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The conflict of interest in development assistance

By Pierre Huetter - posted Wednesday, 24 September 2003


A development agency insulated to some degree from short-term objectives and foreign policy influences, concerned solely with long-term development, would provide clearer thinking and more strategic support for development assistance activities.

Decentralization and democratisation

Well-intentioned intervention by foreign donors inevitably distorts economic activity in the recipient country by skewing people's choices of work and consumption. This occurs as people perceive fiscal opportunities in influencing bureaucratic decision making in the donor country, rather than engaging in commercial activity.

Consultation is the main method of controlling for aid's distorting influences. Using a US education aid example, 'consultation' means the US government would consult the Australian government, community groups and private organizations to determine which education services Australia should buy with money given by the US. Clearly consultations would be unlikely to result in Australia choosing to buy French education services! This also is broadly the reality of development assistance.

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One way to avoid this problem would be to decentralise and democratise development decision making. That is, provide aid through a mechanism which gives the actual, intended individual aid recipients a range of social capital-type entitlements (set period of basic schooling, period of certain types of health care, choice of certain types of skills training), which they can spend at an accredited service provider of their choice – local, Australian, American, Dutch or Japanese.

A more democratic market mechanism can provide signals about which services and which service providers are most in demand. A decentralised model would empower individuals, who then use their purchasing power to influence development service providers. This would make service providers accountable to recipient individuals – an important shift. Such a change would result in distortions to commerce and the social fabric being minimised, social capital maximised, while aid resources are distributed more efficiently by an engineered price mechanism. This would be in contrast to the current model where all power emanates from the donors and accountability flows back to the donors.

Balancing development interventions

Development writers such as Peter Bauer and Helen Hughes advocate cutting aid dramatically to remedy the problems with aid. This is a radical solution whose consequences could be dire and are not clearly foreseeable. A more practical and sympathetic approach might be to balance traditional budget or program aid with decentralized aid. If a recipient government improved its performance on certain development criteria, it could be rewarded with more budget support (and therefore discretion), and less decentralised aid. The reverse is also applicable. If a country receiving aid fails to raise any spark of development with current aid, donors could choose to transfer funding to decentralised aid leaving health and education supported through the alternate distribution process.

Donors could sanction poor recipient governance while maintaining support for the recipient society - a win-win situation.

The perennial problem: short term costs vs long term gains

Of course democratizing development assistance in the way mentioned above has a price - the loss of short term influence for Australia.

Just as reducing trade barriers meant the government lost some direct control over the Australian economy, some industries suffered, and Australia gained a lot. So too giving up direct control of aid to improve its effectiveness will hurt some players in the development industry but benefit Australia and the region.

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What is clear is that reducing the conflict of interest in development assistance would free it from the shackles of short term national interest, and allow it to truly focus on its stated purpose - assisting our poor neighbours develop.

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This article originally was published in Australian Policy Online.



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About the Author

Pierre Huetter used to work in development assistance. pierrehuetter@hotmail.com

Other articles by this Author

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