Aid
Aid, growth and decentralization
What effect does decentralisation have on aid effectiveness?
Authors:
C. Lessmann (ed); G. Markwardt (ed)
Publisher:
Editorial Express, 2009
Many developing countries rely heavily on foreign aid and over time, interest has been growing about its efficiency. In the past three decades researchers have been investigating the aid-growth nexus but there is still no consensus. This paper examines whether the federal structure of aid-receiving countries matters in explaining aid effectiveness. It investigates whether aid effectiveness depends on decentralization in developing countries. In 2006, the World Bank spent about 20 % of its budget on decentralization projects. It is assumed that decentralization should increase aid effectiveness, since local decision-makers are better informed about local needs. But decentralization also has reverse effects brought about by coordination problems, excessive regulation, administrative costs and local capture.
This study uses data from up to 59 countries and finds that aid is less effective and harmful to decentralized countries. It estimated the impact of foreign assistance on growth by considering the interdependency between aid and various decentralization measures. The estimations are based the selected developing countries covering the period from 1966 to 1997. It investigated whether foreign assistance is allocated efficiently among developing countries, finding that decentralization has a positive impact on the amount of aid received.
The study elicits the following observations:
- The most important constraint of the cross-country study is that it is hard to know much about the factual mechanisms of spending decisions of aid in developing countries. It can only be assumed that sub-national governments are involved in spending decisions in decentralized countries, and that the decentralization measures are good approximations
- there might be differences between the various aims and sources of foreign assistance. It might, for instance, be easier for a local government to embezzle money from a general budget than from technical assistance, which is usually supervised directly by the donor
- The paper says the policy implication of the study is straightforward and recommends that aid is less effective in decentralized countries and that it should be carefully considered how foreign aid and decentralization instruments work together.
