WE NEED INSTITUTIONAL REFORM, NOT AID

WE NEED INSTITUTIONAL REFORM, NOT AID

That the world has well meaning individuals ready to assist others but employing the wrong strategies can not be disputed. Why are aid flows to poor nations problematic? First, aid can overwhelm the administrative capacity of governments, leading to waste and inefficient and ineffective programs. Second, it is critical to ensure that an increase in aid does not reduce a country’s incentive to adopt good policies and reform inefficient institutions. Third, dependence on aid may weaken accountability and impede the development of a healthy civil society if a recipient government is more accountable to its donors that to its own citizens.
The more fundamental problem is that “development assistance” is based largely on false premise that poverty is in itself a barrier to development. This is not true; economic development in Western Europe did not require massive redistribution from the rich to the poor. Rather, it required a change in the structure of Europe’s institutions; a move away from the feudal system of the early middle ages to a trading economy. If countries are to develop in a sustainable manner, then institutional reform, not aid is the solution.
Institutions are the framework within which people act and interact- they are the rules, customs, norms ad laws that bind us to one another and act as boundaries to our behaviour. Long run development assistance entails much more than a boost to investment to sustain growth momentum, build resilience to shocks and facilitate socially acceptable burden sharing in response to such shocks. The importance of market-creating institutions that protect property rights and ensure that contracts are enforced cannot be underestimated. Development assistance should focus in helping countries in building market regulating institutions that deal with externalities, economies of scale and imperfect information and, market stabilising institutions that ensure low inflation, minimise economic volatility and avert financial crises.
In his book The Mystery of Capital Peruvian economist Hernando de Soto has shown that economic progress depends mainly on society’s institutions. That means formal property rights, free markets and the rule of law. These institutions enable people to own and exchange goods without fear of arbitrary expropriations, either by bandits or by the state. They thereby encourage economic activity which enables people to escape from, poverty.
For many mow- and middle-income countries, trade and aid complement each other. Developing countries’ prospects for achieving the MDGs would be significantly enhanced with greater access to markets in industrial countries. The highest tariffs faced by developing country exporters are on agricultural products, processed foods, and textiles and apparel products that dominate the exports of the poorest countries. Despite the setback at Cancún, successful completion of the Doha Round could generate substantial income gains for low and middle income nations, and therefore remains a priority.
While there is no one answer as to what makes ODA successful, there are some implications for aid delivery. Accepting national goals, improving donor coordination and harmonising donor polices as far as possible with the country’s own systems. Assistance should be phased in and sequences with improvement in county capacities so as to avoid potential problems associated with aid dependence.