Hysteresis, aid, and governance: theories and empirics from Africa

Foreign aid is, in principle, inexpensive finance that savings-constrained developing countries can use to support productive investment, signal good macroeconomic management, and attract private capital. Many studies have been devoted to its impact and the methodological challenges and assumptions for measuring it. But whether aid is empirically found to be effective or not may not matter to countries relying on aid as a permanent source of financing. Although aid has brought substantial volumes of foreign savings into Africa, its open-ended time-horizon and politicized motivations have also caused excessive dependency on foreign assistance. This chapter examines the changing nature of aid and development in Africa and analyzes the role of hysteresis in the continent’s persistent need for foreign aid since the 1970s. Long-term aid patterns to Africa show evidence of “addiction” - defined as reliance on aid to the point where the economic, social, and political costs outweigh the potential benefits.