The question of whether and how donors might try to create incentives for politicians in developing countries lurks behind many of the debates about how to give foreign assistance. It has come up for me twice in recent days:
- First, I was talking on Thursday evening with a donor agency official in Tanzania, who was explaining to me that her agency gives budget support in order to exercise policy influence with the government of Tanzania
- Second, in the context of Cash on Delivery aid, several people have argued that the whole concept is flawed because it relies on the idea that a promise of more aid will create incentives for developing country governments, and this is unlikely to be true.
I think it is worth establishing two points about the use of aid to create incentives. First, donors are almost never able to use aid to create incentives that work for developing countries, and they probably should not try. Second, I am in favour of piloting Cash on Delivery aid, not because I think it will create stronger incentives in developing countries, but rather because I think it will create better incentives for donors (and it might at the margin increase the accountability of developing countries to domestic stakeholders).
Why donors cannot create effective incentives through aid
It sounds straightforward to say that if a donor offers a lot of money for a developing country to change a policy or achieve a particular outcome, this should, at the margin, have some effect on incentives within the developing country and so increase the likelihood that this policy change will occur or the outcome be achieved. People respond to incentives, right?
Yet there is a mountain of empirical evidence that aid conditionality does not work. (Check the references at the bottom of this post for details.) There are two good reasons why donors cannot create effective incentives for developing countries.
First, donors do not make credible threats. Most donors have an organizational imperative to get the money out of the door. Aid agency staff want to sustain their bureaucratic status by managing large budgets. They do not, in practice, withdraw aid when developing countries do not comply with conditions. Officials in the governments of developing countries know that donors rarely stop aid – indeed, it is much more likely that aid will not be disbursed because of donor maladministration. The Government of Kenya was able to include the same promise to reform agricultural policy in five successive World Bank loan agreements over fifteen years: the condition was never met, and the aid was always disbursed. If the threat is not credible, it creates no incentive. Svensson (2000) set out the argument and the evidence in detail.
Second, the incentive created by aid is not strong enough to influence decisions of government officials. Aid is used to deliver services within the developing country, and that has only a very indirect impact on the interests of a minister or senior official. After all, most aid does not end up in the minister’s personal bank account. Of course, other things being equal, most ministers and officials want to see their fellow citizens better off. They might also calculate that more aid which improves service delivery will make them more popular and so more likely to hold on to office. But these benefits are often much less direct and immediate than the political costs to them of reform. A politician is not going to take on vested interests and risk being ousted from office just to increase the number of wells being dug in a rural area. In other words, people do respond to incentives, but aid is not as big an incentive as you might think.
Consider the choices made by ministers in industrialized countries. They too want to improve the economy, increase spending and improve public services for their citizens, for the same reasons as politicians in developing countries. But they are constrained from implementing sensible economic reforms, or raising more money in taxes, by powerful vested interests. Responding rationally to the incentives they face, they choose carefully which vested interests they are willing to confront at any given time; and that means compromising on the services they can deliver and the amount of economic growth they can bring about. The prospect of faster growth and better services does not lead them to make suicide runs at reforming agricultural subsidies, removing trade tariffs or increased taxes on the super-rich. Developing country ministers are no different. Rational ministers will not risk being ejected from office just to bring more aid to the country.
This is why conditionality based on cutting aid does not work, and it is why it is a great mistake for development agencies to allow their success to be measured in terms of the amount of policy reform they have brought about. Aid works because it pays for essential services, not because it brings about policy change.
I am not sure that industrialised countries could not create meaningful incentives for politicians in developing countries: but I believe it would be much more effective to impose travel restrictions and visa bans, to uninvite Ministers from key conferences, or to sequestrate money accumulated in Swiss bank accounts, than to cut off aid. These approaches would have the added advantage that they wouldn’t leave the poor to starve.
Incentives and Cash on Delivery
If I don’t believe that developing countries will respond very much, if at all, to aid-based incentives, why do I support Cash on Delivery aid?
Some have argued that this is a show stopping argument against Cash on Delivery. Tom Harrison says that “the biggest issue with ‘cash on delivery’ is that it assumes that where governments do not provide key public services it is because they lack the incentive to do so rather than because they lack the capacity to do so”. I agree with him that it would be a mistake to think that we can create incentives for developing countries to deliver key services; but I disagree that this is the assumption on which Cash on Delivery is based. And in a well-argued paper, Ngaire Woods and Paolo de Renzio criticize the idea of Cash on Delivery Aid, partly on the basis that “external actors may have limited leverage on domestic political realities and accountability”. I entirely agree with them about this.
I don’t believe that most developing countries need incentives to deliver better education for their children, better health care or access to safe water. I think in many cases that what they need is money. The problem is that donors won’t give that money without a whole rash of conditions, milestones, benchmarks, policy dialogues, missions, evaluations and reports. Donors are forced to impose all that paraphernalia because they need to demonstrate to their taxpayers that the money has achieved something. It makes aid costly for developing countries, and highly unpredictable. I believe that Cash on Delivery can cut through all that: by providing money on the basis of results, donors can put more money into countries that are willing and able to deliver more and better services, without imposing hassle on either donor or recipient.
The promise of Cash on Delivery might – just might – nuance the political incentives in developing countries a little. If the media, parliamentarians and civil society know that cash is available for any country that delivers better outcomes, that may help them to put pressure on their government to do a better job. The government will not be able to hide behind the old excuses of lack of money or the pernicious impact of donor conditions and foreign interference. They will have to explain to their own citizens why they have not been able to do more.
Furthermore, it is possible that I’m wrong, and that in some cases Cash on Delivery aid will provide a modest incentive for some countries. Some of my friends think it might help, and I’ve never heard anyone make a convincing case that it would do any harm.
I think a reasonable position to take is:
- Donors cannot, in practice, create incentives for developing countries through the promise of aid. That is why aid conditionality does not work.
- It is absurd to measure the success of aid by the policy change it brings about. We should measure aid’s success by the services which are provided.
- Cash on Delivery does not depend on the assumption that developing countries need incentives to provide key services. There are good reasons for testing the idea even if you do not believe that incentives are needed or would work.
Killick, T., (1998), Aid and the Political Economy of Policy Change, Routledge, London and New York.
Collier, Paul. (1997). “The Failure of Conditionality.” In Catherine Gwin and Joan Nelson, eds., Perspectives on Aid and Development. Policy Essay 22. Washington, D.C.: Overseas Development Council.
Devarajan, Shantayanan, David Dollar, and Torgny Holmgren. (2001). Aid and Reform in Africa. Washington, D.C.: World Bank.
Nelson, J.M., (1996), “Promoting Policy Reforms: The Twilight of Conditionality?”, World Development, Volume 25 Number 9, September.
Svensson, Jakob, (2000). “When is foreign aid policy credible? Aid dependence and conditionality,” Journal of Development Economics