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to harmonize, incen� ves must be aligned at one point from both ‘exogenous’
and ‘endogenous’ approaches. The mid-way approach can be developed on
country by country basis by ways of customiza� on process. Customiza� on
involves close review of two-way incen� ves system, which can mo� vate the
donors, the recipients, and the civil society, including academia and business
community. This is where eff ec� ve management of aid takes place and can
produce desired development outcome.
Bharat Pokharel’s “Foreign Aid Poli� cs in Developing Countries” sets
the broader context of aid poli� cs in general and developing countries in
par� cular. He assumes that poor countries have huge fi nance gaps and,
therefore, to avoid these countries from poverty trap aid collected from
taxpayers of rich na� ons is shared to them as foreign aid. While Jaff ery Sachs
in “The end of poverty” argues that shock therapy of aid packages for “bo� om
billions” can end extreme poverty but he also reveals its profound eff ects on
legi� macy and unseen results and goals. Massive aid has deleterious eff ects
on receiving country’s economy. There is no compelling evidence that
donors care ins� tu� onal quality, corrup� on and good governance in their
aid alloca� on decisions. Instead study suggests bilateral aids are dictated by
poli� cal and strategic interest of donors.
Colonial history and vo� ng role in United Na� ons tend to explain more
about the eff ects of aid alloca� ons than its construc� ve role in building
poli� cal ins� tu� ons, robust economic policies and good governance of
recipient countries. Massive aid infl ux provides an easy source of government
revenue, and thus reduces the need to build an eff ec� ve bureaucra� c
mechanism to oversee the extrac� ve, regula� ve and administra� ve
func� ons of the state. The limited extrac� ve capacity, in turn, tends to
deepen the government’s dependence on rents, and consequently creates a
“ren� er state.” Essen� ally, the infl ux of easy money allowed many newborn
governments to “subs� tute aid dollars for state cra� ,” yielding them into the
state of aid dependency. High aid dependence leads to strong presence of aid
agencies in recipient countries with high chances to bypass the cumbersome
government’s bureaucracy and poach skilled bureaucrats away from civil
service towards aid-sponsored projects. This erosion of talents enfeebles
the quality of aid eff ec� veness and government performances. Theory
suggests the importance of ins� tu� onal quality for economic performance
the key to posi� ve development outcome and the very goal of reforms to
improve governance and reduce corrup� on. But as aid distorts the incen� ve
structure for public actors, it can delay ins� tu� onal reforms and, therefore,
tends to be poli� cally less desirable. Aid also creates a “moral hazard” in the
recipient country by serving as a permanent so� budget constraint.
Sound policy and good economic management ma� er more than
foreign aid for developing countries. 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). On the other hand, discrimina� on on the basis of
ins� tu� onal quality does not seem to be a feasible strategy for donors like
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