Proliferation and fragmentation: Transactions costs and the value of aid

Abstract

The problem of the proliferation of the number of aid donors and aid channels continues to worsen. It is widely and plausibly believed that this significantly reduces the value of aid by increasing direct and indirect transactions costs. We contribute to the existing literature by: (a) categorising the apparent adverse effects of proliferation; (b) producing a reliable and fair indicator of the relative degree to which the main bilateral donors proliferate or concentrate their aid; (c) giving some explanation of why some donors proliferate more than others; (d) constructing a reliable measure of the extent to which recipients suffer from the problem of fragmentation in the sources of their aid; and (e) demonstrating that the worst proliferators among the aid donors are especially likely to be suppliers of aid to recipients suffering most from fragmentation. There are significant implications for aid policy.

Effective Development Aid: Selectivity, Proliferation and Fragmentation, and the Growth Impact of Development Assistance

“…As it clearly indicates, the number of ODA projects has been steadily increasing. 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 Acharya et al (2006) suggested that aid often underperforms because it flows through too many institutional channels. There are huge transaction costs associated with aid proliferation (an increase in the number of donors to a specific recipient country) and aid fragmentation (an increase in the number of projects and a decline in the amount per project) for both recipients and donors.…”

“…Acharya et al (2006) produced an index of donor proliferation using the inverse (multiplied by 100) of the Theil index of each donor's ODA delivered in 1999-2001 to its potential recipients.…”

“…Acharya et al (2006) also estimated the correlation between the index of donor proliferation (IDP) and the index of aid fragmentation (IAF) of their recipients and found a high degree of correlation between them. Australia, Japan, and the UK are labeled "others," i.e., "non-proliferators."…”

“…The more equally the donor proliferates its aid to various countries, the lower the value of the Theil index becomes, and the higher the value of the inverse of the Theil index (i.e., the index of donor proliferation). Acharya et al (2006) covered only a 3-year average, which may not reveal the long-term trends of each donor. Kihara (2009b) used the same method of calculating an inverse Theil index as Acharya et al (2006) to create a longer-term index of donor proliferation for 22 bilateral donors (and for 24 multilateral organizations which is not presented here).…”

“…Acharya et al (2006) covered only a 3-year average, which may not reveal the long-term trends of each donor. Kihara (2009b) used the same method of calculating an inverse Theil index as Acharya et al (2006) to create a longer-term index of donor proliferation for 22 bilateral donors (and for 24 multilateral organizations which is not presented here).…”