Institutional Determinants of Development
Chapter 8: Foreign Aid and Development: The Aid-Institutions Paradox
INTRODUCTION Foreign aid programs in the post-war period find their genesis and inspiration in the Marshall Plan mounted by the United States to reconstruct the war-torn economies of Europe, complemented by similar forms of assistance to Japan during the period of US occupation. In both cases, this assistance contributed to a rapid and dramatic reconstruction of many of these economies, with Germany and Japan quickly emerging as major economic powers in the post-war era. However, these two countries possessed highly educated work forces, well-developed infrastructure, high levels of technological sophistication, and well-established institutional and organizational capacity in the public and private sectors. Very few of these conditions were replicated in developing countries, many of whom were granted independence by their former colonial powers (sometimes with very little in the way of advance preparation or transition), beginning in the mid-1950s. Moreover, the motivations of developed countries in providing foreign aid to developing countries were subject to a number of serious distortions. First, with the onset of the Cold War in the late 1940s, many developed countries were inclined to provide aid at levels and in forms that reflected judgments about the ideological affinities of recipient states with either communism or capitalism, or other geo-political considerations, irrespective of whether this aid well served basic development priorities. Second, many developed countries, in their aid policies, showed strong preferences for their former colonies, reflecting historical ties, again according secondary importance to whether the aid was being effectively utilized by the recipient countries. Third, many...
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