Foreign aid, institutions, and governance in sub-Saharan Africa

More than a decade ago, the World Bank argued that "underlying the litany of Africa's development problems is a crisis of governance." Poor quality institutions, weak rule of law, an absence of accountability, tight controls over information, and high levels of corruption still characterize many African states today. Aid levels have been reduced in many parts of Africa during the past decade. Yet in many of the countries with poor governance records, aid continues to contribute a very high percentage of government budgets. This article explores the institutional impact of these high levels of aid and the way that large amounts of aid are delivered. The dimensions of aid dependence and the theoretical framework are discussed in the next section of the article. The third section explores the ways in which high levels of aid, delivered over a long period of time, can affect institutions and governance in African countries, while the fourth section tests these ideas empirically. We find evidence that higher aid levels are associated with larger declines in the quality of governance, as measured by subjective indicators. We also find higher aid associated with lower tax effort in Africa. The conclusion offers some recommendations for reducing the possible deleterious impact of aid. Paradoxically, our argument is not that aid to Africa needs to be reduced; in many cases, more aid will be better. But aid needs to be delivered more selectively and in ways that reinforce a virtuous cycle of development rather than contributing to a vicious cycle of poor governance and economic decline. © 2004 by The University of Chicago. All rights reserved.