Why Foreign Aid Fails : The Dual Big Push and Aid Effectiveness

This study develops a model of allocation of local elites in which low-efficiency production exerts a negative effect on high-efficiency production by squeezing resources to explain why aid has markedly different effects in different countries. There are multiple equilibria in the model. Sufficient resources can transform a low-equilibrium economy into a high-equilibrium one. However, the lower the institutional quality, the more the resources required. These findings imply that aid effectiveness requires the dual big push of resources and institutions. The model also shows that compared with project aid, financial aid may exert a curse effect