Different types of aid can generate different incentives. In this chapter, we look at how the modalities, means, and conditions of aid can produce different kinds of incentives and, in this way, engender a variety of outcomes. Modalities refer to broad instruments of aid, such as Project Aid, Program Aid, and Sector Program Support. The means of aid refer to whether the aid is delivered in the form of credits, grants, or guarantees. Finally, conditionality refers to how donor-imposed constraints on the delivery of aid might persuade a recipient government to behave in certain ways. We begin this chapter by briefly reviewing the most common interpretation of aid as an incentive to spur policy change in the government of an aid recipient. We then examine some of the rules embedded in the modality, means, and conditions of aid, and consider how these in combination might generate incentives within specific contexts of aid delivery.
Early conceptions of aid held that substantial transfer of assets were needed to jump-start the development process. The “gap theory” stressed that foreign assistance could infuse the capital, infrastructure, and technical assistance absent in developing countries. Official capital flows—facilitated through grants and credits, and financed by the governments of developed countries and multilateral donor organizations—were to make possible this developmental transformation. 1
In many situations, however, aid transfers have not been effective in stimulating development. In the case of Project Aid, this low level of return on the aid-dollar has been linked to three fundamental problems (Collier 1999 ; Stiglitz 1997). The first problem is that aid projects are often not scalable, which means that projects that are successful in one context may not be in others, limiting the replicability of a project model. The second problem is that project funding is often fungible (Feyzioglu et al. 1998 ; van de Walle 2001 ; World Bank 1998), which means that donor financing of a project can potentially release resources of the recipient government for other more marginal projects. In effect, therefore, donors do not finance the project they appear to pay for, but rather the one that the recipient government, for whatever reason,