What conditions should we attach to aid?

Politicians, the media, bloggers and other armchair experts on development almost all agree that aid for developing countries should be conditional on reforms by recipient countries, and that aid should be tied to conditions about how the aid is used.  But this approach is generally not supported by people who work in development.

I’ve written a paper which looks at the advantages and disadvantages of conditionality.   Unlike many critics of conditionality, I am broadly supportive of the policy reforms that donors recommend.  But I am not at all convinced that aid conditionality is the right way to get those reforms implemented.

There are three possible arguments for conditionality:

(a) Conditions on aid might increase incentives for policy reform by developing country governments.

(b) Allocating aid to countries with good policy environments might increase the impact of aid spending.

(c) Aid conditions might increase our ability to account for how the money was used and what effects it had.

Alongside these advantages, we should consider the possible disadvantages of aid conditionality.

(a) The conditions increase transactions costs, for both the donor and especially for the recipient.

(b) Conditions may reduce predictability, which in turn reduces the effectiveness with which aid is used.

(c) There is a possibility that some of the policy prescriptions are incorrect, either because they reflect donor interests or because some of the international experts have given poor advice.

(d) The conditions may undermine internal government systems for prioritising, allocating, managing and accounting for public spending.

(e) The imposition of external conditions may contribute to poor accountability of developing country governments to their own citizens.

As set out in detail in the longer note, the arguments for conditionality are not very persuasive; but the possible adverse consequences are alarming.  I conclude that aid  should take the form of long-term, predictable commitments, focused on countries that are pursuing policies that are likely to benefit the poor. I support aid “selectivity” linked to long-term outcomes, which is a far cry from the current system.

You can read the full note here.

2 thoughts on “What conditions should we attach to aid?”

  1. That’s very interesting Owen – particularly what you’ve got to say about the importance of predictability. It reminds me (although there are doubtless many differences) of what I have read about UK government attempts to manage the education and health systems – that is to say that the outcomes they are after might be sensible, but when you get down to the mechanics of how they try to achieve it, it descends into counter-productive box-ticking, absurd funding regimes, and so forth.

    It strikes me, though, that an element of conditionality is inevitable. When you write that aid should be “focused on countries that are pursuing policies that are likely to benefit the poor.” that is in itself a condition, or set of conditions, of sorts (this might be fruitless semantic hair splitting) but of a more flexible sort, not tied to short-term specifics.

    I suppose this might mean that there is a continuum between the sort of tight policy-specific conditionality you are arguing against, and the much loser conditionality implied by the approach: “we should aim to give aid where it’s most likely to do good” and that at some point some sort of measurable ‘conditions’ will come into play. I’d be interested to think/read more about what those conditions might be (such that they actually end up being helpful, and not counter productive in the way that you describe).

    Owen replies: Paddy – thanks. I agree with you that it is sensible to focus aid on countries that are pursuing good policies, and that this “selectivity” is a form of conditionality.

    But I would emphasise two points about this.

    First, if our aim is to ensure that we allocate aid to countries where it will do the most good, in terms of reducing poverty, then according to the same studies that find that aid is more effective in good policy environments, we would get huge benefits from allocating more of our aid to countries with low incomes and large numbers of poor people. The benefits – in terms of increasing the bang for our buck – of targeting the poorest countries far exceeds the benefits of trying to discriminate between good policy environments and poor policy environments. So if we are serious about increasing the poverty impact of our aid by improving its allocation, this is where we should start. Leaning towards good policy environments will help too, but the size of the benefits is an order of magnitude smaller. (It is striking to me that people who are most strident about targeting aid on good policy environments are very rarely heard arguing for reallocating aid towards the poorest countries, even though the argument for doing so is much stronger.)

    Second, the statistical evidence for the benefits of targeting aid on good policy environments is not as strong as our intuitions would suggest. Some studies find a positive effect – the marginal aid dollar may be 30-50% more effective in the best policy environments compared to the worst – but many studies have failed to find any correlation at all; and the statistical relationship is fragile. And we should not fall into the trap of thinking that aid given to poor policy environments is not effective: all of the studies find that aid is effective even in poor policy environments (albeit more effective if policies are better).

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