Making Aid Smart: Institutional Incentives facing Donor Organizations and their Implications for Aid Effectiveness

This paper highlights ways to make foreign aid more efficient demonstrate effectiveness. This topic is addressed primarily because foreign aid is limited and often faces uncertainty in fulfilling determined goals.

The publication offers the following suggestions:

• Provide aid to:
  • Countries that have sound institutional and policy environments;
  • Promote reforms by investing in capacity for self-reform and not conditionality;
  • Finance basic financial services in places where its most needed and marked by deep poverty;
  • Mitigate price shocks due to fluctuations;
  • Facilitate post-conflict recovery during emergency situations and natural disasters;
  • Prevent conflict within a region;
  • Demonstrate projects in order to leverage successful programs.

The paper further highlights:

• That the role of a donor needs to be catalytic in nature. It will be beneficial to conceptualize projects as demonstration projects leading to effective change;
• The ability to identify the limited agenda for reforms and then strengthen domestic players.

The paper concludes by pointing to:

• Political and commercial interests in extending donor aid to countries that have high poverty but reasonable policies;
• Bureaucratic impediments for countries where export prices have dipped suddenly;
• Overcoming political pressure to target post-conflict countries;
• Organizational difficulty in delivering demonstrable impact rather than just investment.