New Perspectives on Aid Effectiveness

Over the last five decades, development assistance has evolved dramatically in response to an equally mutable global political and economic landscape. In this paper, we examine this evolution and discuss how the effectiveness of aid has been and will be seen in the eyes of donors, intended beneficiaries, and outside observers. From an historical perspective, we note that the effectiveness debate has been confined by preoccupation with macro institutions and outcomes. We also discuss how the relative importance of aid has changed with the rapid growth of trade and private capital markets. Looking ahead, we argue that great care should be taken when applying macro performance evaluation to development assistance. This approach increases the risk that aid will be politicized and allocated inefficiently. Rationing credit in whatever form it takes by macro-criteria inevitably screens out credit- or need-worthy recipients, while many beneficiaries in attractive macro settings may be less deserving. Simplistic macro rules-of-thumb not only compromise more rigorous credit and need standards; they reinforce the adversity of people living under substandard governance. In reality, aid and lending relationships involve complex contractual and agency relationships that are essentially microeconomic in nature. We therefore discuss how conceptual innovations in modern economic theory might be enlisted to improve aid effectiveness. In passing, we also review some implications for public donor institutions of another globalization phenomenon, rapidly emergent private policy agencies in the form of NGOs.