ROY GARDNER AND CHRISTOPHER J. WALLER
To set the stage for the analysis that follows, we first consider initial conditions in a recipient country. Prior to a donor agency involvement in the recipient country, we already have a difficult setting. Initial conditions in the recipient almost always reflect tragedies of the commons, public good problems, and principal-agent problems. Given the incentives present in such problems, a donor has an unenviable task at the outset. Donors do not operate in countries like Denmark, Finland, Sweden, and New Zealand (among the top countries in the world on the Transparency International ratings), where corruption is lowest. Donors tend not to operate in countries that have good investment climates and high per capita GDP. Instead, donors operate in countries exhibiting bad circumstances—terrible investment climate, high levels of corruption, and low per capita GDP. Most donor programs are committed to poverty-reduction efforts in less-developed countries (LDCs), but the very inability of LDC governments to address governance problems associated with practically all forms of government intervention, and poverty-reduction programs in particular themselves, complicates the task of the donor. Recall the Octangle in Chapter 4 and, in particular, the donor recipient bargaining arena, to better fix ideas of the discussion that follows.
We identify two broad motives/mechanisms behind the decision on the part of a developed country to enter a recipient country with aid. The first of these is altruism and warm glow. Caring about those less fortunate than ourselves is a commonly held value in most societies. Development aid is an expression of this value. Even in the harshest budget battles, development aid is almost never singled out for a zero-option. Of course, to be effective in addressing altruistic motives, such aid must achieve verifiable results. Even if results are not verifiable, warm glow may be enough. Economic experiments as well as a vast literature in sociology and social psychology have identified the existence of warm glow—that donor governments,