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a “spending eff ect” on direct patronage of elites and on the suppression
of opposi� on groups (Ross, 2001). Both of these observed eff ects have
demonstrably nega� ve impacts on government accountability, equity, and
civil liberty.
Foreign aid delay pressures for reform
By making corrup� on more lucra� ve, aid distorts the incen� ve structure
for public actors, and may therefore delay pressures for ins� tu� onal reform.
Given what we know about the importance of ins� tu� onal quality for
economic performance, ins� tu� onal reform is the key to development in
many poor countries. Yet achieving reform requires solving a complex set of
collec� ve ac� on problems. Theory suggests that reforms are akin to public
goods in that they benefi t the public at large, and it is diffi cult to preclude
anyone from reaping these benefi ts. O� en, the very goal of reforms is to
improve governance and reduce corrup� on levels in the country. However, if
aid makes corrup� on more lucra� ve by making available large sums of easy
money, then the very agents who are supposed to bring about the necessary
reforms will lose their incen� ves to act.
Aid also creates a “moral hazard” problem in the recipient country by
serving as a permanent so� budget constraint. The persistent infl ux of easy
foreign aid money creates the impression that the recipient government
is always likely to be bailed out when things go wrong. Since recipient
governments do not have to worry about answering to taxpayers, and are
only bound by rela� vely loose accountability mechanisms to their donors,
there is li� le incen� ve in the system for fi scal discipline and sound judgment.
Essen� ally, aid serves as “insurance” for incompetent or corrupt leaders and
weakens their incen� ve to seek alterna� ve revenue sources through wise
policies that encourage self-sustaining investments. Furthermore, leaders
(who tend to have short-� me horizons) will be more likely to make risky
or reckless decisions that might yield high short-term results, but may not
necessarily have sustainable or desirable long-term eff ects. The problem is
further complicated by the fact that the best long-term policies, like those
leading to ins� tu� onal and economic reform, tend to be less poli� cally
desirable because they necessitate signifi cant short-term sacrifi ces, and
require pa� ence and longer � me horizons to achieve results.
Eff ects on foreign aid recipients
New research suggests that foreign aid may not necessarily be harmful
and that the exis� ng ins� tu� onal environment of the recipient country plays
a big role in determining the success of aid-led development. An infl uen� al
study by Burnside and Dollar fi nds that aid has a posi� ve impact on growth
in developing countries with good fi scal, monetary, and trade policies, but
has li� le eff ect in the presence of poor policies (Burnside & Dollar, 1997).
In essence, a posi� ve ins� tu� onal se� ng in the recipient country means
that the detrimental dynamics of aid fl ows on governance can be largely
Changing paradigms of aid eff ec� veness in Nepal 69