POLICY CHOICES FOR AID: MATCHING WHAT RECIPIENTS NEED WITH WHAT
DONORS THINK THEY SHOULD HAVE
The current consensus on the best way to package and deliver aid is for it to be largely
unconditional, with ‘ownership’ given to the recipient countries and donors only acting
as ‘partners’. It is widely thought that setting conditions on how aid money is spent
prevents recipient countries from allocating aid to where it will be most effective.
But according to research by Rune Jansen Hagen, having completely unconditional
aid often leads to the same outcome because recipient countries will anticipate what
course of action will unleash the greatest flow of funds, and might find it best to conform
to donors’ expectations even when they believe there are superior alternatives.
His study, presented at the Royal Economic Society’s 2010 annual conference,
concludes that aid donors still play a key role in how aid money is spent, even if there is
no formal agreement, because recipient countries will want tacitly to satisfy their
donor’s preferences when they apply for aid.
The author advocates another solution, in which donor organisations learn more about
the recipient countries to align more closely their preferences for where aid should be
allocated with those of recipient countries. This would make conditional aid closer to
what the recipient countries actually want.
One problem donors should deal with is the lack of country specialists in these
organisations as many employees move quickly from country to country.
More…
In daily life, you tend to get what you pay for, but in foreign aid, you often get what
recipients think you would like to pay for. When donors care about outcomes, recipients
will anticipate what course of action will unleash the greatest flow of funds, and might
find it optimal to conform to donor expectations even when they believe that superior
alternatives exist.
The debate on aid has been heated for half a century. A number of ‘magic bullets’ have
been proposed and discarded when they failed to produce the expected results.
Currently the Millennium Declaration expresses a set of ambitious goals for
development common to rich and poor countries alike, with more aid being one of them.
The Paris and Rome Declarations incorporate the new consensus on the best way to
package and deliver aid. After decades of dancing to the donors’ tune, recipient
countries are now to acquire ‘ownership’ of domestic policies. The rich countries
providing much of the resources needed to implement them are to be ‘partners’ only.
This rhetoric fits well with both empirical studies demonstrating the impotence of many
of the conditions traditionally attached to aid and theories emphasising the need to
tailor policies and institutions to each particular country as opposed to the blueprint
approach embodied in the infamous ‘Washington consensus’. For once, the current fad
in policy circles thus seems well-grounded both theoretically and empirically.
In this paper, I take the new rhetoric seriously by analysing a situation where
unconditional aid is given in a context where local knowledge is important. I show that
while real ownership might be the result, conformity in policy choice is a definite
possibility.
Recipients might choose the same actions in different states of the world even though
they know this is inefficient. They do so when anticipating that donors believe a certain
policy is very good for aid impact because then the volume of transfers more than
compensates for the lower bang-for-the-aid-buck recipients foresee based on their
superior knowledge of the local economy.
This raises the paradoxical possibility that some deviation from the ideal of
unconditional support for the sensible plans of developing country governments might
actually improve matters. I show that different views on how policy affects aid impact
can produce better results than consensus.
Hence, donors and recipients should learn to ‘agree to disagree’, as policies are least
distorted when the parties are neither in complete agreement nor completely at odds
about the realities underlying their relationship.
This indicates that one should be cautious with respect to the recent healthy emphasis
on ownership leading to uncritical acceptance by donors of recipients’ plans. It also
highlights the need for donors to invest in country-specific expertise to have a solid
foundation for their own assessments. This requires a break with past practice as donor
personnel have traditionally been rotated too fast to become country specialists.
I also investigate the consequences of donor coordination in this setting. While an
integral part of the new consensus, a longstanding worry is that if donors gang up,
recipients will lose out. If the starting point is one donor with a highly biased opinion of
what makes aid work, having an advocate for the opposite case might accord the
recipient the space to pursue the correct policy given its private information.
Thus, the movement towards ‘silent partnerships’ where one donor manages both its
own aid and that of others or the establishment of ‘lead’ donors, might lower the quality
of recipient policies if it replaces a healthy competition among donors with different
viewpoints.
As a corollary, I show that donor coordination in the sense of a sufficient convergence
of views can ensure that the equilibrium is separating. This aspect has received scant
attention so far, with the focus being on streamlining the aid delivery system.
ENDS
‘Dancing the H-Street Waltz? Policy Choice in Aid-Dependent Countries’ by Rune
Jansen Hagen, Department of Economics, University of Bergen, Norway
Rune Jansen Hagen
Email: rune.hagen@econ.uib.no
Mobile : (+47) 46454315
Phone: (+47) 55589219 / 55589210