Aid and Governance

The EUObserver.com reports that the European Commission, ahead of the G8 Summit in Russia, has announced plans for a new $3.8 billion aid fund for Africa which will be tied to good governance. 

It is not the first effort to tie aid to performance.  Such is the idea behind the Millennium Challenge Corporation (MCC), for example (wondering how that process is working out?  then check out the MCA Monitor Blog).  I don’t think many would reject that idea of incentives-based aid programs – even one of the biggest critics of aid, Bill Easterly, does not advocate for the complete abandonment of it, rather he supports effective evaluation of how and where aid money is distributed

The two key elements necessary to make aid work, and the absence of which has been fatal to aid’s effectiveness in the past, are FEEDBACK and ACCOUNTABILITY. The needs of the rich get met through feedback and accountability. Consumers tell the firm “this product is worth the price” by buying the product, or decide the product is worthless and return it to the store. Voters tell their elected representatives that “these public services are bad” and the politician tries to fix the problem.  

My take: Incentives-based aid brings it closer to private sector capital flows, yet it remains a step behind.  At the same time, if aid can stimulate real reforms in governance and economic environment, governments will see both aid and private sector investments.  The real question then becomes – how are the decisions made?  In the case of the private sector, I have a feeling that investments respond to changes not just promises to change.  Is it the case with aid?  And another question — If you think aid can be a strong enough incentive to change – why wouldn’t investment be?  Comments?