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Why Foreign Aid Fails

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  • Miroslav Prokopijevic

Abstract

The main point of this paper is that foreign aid fails because the structure of its incentives resembles that of central planning. Aid is not only ineffective, it is arguably counterproductive. Contrary to business firms that are paid by those they are supposed to serve (customers), aid agencies are paid by tax payers of developed countries and not by those they serve. This inverse structure of incentives breaks the stream of pressure that exists on the commercial market. It also creates larger loopholes in the principle-agent relationship on each point along the chain of aid delivery. Both factors enhance corruption, moral hazard and negative selection. Instead of promoting development, aid extends the life of bad institutions and those in power. Proposals to reform foreign aid – like aid privatization and aid conditionality – do not change the existing structure of the incentives in aid delivery, and their implementation may just slightly improve aid efficacy. Larger improvement is not possible. For that reason, foreign aid will continue to be a waste of resources, probably serving some objectives different to those that are usually mentioned, like recipient’s development, poverty reduction and pain relief.

Suggested Citation

  • Miroslav Prokopijevic, 2006. "Why Foreign Aid Fails," ICER Working Papers 19-2006, ICER - International Centre for Economic Research.
    • Handle: RePEc:icr:wpicer:19-2006
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    File URL: http://www.bemservizi.unito.it/repec/icr/wp2006/ICERwp19-06.pdf
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    References listed on IDEAS

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    Cited by:

    1. Claudia Williamson, 2010. "Exploring the failure of foreign aid: The role of incentives and information," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 23(1), pages 17-33, March.
    2. Nabamita Dutta & Russell S. Sobel & Sanjukta Roy, 2016. "Foreign aid’s impact on domestic business climates," Journal of Entrepreneurship and Public Policy, Emerald Group Publishing Limited, vol. 5(3), pages 365-382, November.

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