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Aid effectiveness and donor behaviour. How aid modalities and incentives in aid agencies affect aid outcomes Bertin Martens (ODI London, 13-14 May 2004). Several angles to aid effectiveness. Effectiveness at macro-economic level Many papers: Burnside & Dollar, Hansen & Tarp, etc.

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Aid effectiveness and donor behaviour


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aid effectiveness and donor behaviour

Aid effectiveness and donor behaviour

How aid modalities and incentives

in aid agencies affect aid outcomes

Bertin Martens

(ODI London, 13-14 May 2004)

several angles to aid effectiveness
Several angles to aid effectiveness

Effectiveness at macro-economic level

  • Many papers: Burnside & Dollar, Hansen & Tarp, etc.
  • Black-boxes the set-up of the aid delivery process

Micro-economic approach: agency theory

  • Looks at behavioural incentives in aid set-up
  • Not a judgement on the behaviour of individuals, but on the incentives they are confronted with
foreign versus domestic aid
Foreign versus domestic aid

Domestic aid recipients can give feedback

to decision-makers

Political

decision makers

Implementation

agency

Recipients-voters

foreign versus domestic aid1
Foreign versus domestic aid
  • Foreign aid recipients live in a different political constituency: broken feedback loop
  • Aid decisions are taken in function of donor preferences: ownership is a problem in foreign aid

Recipients

are not voters

in donor country

Political

decision-makers

in donor country

Donor country

implementation

agency

Donor country voters

solutions to the ownership problem
Solutions to the ownership problem

1. Give recipient full ownership:

  • Purest form of aid « hand over the money »
  • Only if donor and recipient preferences are aligned

2. Create an intermediary: the aid agency

why do aid agencies exist
Why do aid agencies exist?
  • The official explanation: to bridge the financing gap, the knowledge gap: not credible
  • Agency theory perspective: Aid agencies introduce ownership restrictions (« packaging » of aid flows)
  • Aid agencies exist only on the donor side, not on the recipient side: credible commitment problem
  • Two basic forms of « packaging »:

« Projects »: input conditionality, managed by donor

« Budget support »: output conditionality, managed by recipient

types of agencies for problems
≠ types of agencies for ≠ problems
  • Aid Agency = joint delegation by multiple principals
  • Donors with homogenous preferences can use NGO’s as filters to select recipients with similar preferences, and to reduce transaction costs
  • Donors with heterogenous preferences delegate implementation to an official aid agency: compromise and access to tax revenue
  • Countries with heterogenous preferences delegate to a multilateral agency (≠ between loans and grants)
external incentives for aid agencies
External incentives for aid agencies
  • Joint delegation and multiple objectives prevent a Pareto optimal allocation of resources
  • Joint delegation: agencies aim to drive a wedge between donor groups, and/or donors-recipients, necessary to reach compromise but also to achieve their own budget maximisation objective (Niskanen)
  • Multiple hard-to-measure objectives with incoherent trade-offs result in inefficient allocations (↔ private profit-maximizing companies)
internal incentives in aid agencies
Internal incentives in aid agencies
  • Both input and output conditionality programmes are subject to asymmetric information and observability of results,
  • Staff, experts performance = fn (observability): moral hazard and adverse selection are facts of life
  • Aid agencies are budget maximizers, so spending pressures will contribute to actual performance
  • More weakly identified objectives will result in performance biased towards inputs (rather than results)
conclusions
Conclusions

There is a wide gap between stated objectives of foreign aid and the reality of incentives in the aid delivery set-up

  • Aid agencies are intermediaries between donor and recipient interests; outcomes are compromises
  • Aid agencies can not be fully efficient
  • Incomplete (shared) ownership is the rule, full ownership the exception