Research Brief
The Second Best Solution

Historically nations have developed at their own pace without assistance or aid. This kind of self-development has its obvious upsides, namely in guaranteeing the ‘ownership’ of countries over their development process. None the less, due to the human cost this route would entail for developing countries today, it is impossible to advocate that they should take this slower route to prosperity. How to manage the 'second best solution' to development, foreign aid, is the topic of the UNU-WIDER working paper 'Aid as a Second-Best Solution: Seven Problems of Effectiveness and How to Tackle Them' by Richard Manning in which he sets out seven problems to aid effectiveness today, and how these could be solved.

Today development aid flows are at about US$150 billion a year. The effectiveness of this aid is a source of much dispute in development practitioner and academic circles. Richard Manning points in his paper to academic studies that have found a positive effect of aid on macro variables and those that have identified working micro-level interventions. These are, at least in number, balanced by studies claiming that aid has no effect, or that the effect can even be harmful. Manning argues that conclusions both strands have some merit, and in order to maximize the positive effect of aid some of the main causes of aid ineffectiveness have to be actively mitigated.

Seven key problems of aid effectiveness

The factors diminishing aid effectiveness today according to Manning are;

1) Aid can be inefficient. The channels of aid delivery built by donors are not free of inefficiencies and fragmentation by any means. In his paper Manning elaborates how different channels of cooperation, bilateral, multilateral, the EU, could take some specific steps to easily boost efficiency of aid delivery.

2) Recipient countries may become dependent on aid. This can lead to the pushing up of exchange rates and can thus stunt the development of the tradables sector. Over-dependence on aid may also allow donors inappropriate leverage over national policy and diminish national governments efforts to raise revenue independently.

3) The private sector might be crowded out through government-to-government aid; this might also lead to the state taking more responsibilities than it can effectively manage. The key issue here is whether aid encourages governments to play a larger role in service delivery than is effective when compared to delivery by agents outside the public sector. More work needs to be done to ascertain whether the current proportion of aid that goes to the state rather than NGOs is optimal.

4) Aid can weaken local accountability through strengthening the executive at the expense of other political forces. Aid channelled directly to governments raises their capacity relative to parliaments, civil society and the media.

5) Government spending in all countries is open to malpractice and inefficiency; this is particularly the case in countries with weak institutions. Accountability to donors can trump accountability to stakeholders. 

6) Donors have mixed motivations for providing aid. These include political influence, cultural promotion and commercial self-interest. These mixed motives can affect the development value of aid spending: and

7) Aid can be used by donors as an excuse not to take action in other policy areas where reforms may be politically costly in domestic terms but more effective than aid in terms of spurring the development of recipient countries.

Where should mitigation start?

Manning provides specific suggestions for tackling each of these problems. There are however some key suggestions which provide at least partial solutions to multiple problems. One such suggestion is that further efforts to achieve the Paris agenda goal of greater aid harmonization in cooperation amongst donors would improve aid effectiveness. Greater donor cooperation would naturally mitigate the impact of aid inefficiency caused by donor fragmentation, mixed motives, and lack of policy coherence amongst donors. It could also have an indirect impact through encouraging the mutual development and adoption of best practices regarding aid delivery. Manning draws particular attention to the further potential of the European Union or the OECD to play a more significant role in fostering donor cooperation and thus improving aid effectiveness.

Another recurring suggestion in the paper is that of support for both formal and informal institutions for holding governments to account, which would mitigate political power imbalances coming from modes of aid delivery. Stronger parliaments, audit bodies, civil societies and media would lessen the problem of over-powerful executives by providing effective countervailing forces. Stronger institutions could also help foster more effective spending by providing local stakeholders with a mechanism through which they can hold governments to account and thereby lessen instances of malpractice and provide a political incentive for governments to improve efficiency.

A focus on improving the personnel policies of both donor agencies and recipient administrations is also highlighted as a mitigation strategy throughout the paper. Currently donor agencies mostly do not retain staff for long enough for effective relationships, key to overcoming problems of aid inefficiency, to be formed between donors and recipients. Furthermore, ineffective spending of aid in recipient countries can, in part, be put down to the inability of public institutions to attract and retain competent staff. These problems could be remedied by providing more attractive career paths and compensation packages to potential and current staff.

Manning concludes by considering the progress of aid effectiveness since the Paris Declaration of 2005. On the one hand the picture is gloomy. Three surveys carried out on the Paris Declaration indicators show that progress in improving aid effectiveness by aid recipients has been modest and progress by donors has been very slow. But Manning points out that a more positive qualitative picture is painted by the independent evaluation of the Paris Declaration, which concluded that the Declaration had improved recipient efforts and already contributed to better development results. These two assessments are seemingly contradictory. They can however be to some extent reconciled. In aid-recipient countries the Paris norms have proven very influential, largely because these countries see them as squarely in their interest. However the reaction amongst donors has been much more mixed. The observed improvements then can be explained by recipient actions, and the more negative assessment can be put, at least in part, down to the lack of changes made by donors.