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Exploring the failure of foreign aid: The role of incentives and information

Abstract

The stated purpose of foreign aid is to promote economic and human development. Recently, the ability of foreign aid to achieve its goals is called into question. Widespread conceptual and empirical literature suggests that foreign aid is ineffective. This paper explores the failure of foreign aid relying on the role of both incentives and information. The success of aid depends on incentives faced by all parties in donor and recipient countries. In addition, both donors and recipients must obtain the necessary information to actually target and achieve desired goals. This analysis provides a double-edged sword to explain why foreign aid fails to achieve development goals.

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Notes

  1. Sachs (2005) supports this view.

  2. Foreign aid is defined as all public official development assistance received. This can be in the form of a loan or a grant. Foreign aid does not include private donations. Donor countries refer to the bilateral donations that occur from one government to another. Aid agencies refer to the multilateral donations from such groups as the World Bank, International Monetary Fund, and the United Nations.

  3. The average percentage shares for tied aid, food aid, and technical assistance are 21%, 4%, and 24%, respectively, for bilateral donors (Easterly and Pfutze 2008).

  4. http://www.un.org/summit2005/

  5. Easterly (2006c) shows that countries still receive loans after failure to reform and after failure to repay the loans.

  6. Bauer (2000) argues that the structure of aid facilitates its failure. The money goes to the rulers, not the people, supporting bad policies and reinforcing a damaging government.

  7. For specific examples, see Easterly (2001).

  8. See Easterly (2006c) for more detailed description of principle–agent theory in foreign aid effectiveness.

  9. von Mises (1929) outlines the dynamics of interventionism where intervention creates a new set of incentives for both public and private actors. These new incentives create a situation where political actors must choose between revoking past interventions or call for additional interventions.

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Correspondence to Claudia R. Williamson.

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Williamson, C.R. Exploring the failure of foreign aid: The role of incentives and information. Rev Austrian Econ 23, 17–33 (2010). https://doi.org/10.1007/s11138-009-0091-7

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  • DOI: https://doi.org/10.1007/s11138-009-0091-7

Keywords

  • Foreign aid
  • Development
  • Incentives
  • Information

JEL

  • O1
  • F5