THE GENERAL CONTEXT

The efficiency of the mechanisms of foreign aid provision has rarely been the subject of analytical deliberation (Pietrobelli and Scarpa, 1992). This lacuna is mirrored in the real world of foreign aid provision. The byzantine bureaucratic structure of aid agencies, the weak economic incentives in aid contracts, and the imprecision of project evaluation seem inconsistent with the pursuit of economic efficiency in this vital, and very large, area of economic activity. To cite one example, there are no existing evaluation methods suitable for application to the dominant types of aid projects in the Tacis and Phare programs, institutional reform projects (Evaluation Unit, 1997a, p.7; Martens, 1998).

The purpose of this chapter is to use some elementary economic analysis to understand the contractual and organisational determinants of the efficiency of foreign aid provision. The chapter focuses on institutional reform projects, both because these are becoming increasingly common and because the difficulties in organising foreign aid provision are particularly acute for such projects. This introduction examines why there has been little analysis of the efficiency of foreign aid mechanisms in the past, why economic analysis has much to offer in this sphere, and why changing views of the role of government make this an especially propitious juncture to apply economic analysis. This introduction ends with a road map to the remainder of the chapter.

The reasons for the lack of academic study of the mechanisms of foreign aid provision are both general and specific.