Aid and conditionality

Abstract

This chapter examines the conditions under which foreign aid will be effective in raising growth, reducing poverty, and meeting basic needs in areas such as education and health. The primary aim is not to draw policy conclusions, but to highlight the main questions that arise, the contributions of the academic literature in addressing them, and the areas where much remains unknown. After describing some key concepts and trends in aid, the chapter examines the circumstances under which aid might transform productivity, and when it can achieve things that private capital flows cannot. The chapter reviews the relevant theory and evidence. Next, it turns to some of the other considerations that might form part of a structural model linking outcomes to aid. These include Dutch Disease effects, the fiscal response to aid, and the important connections between aid and governance, both positive and negative. The second half of the chapter examines when donors should attach conditions to aid. It reviews the debates on traditional policy conditionality, and potential alternatives, including the ideas underpinning the new “partnership” model. This model gives greater emphasis to a combination of autonomy and accountability, for countries where governance is strong. In other cases, donors may seek to attach conditions based on governance reform, and introduce new versions of traditional policy conditionality. The chapter also discusses controversies over the appropriate role of country ownership of aid programs. It goes on to discuss some donor failings, the future roles of randomized trials and evaluation, and the scope for aid to meet basic needs. The chapter ends with a discussion of some of the most innovative ideas for the reform of aid, and a summary of the main conclusions.