Book Reviews

It is a well-known fact that despite substantial aid flows many developing countries have seen little improvement in their standards of living, which raises questions whether aid is well spent. The authors elaborate on the debate on aid effectiveness, albeit from a rather unconventional perspective. Rather than taking the recipient country’s policy performance as the point of departure, the analysis explains aid performance in terms of the incentives inside the aid delivery process itself. Two characteristics are of crucial importance for the dis functioning of the foreign aid ‘industry’: many aid agencies are in fact public administrations and consequently suffer from identical institutional weaknesses , and beneficiaries and donors are geographically separated. It is this second characteristic which distinguishes foreign aid from other sectors of public policy. While voters usually receive most benefits of domestic public services themselves and can thus broadly assess whether tax money is well spent , this information feedback is absent in the case of foreign aid. Using a principal-agent framework, the authors address several questions related to the subsequent stages in the aid delivery process. Seabright argues that a number of problematic characteristics of public administrations apply a fortiori to aid agencies, including the presence of multiple political principles and objectives, hard-to-verify and hard-to-measure results, and weak incentives for staff. These shortcomings make themselves felt in an overreliance on inputs, selection of projects for ease of monitoring rather than overall contribution to beneficiary welfare, a personnel policy that recruits and directs staff to easily monitored tasks, and promotion rules that rely upon performance in these tasks even for selecting people for tasks that require more judgement. Murrell concentrates on the interaction of donors, contractors and recipients, and its effects in the increasingly popular field of institutional reform projects. In this particular area, a problem arises because of moral hazard on behalf of the recipient which prevents that de jure law is effectively transformed in de facto law , while information asymmetries constrain the donor in his ability from distinguishing between de jure and de facto law. The bargaining relation between donor agent and recipient agent is modelled, equilibria are compared, and several real-world applications are made e.g. the influence of interest groups, embeddedness, and ex-post evaluation . Mummert touches upon the impact of institutional reform projects on the behaviour of citizens. The author concludes that the scenario of indigenous social norms impeding institutional reform projects is not very likely. A conflicting relationship between externally induced institutional reform and social norms can only occur if either one is of a highly prescriptive nature that is, permitting only one kind of action, as opposed to proscriptive DE ECONOMIST 151, NO. 3, 2003