High levels of aid contribute to the deterioration of governance. However, aid does not have to be reduced, rather more effectively delivered. A selective approach to aid allocation can reinforce development processes. This article, published in Economic Development and Cultural Change, examines the impact that aid and the way in which it is delivered have on governance.
Previous research had focused on the importance of good governance to economic growth and development. Other efforts had concentrated on the impact of aid on development. This study brings both issues together and based on evidence from Sub-saharan Africa concludes that high levels of aid have a negative impact on the quality of governance. Aid contributes to the weakening of local institutions and to the creation of perverse incentives that, in turn, make positive change less feasible.
Although governance in many African countries is constrained by lack of state capacity, weak institutions, economic crisis, political instability and war, the negative impact of aid is undeniable. If aid is going to produce the intended results the following risks have to be considered:
- Aid reduces the amount of time and effort effectively dedicated to policy formation. Large numbers of projects funded by multiple donors require excessive government oversight and reporting.
- Aid implementation puts more pressure on government capacity. Qualified staff hired by donors and the creation of parallel technical units does not allow for skills transfer or development.
- Aid reduces incentives for democratic accountability by making available financial resources that do not depend on government efficiency or on taxes raised from citizens and business.
- Aid reduces local incentives to generate financial resources, as reflected by the decline in tax revenue as share of GDP. Aid also reduces incentives to face budget constraints by encouraging the transferral of the problem of repayment to future governments.
- Aid may reduce tax revenues. Staff, goods and property involved in aid programmes do not pay tax and in effect replace local labour and products that would be taxed.
- Aid reduces incentives for political elites to define local priorities. They tend to go along with donor agendas because of the fringe benefits and extra resources for patronage that aid provides.
Aid is not negative in itself. Adopting a more effective approach to aid delivery can improve governance and promote poverty reduction if donors and aid-dependent countries commit to it. To help reduce the existing risks donors need to:
- Deliver aid in a more selective and coordinated way. Pooling funds in shared programmes, organised on a regional basis, can reduce the pressure to spend and increase competition for funding at different levels.
- Introduce exit strategies in all large-scale programmes from the start. This can enable receiving countries to plan for the end of aid in the early stages.
- Establish clear rewards/ punishment systems to improve the way in which staff make aid decisions. Because the cost of failure does not fall on the donor, staff continues to support high risk programmes.
- Support the development of accountability mechanisms that not only address donor-state relationships, but more importantly those between state and society.
