Author: Deborah Bräutigam, Expert Group on Development Issues.

In the face of the pessimism that has grown up around aid, new research shows that with a good institutional environment large amounts of aid can have very positive results in developing countries. Aid can help govern- ments to more quickly and effectively meet their development objectives, and can improve the standard of living of the poor. Aid can be part of the solution. Unfortunately, most developing countries do not currently have a good institutional environment, and in these countries, high levels of aid have a much less certain impact. There are many reasons why governance and the institutional environment may be poor in developing countries. Leaders with short time horizons or other priorities may see little point in the long-term task of building a capable bureaucracy. Two decades of economic crisis have undermined bureaucratic capacity, weakened anti-corruption norms, and made it difficult for governments to pay enough to retain talented people. Many low-income countries have only recently emerged from civil wars. Yet there is another factor that may play a role: the large amounts of aid received by many low-income countries. Continued over long periods of time, depend- ence on aid may make it more difficult for good governance and better insti- tutions to develop. This study analyzes the political economy of aid dependence. Large amounts of aid delivered over long periods, create incentives for governments and do- nors that have the potential to undermine good governance and the quality of state institutions. These incentives are not always acted on, but when they are, large amounts of aid may reduce local ownership, accountability and democratic decision-making, while fragmenting budgets and lowering tax effort. Large amounts of aid, delivered to countries with weak institutions create some of the institutional problems that lead to ineffectiveness. In aid dependent countries, donor agencies and foreign experts often take over many of the critical functions of governance: substituting their own goals for an absent leadership vision, using foreign experts and project management units in place of weak or decaying public institutions, and providing finance for investments whose operation and maintenance is neither planned for nor affordable. In these countries, aid has been part of the problem. And long- term dependence on aid creates disincentives for both donors and govern- ments to change the rules of their engagement. In aid dependent countries, we can model government actions as a stylized game involving three sets of players: those within government (bureaucrats and politicians), those in society (interest groups and the electorate more generally), and aid donors. The choices of these actors are a function of their separate interests and ideas, the incentives they face, and the formal and in- formal rules (institutions) that shape their possibilities for action. All claim to want better governance: increased transparency and predictability, greater 1 2 domestic ownership of policies and programs, fiscal sustainability, account- ability and so forth. Yet the formal and informal rules of the present system and the incentives it creates can make it difficult for governance reforms to occur, and for governments and donors each to escape from the trap of aid “interdependence”.