Aid dependence and governance

This study analyses the political economy of aid dependence. It argues that large amounts of aid, delivered to countries with weak institutions, create some of the institutional problems that lead to ineffective governance. It may reduce local ownership, accountability and democratic decision-making, while fragmenting budgets and lowering tax effortFindings of the report includequantifing aid dependence and the effect on governance: by measuring aid intensity as a percentage of GNP and correlating this to ICRG's index of governance quality. Finds that intensity has a separate, negative, and highly significant effect. The results indicate that high levels of aid delivered over long periods of time may affect growth and development through their impact on governance and institutional qualitythe history of aid dependence: the number of countries in this category is increasing because of: number of countries that receive high amounts of aid has beenthe inclusion of many former Soviet dependencies; the lingering effect of wars that were exacerbated by superpower conflicts; the economicand debt crises. The study also suggests study suggests that part of the problem lies in the incentives created by the current system of aid, and the way they affect the collective action problems that are inherent in any reform attempt.the need to look at the subjective interests of the 3 parties involved in cooperation implementation (government, electorate, aid agencies)effects on political power: aid dependence gives aid agencies extraordinary power in policy negotiations, but this can backfire, but aid dependence can make reforms less likely to occur. It can contribute to a “strong president, weak parliament” syndrome, distort political accountability, weaken government ownership of reforms (and thus reduce their likelihood of enactment, or of being sustained), contribute to the short time horizons and uncertainty that plague efforts at cooperation in poor countries, and may reinforce patronage practices. By-passing central governments and shifting large amounts of aid to NGOs or local governments may not alleviate any of these problems, but simply cause them to appear in another form.State capacity, bureaucratic competence and corruption: large amounts of aid and technical assistance enable bureaucracies to continue functioning without at the same time creating any incentive for them to cooperate with efforts to increase meritocratic appointments, reduce corruption in procurement and provision of services, or cut back on unsustainable numbers of public employees. Instead of building capacity, donor agencies may be poaching talented staff from government offices, providing un-necessary and unwelcome technical assistance. The agencies may also be underiming the developemnt of accountable expendure systems, by substituting their own accountants and reporting, creating an enclave of accountability that rarely grows beyond the donor agencyTaxing and spending: aid dependence tends to exacerbate problems of budget fragmentation, repetitive budgeting, and cash flow management. Budgets that are essentially aggregates of donor projects are divorced from planning and policy objectives. Continued provision of large amounts of aid over long periods of time removes the hard budget constraint from government calculations of what is affordable and sustainable in policy choices, and genuinely hard budget constraints are essential for keeping government commitments at sustainable levels. Finally, countries that are heavily dependent on aid tend to have lower levels of tax effort, suggesting that large amounts of aid may serve to reinforce inadequate revenue collection efforts.The report also looks at two best practice case studies: Taiwan and BotswanaPolicy recommendations for donors include principled selectivity in resources allocation, based on three pillars of performance: (1) pursuit of macroeconomic stability and fully accountable budget and expenditure management (including plans for increasing foreign exchange and domestic revenue generation over time)(2) progress toward establishing the rule of law, a meritocratic civil service and reducing corruption(3) progress toward improving the social welfare of the poor. Both donors and recipients in selected countries need to plan for a termination of official aid in fifteen to twenty years. And donors need to cooperate in ways that ensure that aid becomes part of the solution, and not part of the problem. [based on author]