Improving aid: stories from the financial sector

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Improving aid stories from the financial sector

• Ross Levine, Brown University

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A simple framework
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A framework (1 of 3)

• Policies are functions of
• The private interests of decision makers,
• Information (correct or mistaken) about the
  impact of policies.
• Other factors, including institutions

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A framework (2 of 3)

• Aid agencies can affect policies by
• Providing information about the impact of
  policies.
• Providing money to sway decision makers.
•  
• Aside
• Theory aid can directly improve ultimate
  outcomes.
• Reality there is little bang for the buck per
  se.

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A framework (3 of 3)

• The welfare implications aid agency advice
  depends on
• The degree to which they recommend policies that
  will improve social welfare.
• The degree to which the private interests of
  decision makers align with recommendations.

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What should we expect aid agencies to do?
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Expectations of aid (1 of 3)

• Aid agencies are generally irrelevant
• Aid agencies make recommendations loans. 
• Countries circumvents recommendations
• achieve private interest objectives
• Not public interest goals
• Outcomes largely reflect domestic politics.

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Expectations of aid (2 of 3)

• But, not always
• Occasionally, the private interests of domestic
  authorities and social welfare align
• Authorities genuinely seek help on policies.
• It is difficult to a priori identify these
  occasions

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Expectations of aid (3 of 3)

• Aid agencies should Provide sound advice.
• If countries genuinely seek to promote social
  welfare ...
• If the authorities do not have such angelic
  intentions ...

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Incentive failures at aid agencies

• Why aid agencies frequently fail to provide good
  advice

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Incentive failures (1 of 2)

• Evaluation
• Aid agencies insufficiently evaluated on advice.
• Aid agencies excessively evaluated on money.
• Financial survival
• Aid agencies are frequently organized as banks
• Financial survival depends on distributing money
• It does not depend on distributing sound advice

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Incentive failures (2 of 2)

• Dont interfere with lending!
• Examples from finance
• Mexico
• 1992-1994
• The crisis of 1994-5
• IFC and stock markets
• Small and medium enterprise finance
• Bank regulation 2007-2009

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How to improve?
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To improve

• Improve incentives ?

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To improve

• Evaluation
• Outcomes are problematic metric. Ideal aid agency
  may not overcome the private interests of
  domestic authorities.
• Difficult to assess policy recommendations ex
  post, but try.
• Internal incentives, orientation, structure
• Reduce the importance of making loans in
  promotions.
• Increase importance of providing sound advice.
• Focus on knowledge, research, training
• Change the bank model of aid agencies