02 May 2010

Banerjee and He on Making Aid Work

We live in an age of aid pessimism. There is a strong, if rarely completely articulated, presumption that aid can at best help people survive, but it cannot promote development. The U.S. government’s new initiative, the Millenium Challenge Account (MCA), is based on the idea that the whole idea of aid giving needs to be rethought. In particular, it wants to tie aid to country performance: only countries that pursue economic policies that the U.S. government approves of will be eligible for aid from this account. The premise is that aid has not been working because the policy environment is not right. While it is clear that this is a problem – there are countries where the risk of the money ending up in a government official’s pocket is substantial – the thrust of our argument is that the way money is planned to be spent is also a very big problem, but a problem whose source lies in the way the donor organizations function. Combined with the fact that many of the world’s neediest live in the countries that will not make it onto the MCA list and that we expect the incentive effects of the MCA to be minimal, this suggests to us that the MCA approach amounts to abandoning a large part of the world’s poorest for no fault of their own. A more effective and less unfair challenge may be to try to see if it is possible to design projects that work in the countries with the biggest problems. If we could make that work, we would not only help those who need it the most, but what is perhaps even more valuable, we will raise expectations and build hope where there is none.

I am intrigued by the last sentence. How do we measure the value of raising expectations and building hope?

Read the whole thing here.

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