Tuesday, March 1

Institutions and Accountability

AdamSmithee has found some interesting references regarding the relationship between the usefulness of development aid, viable national institutions and civil liberties. Foreign Dispatches pointed out some of the crucial points.

Like ethiopundit always insists, aid - institutions - civil liberties - growth are inextricably linked. In a nutshell, INSTITUTIONS such as those that defend PRIVATE PROPERTY RIGHTS allow aid to be used effectively. Money alone can solve nothing. Just as important is government ACCOUNTABILITY to the public expressed through CIVIL LIBERTIES that make any sort of institutions work more effectively.

Here are some excerpts from the first article - 'Sowing and Reaping: Institutional Quality and Project Outcomes in Developing Countries' By David Dollar and Victoria Levin describes itself thus:
In this paper, Dollar and Levin introduce microeconomic evidence on factors conducive to the success of aid-funded projects in developing countries. The authors use the success rate of World Bank-financed projects in the 1990s, as determined by the Operations Evaluation Department, as their dependent variable. Using instrumental variables estimation, the authors find that existence of high-quality institutions in a recipient country raises the probability that aid will be used effectively.
An interesting result here is that democratic political institutions facilitate successful policy-based loans, whereas property rights/rule of law is more important for investment loans. Given the well-established relationship between property rights and growth, this latter finding makes sense: it is difficult to have a high-return public investment if the institutional framework is not conducive to economic growth. This may appear self-evident with “hard” investments such as transport infrastructure. But it is interesting that there is a similarly strong relationship between property rights and “soft” investments in education and health. It is difficult to have successful projects addressing these important social needs in a weak institutional environment.
[... and they conclude ...]
We have documented a stylized fact that is well known to anyone who has practical experience in the aid business: the success of aid-sponsored projects depends primarily on the quality of the institutions in the recipient country.
[T}he fact that in several different macro data-sets researchers have found that growth is correlated with the interaction of aid and a measure of institutional quality or economic policies increases our confidence that aid is playing a useful role when it is targeted to low-income countries with reasonably sound institutions and policies. In terms of aid policy, our work provides additional support to the view that aid resources have the greatest impact on development when they are channeled to poor countries with sound institutions.
Below are some bits from the second article - 'Civil Liberties, Democracy, and the Performance of Government Projects' by Jonathan Isham, Daniel Kaufmann, and Lant H. Pritchett begins
This article uses a cross-national data set on the performance of government investment projects financed by the World Bank to examine the link between government efficacy and governance. It demonstrates a strong empirical link between civil liberties and the performance of government projects. Even after controlling for other determinants of performance, countries with the strongest civil liberties have projects with an economic rate of return 8-22 percentage points higher than countries with the weakest civil liberties. The strong effect of civil liberties holds true even when controlling for the level of democracy.
[... and they conclude ...]
The extent of a country's civil liberties has a substantial impact on the successful implementation of government investment projects financed by the World Bank. This impact of civil liberties is as empirically large as the more celebrated impact of economic distortions on project returns. Given that citizen voice is an important precondition for government accountability and, not coincidentally, that voice is suppressed in the absence of civil rights, this result is perhaps not surprising.

This result adds to the evidence for the view that increasing citizen voice and public accountability-through both participation and better governance-can lead to greater efficacy in government action. Some analysts argue that there is a trade-off between liberties and development. We find the opposite evidence, that suppressing liberties is likely to be inimical to government performance. This has obvious implications not just for governments but also for development assistance.
Ethiopia’s governance is today a Frankenstein’s monster of Marxist-Leninist mantras scavenged from the rubbish bin of history and only partially housebroken by a dependence of Western aid.

The institution eroding (indeed aborting) structural corruption of an effective one party state with no property rights is a natural feature of such government as is its natural hostility to all human rights outside of the sight of ferenjis (foreigners - particularly aid donors.

As the old saying goes "You can fool some of the people some of the time but you cant fool all of the people all of the time“. In the end all manner of public relations won’t fool the very human laws of economics.

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