Gradualism in aid and reforms

Parimal Kanti Bag () and Prabal Roy Chowdhury ()
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Parimal Kanti Bag: National University of Singapore
Prabal Roy Chowdhury: Indian Statistical Institute, Delhi

Discussion Papers from Indian Statistical Institute, Delhi

Abstract: The paper examines a problem of aid allocation by a donor country (or organization) to an LDC where aid diversion by the LDC bureaucrats/elite is a decreasing function of the level of governance. Irrespective of whether the donor can fully commit to a conditional aid program or not, it is shown that for maximal improvement in governance the aid should be disbursed in increments with each subsequent tranche being conditional on prior reforms, instead of resorting to a quick-fix solution (aid gradualism). While the attraction of future aid incentivizes the recipient bureaucrats to implement reforms, these reforms in turn also make aid diversion less feasible. Further, under full commitment, the optimal aid package may involve offering interim bribes to bureaucrats in an effort to ultimately improve governance and lower corruption. With only partial commitment (so that time consistency requires the donor to reconfigure aid in each round), it is shown that (a) interim bribery is no longer viable, and (b) both the aid and implemented reforms exhibit strong gradualism, or what is known as the starting small and grow later principle in commitment models.

Keywords: Budgetary cost of structural reforms; budgetary aid; aid diversion; bureaucrats; corruption; transparency; governance; time consistency; commitment; gradualism; start small grow later (SSGL) principle (search for similar items in EconPapers)
JEL-codes: H8 O2 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2015-02
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