The institutional economics of foreign aid

Summary From an institutional point of view, official development assistance differs from domestically financed services in important ways. First, the beneficiaries and financiers are not just distinct—they live in different countries, with different political constituencies. This geographical and political separation between taxpayers and beneficiaries blocks the normal performance feedback process. As a result, even though many individuals are responsible for ensuring the effectiveness and sustainability of aid, no one is really held accountable. Second, official development assistance is to a large extent a governmentto-government relationship. Binding political constraints in both recipient and donor countries severely limit the actions the donor can take to alleviate poverty. Finally, foreign aid is handled not by one but by multiple agencies. This results in coordination failures that reduce the impact of aid. This paper analyzes these institutional features and discusses possible ways of limiting their adverse consequences.

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