This study analyzes the effect of foreign aid on governance in Pakistan by employing ARDL approach using annual data from 1984 to 2012. The study provides empirical evidence that foreign aid in Pakistan erodes the quality of governance, which has been measured by using indices of bureaucratic quality, corruption and rule of law in Pakistan. Aid dependence possibly damages the quality of governance by increasing corruption, weakening accountability, creating moral hazard, weakening policy learning, draining off talent and ability from the bureaucracy, and relieving burdens to restructure inefficient institutions and policies. Foreign aid programmes should be clearly understood and taken as a temporary and short-term development tool. There should be aid “exit strategy” and motivation for self-help.

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