Skip to main content
SpringerLink
Log in

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

  • Published:
The Review of Austrian Economics Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

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.

References

  • Alesina, A., & Dollar, D. (2002). Who gives foreign aid to whom and why. Journal of Economic Growth, 5(March), 33–64.

    Google Scholar 

  • Alesina, A., & Weder, B. (2002). Do corrupt governments receive less foreign aid. American Economic Review, 92(September), 1126–1137.

    Article  Google Scholar 

  • Bauer, P. T. (1971). Economic history as theory. Economica, 38, 163–179.

    Article  Google Scholar 

  • Bauer, P. T. (2000). From subsistence to exchange. Princeton: Princeton University Press.

    Google Scholar 

  • Boone, P. (1996). Politics and the effectiveness of foreign aid. European Economic Review, 40, 289–329.

    Article  Google Scholar 

  • Brautigam, D., & Knack, S. (2004). Foreign aid, institutions and governance in sub-Saharan Africa. Economic Development and Cultural Change, 52(2), 255–86.

    Article  Google Scholar 

  • Brumm, H. J. (2003). Aid, policies and growth: Bauer was right. Cato Journal, 23, 167–74.

    Google Scholar 

  • Buchanan, J. M. (1975). The Samaritan’s dilemma. In E. S. Phelps (Ed.), Altruism, morality, and economic theory. New York: Russell Sage Foundation.

    Google Scholar 

  • Burnside, C., & Dollar, D. (2000). Aid, policies, and growth. American Economic Review, 90, 847–868.

    Article  Google Scholar 

  • Commission for Africa. (2005). Our common interest: Report of the commission for Africa. London: Commission for Africa.

    Google Scholar 

  • Coyne, C. J. (2008). After war: The political economy of exporting democracy. Stanford: Stanford University Press.

    Google Scholar 

  • Coyne, C. J., & Leeson, P. T. (2004). The plight of underdeveloped countries. Cato Journal, 24, 235–249.

    Google Scholar 

  • Coyne, C. J., & Ryan, M. E. (2009). With friends like these, who needs enemies? Aiding the world’s worst dictators. The Independent Review, 14(1), 26–44.

    Google Scholar 

  • Djankov, S., Montalvo, J. G., & Reynal-Querol, M. (2006a). Does foreign aid help? Cato Journal, 26(1), 1–28.

    Google Scholar 

  • Djankov, S., Montalvo, J. G., & Reynal-Querol, M. (2006b). The curse of aid. Working Paper, Universitat Popmeu Fabra

  • Easterly, W. (2001). The elusive quest for growth: Economists’ adventures and misadventures in the tropics. Cambridge: MIT.

    Google Scholar 

  • Easterly, W. (2002). How did the heavily indebted poor countries become heavily indebted? Reviewing 2 decades of debt relief. World Development, 30(10), 1677–1696.

    Article  Google Scholar 

  • Easterly, W. (2003). The cartel of good intentions. Journal of Policy Reform, 1–28.

  • Easterly, W. (2006a). The white man’s burden: Why the west’s efforts to aid the rest have done so much ill and so little good. New York: Penguin.

    Google Scholar 

  • Easterly, W. (2006b). Chapter 2: Freedom versus collectivism in foreign aid. In Economic Freedom of the World: 2006 Annual Report. Vancouver, Fraser Institute.

  • Easterly, W. (2006c). Planners versus searchers in foreign aid. Asian Development Review, 23(1), 1–35.

    Google Scholar 

  • Easterly, W. (2007a). Are aid agencies improving? Economic Policy, 22(52), 633–678.

    Article  Google Scholar 

  • Easterly, W. (2007b). Was development assistance a mistake? American Economic Review, 97(2), 328–332.

    Article  Google Scholar 

  • Easterly, W., Levine, R., & Roodman, D. (2004). New data, new doubts: A comment on burnside and dollar’s ‘aid, policies, and growth. American Economic Review, 94, 774–780.

    Article  Google Scholar 

  • Easterly, W., & Pfutze, T. (2008). Where does the money go? Best and worst practices in foreign aid. Journal of Economic Perspectives, 22(2), 29–52.

    Article  Google Scholar 

  • Frey, B., & Schneider, F. (1986). Competing models of international lending activity. Journal of Development Economics, 20(2), 225–245.

