Can Aid Reform Institutions?

Can aid reform institutions? The realities of foreign aid and the nature of aid-giving organizations are at odds with what we know about institutional change: that it is often gradual, path dependent, context specific, and contrary to notions of best practice in Western countries. Empirical analyses find no positive correlation between aid and better institutions or between aid and growth in GDP per capita. If aid cannot reform institutions, can aid avoid damaging institutions? Efforts to avoid the ill effects of damaging institutions by insulating aid projects or by relying on NGO's or beneficiary participation, have met with mixed success. Efforts to aid only those poorer countries that are already improving their institutions confront serious measurement problems. This paper calls for more experiments, better local information, more case studies of the institutional prerequisites for the implementation of high priority policies, and greater local capacity to study institutional problems and design sustainable institutional reforms.