Aid and Trust in Country Systems
58 Pages Posted: 20 Apr 2016
Date Written: July 1, 2009
The 2005 Paris Declaration on Aid Effectiveness sets targets for increased use by donors of recipient country systems for managing aid. A consensus view holds that country systems are strengthened when donors trust recipients to manage aid funds, but undermined when donors manage aid through their own separate parallel systems. This paper provides an analytical framework for understanding donors decisions to trust in country systems or instead to micro-manage aid using their own systems and procedures. Where country systems are sufficiently weak, the development impact of aid is reduced by donors reliance on them. Trust in country systems will be sub-optimal, however, if donors have multiple objectives in aid provision rather than a sole objective of maximizing development outcomes. Empirical tests are conducted using data from an OECD survey designed to monitor progress toward Paris Declaration goals. Trust in country systems is measured in three ways: use of the recipients public financial management systems, use of direct budget support, and use of program-based approaches. The authors show using fixed effects regression that a donors trust in recipient country systems is positively related to (1) trustworthiness or quality of those systems, (2) tolerance for risk on the part of the donors constituents, as measured by public support for providing aid, and (3) the donors ability to internalize more of the benefits of investing in country systems, as measured by the donors share of all aid provided to a recipient.
Keywords: Gender and Health, Development Economics & Aid Effectiveness, Economic Theory & Research, Disability, Microfinance
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