’s commitment problem.
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Marjit, S., Mukherjee, V. (2016). Does Foreign Aid Corrupt? A Theoretical Note. In: Banerjee, S., Mukherjee, V., Haldar, S. (eds) Understanding Development. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-2455-6_8
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