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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

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


decision makers




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


are not voters

in donor country



in donor country

Donor country



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)

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