After the Big Push? Fiscal and Institutional Implications of Large Aid Increases

Abstract

From the recent G8 Summit to UN declarations, calls for a Big Push in official development assistance by OECD countries are becoming more frequent and pressing. Although there may be a consensus among the donor community to increase giving, what impact will this new aid have on recipient countries? In this Working Paper, CGD Research Fellow Todd Moss and the IMF's Arvind Subramanian point out that currently, twenty-two low-income countries receive aid equivalent to more than 50% of their budgets and eleven receive more than 75%. Given six different Big Push scenarios, Moss and Subramanian forecast that, on average, these numbers will rise to thirty-five and seventeen countries, respectively. Importantly, the authors argue that the potential dangers of increased aid flows will become all the more relevant and pressing as aid intensity ratios increase. These include the effect of aid on institutions and incentives to collect tax. They also raise concerns about whether high levels of aid could actually hurt public accountability and potentially undermine the social contract between citizen and state. Sustainability is a final issue since continued flows are far from guaranteed and rapid increases in aid can create new problems if not sustained over the long run. Moss and Subramanian highlight the important question of aid effectiveness, and urge us to ask: In addition to the possible benefits from increased aid, what might also be the downsides?