The Impact of Official Development Assistance on Government Effectiveness: From the Perspective of Government Competitiveness

Abstract

The effectiveness of aid is still a contentious issue of debate. A few East Asian countries, such as South Korea, Hong Kong, Singapore, and Taiwan were notable for the extraordinary growth by government-led development strategy. By contrast, though the history of foreign aids has been more than 60 years, many developing countries are suffering from poverty. Given the four Asian tigers cases, this study focused on the role of government to achieve economic and social development, and made attempts to explore the relationship between aid dependence on government spending and government effectiveness, and the mediating effect of corruption from the perspective of government competitiveness. The analysis draws upon a panel data of 82 recipient countries in the period 2004-2013. Government effectiveness and control of corruption are measured by the World Banks the Worldwide Governance Indicators(WGI), and the aid dependency ratio released by the World Bank is used for the independent variable. The analysis of the relationship between dependence on ODA to government expense and government effectiveness is examined through pooled OLS(Ordinary Least Squares). Moreover, the mediating role of the capacity to control corruption is verified by using Baron & Kennys steps and the Sobels test. The findings of the study substantiate the hypothesis that dependence on ODA undermines government effectiveness in developing countries. In addition, it cannot be deduced that there are full or partial mediation effects of the control of corruption between ODA and government effectiveness. To increase aid effectiveness, the recipient governments should exercise ownership over its developmental strategies. Considering cases in East Asian countries which have made rapid growth with government intervention, recipients must build its administrative capacity. To sum up, governments of developing countries need to strengthen their government competitiveness.