Will more aid help developing countries? The answer to this question depends on our view of states in developing countries.
Two views prevail. One view sees aid undermining government accountability to citizens, propping up autocratic regimes and disappearing into the pockets of corrupt officials. Another perspective sees aid contributing crucial fiscal and administrative capacity that helps governments better serve their people. In fact, neither view is entirely right (or wrong). Increasing aid enhances government capacity up to a point, but aid can undermine legitimacy if it undermines state accountability to citizens.
The cross-national statistical evidence shows that increasing aid improves government capacity, though the relationship starts to tail off at levels higher than approximately 40 per cent of the Gross Domestic Product (GDP). The same data also shows that donor fragmentation contributes to government incapacity. A close case study of Mozambique confirms and deepens our understanding of these processes. In Mozambique, improved donor coordination and higher volumes of aid helped to increase capacity, reduce transaction costs for government and increase the government’s accountability.
To make these points, the current article uses cross-national statistical evidence and that case study. Cross-national statistical data was available for the 1980s and 1990s from International Monetary Fund (IMF) Government Finance Statistics and Organisation for Economic Cooperation and Development (OECD)Development Assistance statistics. Both sources are fairly reliable and consistent, though the country coverage is less than desirable. Nevertheless, panels of at least 105 countries are available for most years. To analyse the data, dynamic panel data analysis compared evidence across countries and over time. The main variables included in the analysis were the volume of aid, donor fragmentation and tax effort. The analysis of Mozambique was taken from a Department for International Development (DFID)- funded study in which the author had a role (Hodges and Tibana 2004).
This article comes from the IDS Bulletin 36.3 (2005) Aid and Governance: Doing Good and Doing Better