Does Aid Fragmentation Affects Sustainability and Growth: The Case of Nepal

Abstract

Nepal’s strategic position and open border with India and China have attracted unusually high attention, particularly during the Cold War era, not only from these two large neighbours but also from European countries, the USA and the former Soviet Union. However, despite decades of aid inflows, Nepal remains one of the poorest countries. While debate over aid–growth nexus remains unsettled, our empirical results do suggest that aid fragmentation is detrimental to growth, perhaps due to increased administrative burden to manage a large number of small projects and meet reporting requirements of the donor community. While we find that aid is good for growth, attracting uncoordinated and fragmented aid without the need for assessment can, in fact, do more harm than good. These findings point to the importance of coordinated aid approach not only at the country level but also among the donor community.

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