    Article  Google Scholar 

  • Friedman, M. (1958). Foreign economic aid: Means and objectives. In G. Ranis (Ed.), The United States and the development economies (pp. 250–263). New York: Norton.

    Google Scholar 

  • Harford, T., & Klein M. (2005). Aid and the Resource Curse. Public Policy Journal (World Bank) (291).

  • Hayek, F. A. (1945). The use of knowledge in society. American Economic Review, 35, 519–530.

    Google Scholar 

  • Heckelman, J., & Knack, S. (2008). Foreign aid and market-liberalizing reform. Economica, 75, 542–548.

    Article  Google Scholar 

  • Knack, S. (2001). Aid dependence and the quality of governance: Cross-country empirical tests. Southern Economic Journal, 68(2), 310–29.

    Article  Google Scholar 

  • Leeson, P. T. (2008). Escaping poverty: Foreign aid, private property, and economic development. Journal of Private Enterprise, 23(2), 39–64.

    Google Scholar 

  • Maren, M. (1997). The road to hell. New York: The Free.

    Google Scholar 

  • Mosley, P. (1985a). The political economy of foreign aid: A model of the market for a public good. Economic Development and Cultural Change, 33, 373–393.

    Article  Google Scholar 

  • Mosley, P. (1985b). Towards a predictive model of overseas aid expenditures. Scottish Journal of Political Economy, 32, 1–19.

    Article  Google Scholar 

  • Moyo, D. (2009). Dead aid: Why aid is not working and how there is a better way for Africa. New York: Farrar, Straus and Giroux.

    Google Scholar 

  • Ovaska, T. (2003). The failure of development aid. Cato Journal, 23, 175–188.

    Google Scholar 

  • Powell, B., & Ryan, M. (2006). Does development aid lead to economic freedom? Journal of Private Enterprise, 22(1).

  • Prokopijevic, M. (2006). Why foreign aid fails. Working Paper Series No. 19, International Center for Economic Research.

  • Rashid, S. (2005). Watchmen, who watches thee? Donors and corruption in less developed countries. The Independent Review, 10(2), 411–418.

    Google Scholar 

  • Sachs, J. D. (2005). The end of poverty. New York: The Penguin.

    Google Scholar 

  • Sobel, R. S., & Leeson, P. T. (2007). The use of knowledge in disaster relief management. The Independent Review, 6(4), 519–532.

    Google Scholar 

  • Svensson, J. (1999). Aid and growth: Does democracy matter? Economics & Politics, 11(3).

  • Svensson, J. (2000). Foreign aid and rent-seeking. Journal of International Economics, 51, 437–461.

    Article  Google Scholar 

  • Trumbull, W. N., & Wall, H. J. (1994). Estimating aid-allocation criteria with panel data. Economic Journal, 104, 876–882.

    Article  Google Scholar 

  • Tullock, G. (2005). Bureaucracy. In C. Rowley (Ed.), The selected works of Gordon Tullock (Vol. 6). Indianapolis: Liberty Fund.

    Google Scholar 

  • United Nations Millennium Project. (2005). Investing in development: A practical plan to achieve the millennium development goals (main report). New York: United Nations.

    Google Scholar 

  • von Mises, L. (1922[1981]). Socialism: An economic and sociological critique. Indianapolis: Liberty Fund.

    Google Scholar 

  • von Mises, L. (1929[1977]). A critique of interventionism: Inquiries into Economic Policy and the Economic Ideology of the Present, trans. Hans F. Sennholz. New York: Arlington House.

  • von Mises, L. (1944). Bureaucracy. New Haven: Yale University Press.

    Google Scholar 

  • Werker, E., & Ahmed, F. Z. (2008). What do nongovernmental organizations do? Journal of Economic Perspectives, 22(2), 73–92.

    Article  Google Scholar 

  • Williamson, C. R. (2008). Foreign aid and human development: The impact of foreign aid to the health sector. Southern Economic Journal, 75(1), 188–207.

    Google Scholar 

  • Younas, J. (2008). Motivation for bilateral aid allocation: Altruism or trade benefits. European Journal of Political Economy, 24, 661–674.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Economics Department, Appalachian State University, Boone, NC, USA

    Claudia R. Williamson

Authors
  1. Claudia R. Williamson
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Claudia R. Williamson.

Rights and permissions

Reprints and permissions

About this article

Cite this article

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

Download citation

  • Published:

  • Issue Date:

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

Keywords

JEL

Search

Navigation