Foreign Aid, Development and Civil War in Nepal

Abstract

A growing literature on development in fragile states has led policymakers to revisit the role of foreign aid and economic development in post-conflict situations. The proponents of aid argue that aid helps accelerate growth, and thereby addresses poverty and underdevelopment (Dalgaard et al. 2004; Hansen & Trap 2001; Sachs 2005), while critics show evidence that aid retards growth by discouraging saving and investment, and perpetuating corruption in poor countries (Easterly et al. 2003). Burnside & Dollar (2000) and Collier & Dollar (2001) have contributed to this debate by demonstrating that aid is growth- enhancing in countries with good policies and institutions, thereby implying that linking aid to policy reform should help accelerate growth and alleviate poverty — although their findings have been debated (see, for example, Dalgaard et al. 2004; Easterly et al. 2003). As this debate continues, the literature on aid effectiveness has been growing.