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Why Foreign Aid Fails

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  • Miroslav Prokopijević

    ()
    (Institute of European Studies, Belgrade, Serbia)

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    Abstract

    The main point of this paper is that foreign aid fails because the structure of its incentives resembles that of central planning. Aid is not only ineffective, it is arguably counterproductive. Contrary to business firms that are paid by those they are supposed to serve (customers), aid agencies are paid by tax payers of developed countries and not by those they serve. This inverse structure of incentives breaks the stream of pressure that exists on the commercial market. It also creates larger loopholes in the principle-agent relationship on each point along the chain of aid delivery. Both factors enhance corruption, moral hazard and negative selection. Instead of promoting development, aid extends the life of bad institutions and those in power. Proposals to reform foreign aid like aid privatization and aid conditionality do not change the existing structure of the incentives in aid delivery, and their implementation may just slightly improve aid efficacy. Larger improvement is not possible. For that reason, foreign aid will continue to be a waste of resources, probably serving some objectives different to those that are usually mentioned, like recipients development, poverty reduction and pain relief.

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    File URL: http://www.panoeconomicus.rs/casopis/petibroj/PROKOPIJEVIC%20Why%20Foreign%20Aid%20Fails.pdf
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    Bibliographic Info

    Article provided by Savez ekonomista Vojvodine, Novi Sad, Serbia in its journal Panoeconomicus.

    Volume (Year): 54 (2007)
    Issue (Month): 1 (March)
    Pages: 29-51

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    Handle: RePEc:voj:journl:v:54:y:2007:i:1:p:29-51

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    Web page: http://www.panoeconomicus.rs/

    Related research

    Keywords: Foreign development aid; Planning; The structure of incentives; Aid inefficiency; Reform of foreign aid.;

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    Cited by:
    1. Kalyvitis, Sarantis & Vlachaki, Irene, 2012. "When does more aid imply less democracy? An empirical examination," European Journal of Political Economy, Elsevier, vol. 28(1), pages 132-146.

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