Aid and the resource curse

Aid and the resource curse

Published Jan 2005

Authors

T Harford, M. Klein

Publisher

Focus themes

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The threat of the resource curse on national institutions

This paper suggests ways to avoid the ‘resource curse’, where countries with abundant natural resources grow more slowly than those without.

The author urges that more attention be devoted to "resource curse" and discusses how national institutions may have been damaged due to the availability of increased aid. It notes that:

  • aid can support poor governments and remove the pressure to reform
  • aid creates a "moral hazard" problem, meaning governments can spend money without a firm budget constraint, confident that donors will bail them out
  • by paying big salary premiums, large donor projects can "poach" good people away from government, weakening its institutions.
  • recipients will often prefer to expand their operations to cover whatever projects donors wish to fund
  • aid fuels patronage and sparks fights over rents

The paper highlights two possible solutions:

  • to direct aid away from governments and consider the private sector as an alternative option
  • closer control over the aid flows with corruption being vigorously fought

[adapted from the author]

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