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Erwin Bulte is professor of economics at Wageningen University and Tilburg University.

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Erwin Bulte: Aid and governance

Erwin Bulte | 10 January 2010

For those of us who try to stay informed about the state of world affairs via the Dutch media, it appears as if a new consensus has emerged: that development aid is bad for Africa. Aid is presented as a lose-lose proposition, kept intact by well-meaning but fuzzy-headed idealists.

As if it were a coordinated attack, this message was recently brought to us through several channels simultaneously. The television programme 'Tegenlicht' featured a one-hour episode during prime time, toying with the thought: what would happen if development aid stopped overnight?. Whipped up by eloquent critics of development aid, such as the Zambian economist Dambisa Moyo, the programme concluded that stopping aid could be a blessing for Africans. Shortly thereafter, there was a lot of media attention on a PhD thesis concluding that Dutch development aid has done more harm than good. Adding to the media frenzy, a former member of parliament, Arend Jan Boekestijn, launched a book arriving at the same dismal conclusion.

Where there is so much smoke, there must be fire. When television, newspapers, (former) politicians and academics converge towards one powerful message, then surely it must be founded on facts. Right?

Wrong. Of course, there is anecdotal evidence linking aid to sloth and corruption. But then there is anecdotal evidence for just about every proposition, including my own view that Feyenoord really are the strongest team in our national football league. There is also a lively economics literature that attempts to unravel the causal effect of aid on development. This is not a trivial undertaking, as development aid is supposed to flow towards economies that are poor and needy. A negative correlation between aid and economic growth therefore need not imply that aid slows growth – it could simply be the case that aid is targeted just right. Careful econometric studies paint a mixed and nuanced picture, and do not support the negative message that aid is bad.

Let us consider the eroding effect of aid on institutions and governance, one of the main mechanisms linking aid to disappointing economic outcomes, according to the critics. Aid invites sloth, corruption and rent seeking. Aid makes political leaders in developing countries accountable to international donors, but not to their domestic constituencies. Aid undermines institutions by poaching qualified local staff, or fragmenting recipient countries’ policy agendas. All of this may be true. Or not. In any event, these interesting hypotheses can be tested.

There is some, mixed, evidence – see references below. But because it is so scant, and because some of it is not about African countries or does not focus on short-term institutional change, I asked two of my PhD students to delve into this problem. I asked them to explain short-term changes in 'institutional quality' in African countries (proxied by various governance proxies made available via the ICRG) during the period 1985-2004, using a set of variables including the (lagged) inflow of aid.

The results are surprising, and challenge the new ‘consensus’ so forcefully brought to us by the various media. Across the board, a greater inflow of aid today implies better scores in terms of 'rule of law' next year, as well as reduced corruption. Interestingly, this 'positive effect' of aid increases over time – the institutions-boosting effect of aid is much greater in the current era of aid conditionality than during the last few years of the Cold War. The donors have learned how to get more bang for their buck. No matter how the PhD students tried to massage or torture their data, they failed to come up with any support for the view that aid undermines African governance.

There is no firm empirical basis for the new consensus that aid hurts Africa, and it is surprising that so many statements to the contrary go unchallenged. Last year’s economic recession implies that the Dutch development budget will be cut considerably. I believe this is unfortunate in light of the challenges and opportunities that Africans and we face when trying to, for example, intensify African agriculture to promote exports and feed a growing population. It would be even more unfortunate if misinformation about the impact of aid sets the stage for more dramatic measures – halving or halting all aid under the shameless cover that we are seeking to act in the interest of Africans.

More information...

These papers find support for the proposition that aid invites corruption:

These papers find the opposite: aid improves institutions.