Aiming at the Wrong Targets: The Difficulty of Improving Domestic Institutions with International Aid

We explain why the record of aid agencies in building and reforming public sector institutions in developing countries has been broadly unsuccessful, despite extraordinary amounts of time, money, effort, and a commitment to achieve targets. We argue that requirements to specify and monitor observable indicators of success have created strong incentives for aid-dependent countries to signal performance to their foreign sponsors by achieving targets. However, in the absence of requirements about the types of targets that should be pursued, countries that rely heavily upon external sources of financial support select easy targets that have limited value for strengthening public sector institutions. In particular, aid-dependent countries are more likely to select targets that measure how public sector institutions are organized, rather than targets that measure what policy outcomes are achieved through strengthened public sector institutions. We demonstrate that this argument has both explanatory and predictive power for World Bank environment and natural resource management projects.