The Role of Social Institutions in Determining Aid Effectiveness

In recent years, scholars and policymakers have placed growing attention on the issue of aid effectiveness, that is, the efficiency of donor assistance in achieving stated economic and human development objectives. While research has tended to highlight the need for greater capacity building and improved governance as mechanisms to make aid 'effective', the social origins of such mechanisms have not been thoroughly examined. Using the latest cross- country indicator series on aid effectiveness from the OECD and the Indices of Social Development, hosted at the Institute of Social Studies in the Hague, this paper examines the determinants of effective aid spending, and finds a significant effect linking the quality of aid assistance to social institutions relating to public order and trust. These effects are verified when instrumenting social institutions by measures of state history, suggesting that long-term political development is the main source of public order and the presence of state institutions capable of effective management of aid flows. Whereas in the 1970s international donors were willing to provide significant assistance to governments with major weaknesses in budgetary oversight and accountability, such as Mobutu’s Zaire or Suharto’s Indonesia, in recent years, there has been a growing recognition among donors that not only the quantity of international development aid but also its efficient use matters for international development. To this end, for example, the 2005 Paris Declaration saw partner countries and donors agree to hold each other accountable for making progress against agreed commitments and targets by monitoring their implementation, and in a series of follow-up summits these commitments have been further built upon (OECD 2005). However, as yet the conditions which lead to the effective use of donor aid have not been extensively studied. In a widely cited article, Burnside and Dollar (2000) attempted to show that the impact of aid on GDP growth is positive and significant in developing countries with ‘sound’ institutions and economic policies (i.e. open trade, fiscal and monetary discipline) and not significant in countries with "poor" such policies. However, their study has been extensively criticized on account of the lack of robustness of their estimates and the underspecification of their models (Roodman 2007, Easterly et al. 2000). To some extent, these problems are inherent within studies of aid effectiveness, which must overcome the endogeneity of aid allocation to economic underperformance (as donors may prioritize countries with greater development challenges), the long and variable lag that may exist between provision of development aid and its expected outcomes, and the difficulty of operationalising ‘effectiveness’ itself. As a result, empirical literature in this field remains underdeveloped, despite the massive importance of the research for policymakers and the international development community more generally.