Aid and institutions

According to Iqbal Quadir in the Wall Street Journal

Aid empowers bureaucracies, promotes statism, and weakens government incentives to boost tax revenues through growth. Economic assets are often kept in the hands of the state, leading to monopolies, stagnation and extortion. All of this hurts entrepreneurs, who have the potential to create wealth and promote governmental accountability.

The history of Western economic and political advancement illustrates that it is the economic strength of citizens — not governments — that gives rise to checks and balances

This seems a plausible theory, but I’ve yet to see any evidence for the claim that aid reduces the accountability of governments.  If anything there seems to be a modest positive correlation between aid and government taxation (that is, governments that receive more aid also tend to tax their citizens more  – though perhaps taxes would be even higher without the aid).  And I’ve never seen any proper analysis of whether accountability goes up in proportion to taxes or whether there is a threshold (are Denmark and Sweden more accountable than the UK and France because they have a higher tax rate?). 

I also observe that many of the most active political movements draw their strength from people who pay relatively little tax, such as students.

So my take is: maybe. Show us the numbers.

3 thoughts on “Aid and institutions”

  1. There have been studies showing an inverse relationship between aid and taxation effort, and aid and institutions. The more recent good summary of the literature (that I am aware of) is here: http://www.cgdev.org/files/5646_file_WP_74.pdf

    Other worthwhile reads are:
    Brautigam, Deborah A & Knack, Stephen, 2004. “Foreign Aid, Institutions, and Governance in Sub-Saharan Africa,” Economic Development and Cultural Change, University of Chicago Press, vol. 52(2), pages 255-85, January.

    and anything by Mick Moore on the topic.

    1. Ryan

      Thanks. Even the study you quote – which wanted to make the case for a negative relationship – summarized the empirical literature thus:

      Generally, thus, the literature finds a negative relationship between aid and revenue collection, but this is not a conclusive result. For all of the studies, there are considerable concerns about the quality of the data and also the sensitivity of the results to specification changes, which make firm causal conclusions about the aid-revenue relationship impossible.

      Similarly, the negative correlation between tax effort and governance has not been shown empirically either. Yet both these would need to be true (a negative causal effect between aid and tax effort, and a negative causal effect between tax effort and governance) for the argument to have empirical substance. (I stand ready to be corrected, but I can’t recall Mick Moore producing any evidence for this either.)

      So we are faced the obvious benefits of aid, which we can see every day, with a theoretical double chain of causation of aid on poor governance for which the empirical evidence is extremely weak or non-existent. (If the aid advocates were relying on such weak empirics the aid sceptics would be crawling all over them.)

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