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Payments for Progress: A Hands-Off Approach to Foreign Aid

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  • Nancy Birdsall

    ()

  • Owen Barder

Abstract

There are significant differences of opinion about the merits of additional aid in meeting the MDGs, including whether and how aid should be given in ‘fragile states’, whether additional aid on the scale envisioned can be effectively used even in well-managed economies, and whether the aid system, particularly in highly aid-dependent countries, undermines instead of strengthens local institutions. We discuss an approach to scaling up foreign aid that would explicitly be aimed at strengthening local capacity and institutions, including in fragile states. “Payments for progress” would link additional aid to clear evidence of progress already achieved on the ground. This approach would give flexibility and autonomy to local institutions, providing an opening for local institutional experimentation, while at the same time ensuring that aid pays only for real, measurable achievements. Donors would bind themselves as a group to pay a specific amount for clear evidence of progress against one or more agreed goals in low-income developing countries. Developing country governments would present an independently audited statement reporting their progress on the measures, and donors would pay the agreed amount. Payments would be determined as a function of the outcomes, and not linked to the implementation of any particular policies, any other intermediate outputs, or “tied” to purchases from particular suppliers or companies. Governments that found ways to provide services efficiently and so reduce the costs of providing them would benefit from a larger surplus. We discuss the issues such an approach raises—in setting the benchmarks against which progress is measured, in avoiding cheating, and in managing unintended negative consequences of an incentives-based approach. We conclude with a summary of the advantages for donors and recipients.

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Bibliographic Info

Paper provided by Center for Global Development in its series Working Papers with number 102.

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Length: 24 pages
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:cgd:wpaper:102

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Web page: http://www.cgdev.org

Related research

Keywords: foreign aid; MDGs; aid-dependent countries; local capacity; fragile states; tied aid;

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Cited by:
  1. Quibria, M.G & Ahmad, Shafi, 2007. "Aid Effectiveness in Bangladesh," MPRA Paper 10299, University Library of Munich, Germany, revised Sep 2008.

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