A foreign aid dilemma
a study of budget support versus project aid
Foreign aid is a very debated and controversial topic. The most recent studies have focused more on GDP growth and foreign aid correlation, however not much of the debate has focused on what kind of foreign aid should be given. The most common foreign aid is budget support, often a bilateral funds transfer between two countries. This kind of foreign aid can be both conditional and unconditional from the donors? perspective. The most known type of foreign aid is project aid, often headed by a international organization, that see the entire project through, from raising funds, to actually be in the aid receiving country, establishing healthcare, education, road-construction etc.Our purpose is to compare two micro-economic studies of budget support versus project aid. These two are using similar economic models. We are to draw conclusions of their models, and how or if, their conclusions can be applied on the real world. Different opinions of these two studies conclude towards different results but both points out that conditional budget support produces the most effective results in the receiving country.Both to some extent neglect the role of project aid, and neither takes corruption into account as a factor for the lack of efficiency of budget support. Also the "crowding out"- effect of project aid has been one of the main topics in the debate against it. On the other hand, both authors aggregate the individual donor nations and organizations into one universal donor, taking the real-world un-coordination of conditional budget support out of the picture. We attempt to extend the perspective by offering suggestions on how to improve these models, based on the problems mentioned above.We conclude that more variables need to be put into the equations, especially for the un-coordination by donors, as-well as corruption. We also acknowledge the difficulty to try to put an economic and social phenomenon that is foreign aid, into a simplified micro-economic equation.