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Adrian Wood, a professor of international development at Oxford, proposed in an article in the Financial Times last week (free registration required) that donors as a group limit their aid flows to aid-dependent countries to no more than 50 percent of the tax revenue a country raises from its own citizens (excluding oil and other mineral revenue). He argues that too much aid undermines a government's accountability to its own citizens -- a point made by Moss and Subramanian, Brautigam and Knack (Subscription Required), and African tax commissioners, too.

Prof. Wood sent his Op-Ed to some of the world's leading scholars of aid and aid effectiveness, sparking a lively e-mail conversation, that has continued for nearly a week. With the authors' permission, I've excerpted some of the more interesting responses below.
Among others, Michael Lipton liked the idea, and reiterated the dangers of donors financing "recurrent costs" -- something the Scandinavians and the Africa Commissioners (the Blair Commission) have endorsed. But….
Jeffrey Sachs objects to any new formulas to cap aid:

What a time to be arguing for capping aid based on some new and arbitrary limits, when the donors are flagrantly violating every promise that they've made to increase aid. And targets like 10 percent of GNP are simply meaningless when we're dealing with countries at $200 per capita, disease pandemics, no electricity, roads, ports, safe water. That's a $20 ceiling. Great. There are practical things that can be done to save lives, build infrastructure, develop agriculture, adapt to climate change, put children in school, and more. Aid levels should be based on rigorously assessed needs to achieve given objectives, most importantly the Millennium Development Goals, and should be delivered in a systematic manner, based on milestones, audits, monitoring, and evaluation.

Gus Ranis, while sharing Wood's concerns about the potentially perverse effects of too much aid, was skeptical about the value of rigid rules:

I agree with the dangers to governance that potentially accompany foreign aid or natural resource related flows of capital. However, whether this danger can be avoided depends on how the volume of aid and its purposes are negotiated, hopefully by letting the recipient take more of the initiative and determine its own "self-conditionalities." I am also skeptical about any across the board rigid rules which make it impossible to reflect different countries' very different problems, opportunities and tax capacities.

Here's what I think.
First, donors do need to tie their hands with simple and clear rules -- to overcome their own coordination and so-called "alignment" (with recipient country programs) pathologies. They have been trying for at least a decade, but so far without any notable progress -- as is clear from their own reports to themselves and their recipient country "partners" (see the new OECD-DAC report prepared for the High-Level Forum on Aid Effectiveness just held in Accra).
So it is hard to argue with the simplicity and clarity of the proposal. (Two weeks ago we suggested six ideas donors might have embraced to lock themselves into better behavior at Accra. Only on transparency did something clear emerge however -- and six ideas may be too many!) But the real problem is that Adrian Wood's simple rule won't work because a proposal to be applied to the collective of donors doesn't make any one donor accountable to anyone. Oops: another accountability problem. How ironic.
Second, Wood's proposal might well create a perverse incentive for aid-dependent governments to resort even more to trade and other indirect taxes than they already do. For why that's bad for the incipient middle class, for small business, and for governance itself, see my working paper Do No Harm: Aid, Weak Institutions, and the Missing Middle in Africa especially p. 16.
Third, some recurrent costs are in fact "investment," including the salaries of teachers who build the human capital of the next generation. The problem is not that donors might reasonably cover some of the costs of salaries in very poor countries. The problem is that under the existing aid system they cannot do so in ways that are stable and predictable and they cannot manage to get out of the way with their own ideas about the key inputs. They cannot, as a group, really cede ownership so they constantly risk undermining local institutions.
I agree with Jeff Sachs that more money could be spent well. And I agree with those who fear that there can be too much of a good thing. What's needed is an approach to aid that helps, indeed forces donors, to shift accountability of recipient governments away from donors and back to citizens -- allowing for the feedback governments need from their own taxpayers. We suggest one way to try that -- called Cash on Delivery Aid. You can read about that here, and, soon, in our forthcoming publication: Cash on Delivery: Paying for Progress with Foreign Aid.
The debate continues, with e-mails flying fast and furious this morning. With the authors' permission, we will post some of these comments below. I invite you to join the fray.