The effectiveness of foreign aid in Bolivia
Author: Lykke E, Andersen and Jose Luis Evia, Instituto de Investigaciones Socio Economicas
Source: Global Development Network
Theoretically, foreign aid can be an important ingredient in the development of a host country. Between 1997 and 2002 Bolivia received more than $US 3,000 million in foreign aid and more than $US 3,500 million in foreign direct investment (FDI). The country also received debt relief and implemented a National Poverty Reduction Strategy. During the same period, however, the GDP growth rate fell, relative and absolute poverty increased and fiscal deficit also increased. These figures suggest that neither foreign aid, nor debt relief, nor FDI has the capacity to increase growth rates and reduce poverty in Bolivia.
This paper analyses the effects of changes in foreign aid on GDP growth rate, the balance of payments and the fiscal deficit. It also investigates the distribution effects of aid. A computable general equilibrium model is used to simulate the effect of additional foreign donations of $258 million per year for 4 years on top of ‘normal’ levels of aid.
The paper concludes that whilst projects may be successful at a micro-level, aid can have adverse macroeconomic effects leading to increases in inequality and deepening poverty. The paper provides recommendations for donors and government to ensure that foreign aid has the largest and most sustainable impact possible.
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