AN AID-INSTITUTIONS PARADOX?

AN AID-INSTITUTIONS PARADOX? A REVIEW ESSAY ON AID DEPENDENCY AND STATE BUILDING IN SUB-SAHARAN AFRICA

Moss, Pettersson & N. van de Walle

 A Summary

In a Nutshell

Aid was traditionally used, in part, as a means of building good quality domestic institutions through conditionality and targeted spending. This approach underlies the capacity building and the “big push” system of aid for improving public infrastructure and institutions [e.g. Sachs]. The idea behind the big push is a compact between the African states and the West whereby African states agree to devote more resources to ending poverty, and in return the West provides a huge increase in aid. The idea is that the large increases can leverage commitment to improve the institutions important for growth and poverty reduction.

 However, there is now much agreement that the neopatrimonial structure of African public life prevents the development of the type of institutions that are good for growth. Resources are not used to promote development, rather the political elites act in a predatory fashion to maintain themselves in power. Additionally it appears that certain types of aid could in fact reduce institutional development. At high levels over a sustained period aid can have distorting effects on some of the very outcome the donors wish to encourage such as policy ownership, institutional development and autonomous growth. Although it is possible that the lack of development we have seen is also attributable to the political instability and periodic violence that affects the region we still need to question why the large volume of aid has achieved few results in improving the institutions of the region.

 Macro Outcomes

  • Dutch disease – large amounts of aid can discourage domestic industrialization by undermining competitiveness (although this can be avoided by exchange rate management by a competent central bank).
  • Budget – aid volatility can prevent governments from budgeting effectively. Additionally the aid can serve as a soft budget constraint on policy makers which encourages the view that budgets are flexible thus encouraging fiscal indiscipline. Evidence of this comes in the form of unsustainable government consumption.
  • The results of these effects can be slower growth, fewer jobs, macro instability, inflation from deficit spending and deterioration of the quality of public servants, all of which can contribute to an inability to move from patrimonialism to a more developmental path.

 Institutional Change

  • Patrimonialism – donor projects allow for patrimonial behaviour. Scholarships, cars, well paid seminar days etc. all undermine the transition to good public institutions. In states where power means access to state privileges and political systems are supported by complex networks of clients, aid is politicized often in place of paying a regular salary. Thus aid reduces institutional development and increases government consumption rather than public investment.
  • Revenues – the system of taxation reflects all other public institutions and collecting revenue from citizens is one of the primary ways of building accountability. Some even argue that the key determination of whether a state will transfer from aid dependency to economic self-sufficiency is whether the state learns to tax. Yet aid reduces the incentive to tax as it is unearned income. This means the institutions of taxation will not develop. It is suggested that grants are seen as free substitute for tax revenues and so reduce taxation, but loans are less de-incentivizing as they must be repaid.
  • State – aid can affect the evolution of state/society relations by undercutting ownership, accountability and participation. Elites do not need public approval for policy as the public do not fund it, and it is easier to submit to donor demands than build an autonomous tax structure. A reliance on aid as a substitute for local resources means the flow of revenues to a government is not related to government efficiency so there will be a tendency to underinvest in developmental capacity. This moral hazard reduces the incentive to adopt good polices and reform inefficient institutions.
  • Democracy – governments do not have to worry about maintaining legitimacy as they do not collect revenues from the population. Thus more unearned income is a cause of weaker democracy. This has been somewhat moderated by the conditions attached to aid, but they are rarely enforced and are a poor substitute for accountability to the citizens. Evidence for this is that the regional governments are characterized by strong presidents and weak legislatures. 

 [Implications

This has implications for the big push ideas of Sachs etc. Whilst institutions may be important for growth, this article suggests that it is not possible to purchase those institutions. First order evidence for this is the huge amount of money that has been spent in trying to develop Africa. The Berg Report called for doubling aid to Africa, which was then doubled again at Gleneagles under the leadership of Tony Blair. And yet the problems persist. This alone should encourage skepticism about the current proposal of increasing aid.

 Second order evidence is that provided in the article i.e. that aid can in fact reduce institutional development. This analysis would seems to imply that aid should be directed to projects where outcomes can have positive institutional effects such as debt relief, peacekeeping and security, together with the provision of public goods such as agriculture and disease research.]

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