What is the effect of large-scale aid on public institutions and governance in poor countries? What effect will substantially increasing aid have on institutional development in Sub-Saharan African countries? This paper for the Center for Global Development argues that there is an aid-institutions paradox afflicting development in aid-dependent African countries. Large and sustained flows of aid undermine the development of effective state structures. Donors should refocus aid on debt relief, peacekeeping and security, and regional and global public goods such as disease eradication.
Sub-Saharan Africa receives a historically unprecedented level of aid. Half of the region’s 46 countries with data for 2003 received more than 10 per cent of GNI in foreign aid, and 11 countries received more than 20 per cent. A number of current proposals support a substantial increase in foreign aid to this region. However, there is growing scepticism about the desirability of such large aid increases.
This essay explores the relatively un-researched impact of aid on public institutions in low-income countries. The critical importance of sound public institutions is now recognised by both economists and political scientists. Increasingly, measures of institutional effectiveness are an explicit factor for aid allocation and disbursement. However, aid operates in a similar way to the ‘resource curse’ by undermining the social contract between state and citizens and the incentives to build functioning government institutions. These harmful dynamics are particularly acute in Sub-Saharan Africa where countries have received aid for long periods. Large volumes of aid:
- Have negative impacts on (i) macro-economic competitiveness (ii) the relation between aid and measurable development outcomes (iii) the weak capacity of recipient governments to absorb existing flows.
- Reinforce undemocratic patrimonial and clientelist elements in governments, and sustain anti-developmental practices within the state apparatus.
- Displace the processes of institutional maturation essential to development, especially the capacity of the state to collect revenue.
- Fundamentally alter the government’s relationship with citizens. Elites focus on keeping donors happy and funds flowing rather than ensuring the support of the public.
- Reinforce powerful executives over already weak and pliant legislatures, supporting the tendency to authoritarianism.
Large volumes of aid undercut the principles of ownership, accountability and participation which they are supposed to foster. Not all aid is ‘bad’ however. Increased aid flows targeted at debt relief, peacekeeping, and regional security arrangements are likely to have positive effects on institutions. Funding global or regional public goods such as agricultural or anti-malaria research are unlikely to have the negative effects described. Donors should focus more on these areas. Other policy implications are:
- Taxation and developing the capacity of the institutions involved in taxation are key issues for state building, state survival, and developing governance.
- Civil society and legislatures should be strengthened to build citizen participation and accountability.
- Donors’ incentives to improve aid effectiveness have been less strong than internal bureaucratic, commercial, foreign policy and ideological objectives. There needs to be a clearer and more prominent focus on effectiveness.
- When total aid is split into grants and loans, grants have a significant negative effect on tax revenue, while loans have a significant positive effect.
