Dirty Words in Development: Incentives

“Whatever you do, don’t mention incentives. I did it once, but I think I got away with it.”

“Whatever you do, don’t mention incentives. I did once, but I think I got away with it.”

Matt’s excellent recent post on aid coordination should make uncomfortable reading for many donors. He argued that one reason for poor coordination is that all donors are trying to impress distinct electorates that perceive the same problems in development due to insufficiently varied global advocacy. This is actually a bundle of important issues that Matt has expressed succinctly, and I want to address just one aspect in a more depth.

Why is it that donors are all trying to impress their own electorate? Well, quite simply, that’s what they have to do to continue their existence. Their primary incentive is to do so.

Incentives. It’s a word much used in economics, one I like a lot. Economists love to talk about an agent’s incentives. It’s essentially economics’ counterpart to history’s interest in motivation. ‘Incentives’ is a little sharper though. It’s not just about why we did something, it’s about why we will always attempt to do so; until our incentives change at least. Yet, despite the dominance of economics in academic thinking about development, it is one concept that hasn’t really filtered down to the practitioners in a meaningful way. The closest we get is our discussion of ‘accountability’ and, in its comedy form, ‘mutual accountability’ (I will justify my cynicism about these concepts in a future blog). Our wish to impose accountability and create mutual accountability are really attempts to change the incentives in aid on both sides of the relationship by introducing a new set of sticks and carrots we hope all stakeholders will follow after or run away from; in other words, new incentives that should motivate actions. Unfortunately, we’re trying to change incentives without first being explicit and honest about what they currently are, and how strong they are, and that is a recipe for failure. What’s more, what little analysis we do make of incentives is almost entirely focused on recipient Governments and not on donor agencies, for which the ways in which incentives affect behaviour are far less well understood.

Incentives work on multiple levels, but the most important for us are probably the individual level and the institutional/organisational level. At each level, agents face multiple incentives of different strengths, and how they balance their pursuit of these incentives is a key determinant of how they behave. Complicating matters, the same incentive can cause different kinds of behaviour in different circumstances.

I’ll focus on institutions. Developing country Governments face a few key incentives. Probably the largest are the incentive to retain power and the incentive to increase the material wealth and well-being in the country, since the two often go hand-in-hand. Further incentives include enriching the Governmental elite (which may take legal or illegal forms) and so on. But central to everything is the incentive to retain power: by definition nothing else is possible as a Government if this incentive is not met. This motivating force must therefore be at the centre of our attempts to understand how Governments interact with their populace, and how they pursue development policies. It explains the predilection towards high-visibility prestige projects by Governments (Malawi’s recent general election was won by the incumbent, whose much-loved slogan was ‘Let the Work of My Hands Speak for Me’, often on billboards overlooking newly built roads), and the attempts to chase donor money, because in the media at least, accessing the money is the real win since evaluation and impact are far less closely reported upon. In democratic countries with a transparent information system, this incentive might induce a strong developmental vision; in autocracies, it may cause a retrenchment of information and a focus on immediate-impact activities to stave off rebellion and protest. It is because this incentive to retain power is so strong that donor attempts to strengthen accountability are often flawed. The ways in which power is maintained must be understood first: it is through these mechanisms that accountability can be strengthened. Putting new lines of accountability in place will achieve little unless they speak directly to the incentive of retaining power.

The incentives of donor agencies are more complex and varied, since different types of donor agency have slightly different incentives. Bilateral agencies are part of a political structure; these are the agencies which need to impress their electorates, as the chief Governmental incentive is to retain power. Their primary incentive is driven by their accountability structure: since they are part of an elected Government, they are required to justify their funding to their Parliament and their public. This has a powerful influence on the ways in which they spend their money. They tend to focus on actions that are more easily sold to the public, such as health, education and governance-related interventions, which respond to the popular conceptions about the principal problems in developing countries, often propagated by advocacy groups. The global impact is that in most developing countries the bilateral agencies cluster in and clutter the aid landscape in social development activities, putting far less funding and expertise in the problems of economic growth and development. Domestically collected data from Malawi suggested that in 2007/08, 66% of all aid was for social development and good governance. Restricting this to just bilateral agencies would likely increase this proportion significantly. Similarly, only two donors were active in the Energy and Mining sector, and five in the Trade, Industry and Private Sector Development sector, of which three were multilateral agencies. This compared to eleven in Health (an underestimate, as pooled funds from several donors were counted as a single donor) and twelve each in Education and Governance.

Multilateral agencies have a different set of incentives again. They are insulated from the electorates from whom their funding is ultimately provided, which allows them more freedom in selecting less popular activities to fund. However, since they are funded by Governments who have their own aid agencies, their funding is more precarious, and their accountability particularly strong to these member-states or their boards. They must justify their existence by demonstrating their value added as an aid agency, which may be done in a number of ways. The World Bank produces a huge amount of research and undertakes major economic interventions which bilaterals rarely do. The UN agencies use the legitimacy earned from wide membership to position themselves close to Governments as a partner in development, rather than a ‘donor’. In each case there is a real benefit in the way the incentive influences behaviour, in that it induces the multilateral agency in question to seek out and fulfil a role that bilateral agencies do not already cover. However, regardless of how the independent existence of a multilateral is asserted, they have a second incentive, to spend funds within their funding cycle. Since funding is received from contributions and not taxation, unspent funds are more easily used to justify reduced future allocations; consistent failure to utilise funds allocated could even call into question the existence of a multilateral agency. A further incentive exists in the case of the multilateral banks: to lend, something which is often forgotten.

In an analysis of institutional incentives, only the recipient Government faces an incentive structure which puts the population of the country receiving aid as its primary focus of attention, whether this is through the desire to win democratic elections or the need to forestall unrest. This is not always a good thing, since the short time horizon of Governments may lead to a bias in selecting activities with short-term payoffs rather than longer term gains. Despite this, it is the incentives of donors that require much more attention in the future: these have real effects on the ways in which aid is allocated, but are not under anything near the level of scrutiny recipients’ are. The result is that our attempts to understand the balance of development spending and the process of defining policy in development are not only incomplete, but biased towards only one set of influences. If donors’ domestic incentives are as strong as they appear to be, there is an argument that an important policy for development is education of taxpayers within the donor country, to reduce the distortions that their preferences in aid produce. Advocacy in its present form is not the answer to this; it rather seems to be a source of the skewed preferences observed.

It’s also worth briefly considering personal incentives, which may also have a concrete impact on how aid works. An aid recipient may have a payment structure that rewards staff who travel frequently, through the payment of large allowances; the personal incentive is therefore to travel as much as possible, regardless of the developmental value of this. This is not an unusual situation, in Africa at least. Donor practices may also cause problems. Donor country offices often place international staff in a country for relatively short periods of time, between eighteen months and three years. For an individual to make an impact they may attach themselves to a prestige project or reform, to demonstrate their value. This doesn’t encourage a long view of payoffs to the recipient country and may contribute to the short-termism of many aid funded programmes.

I’m not sure there is a policy recommendation that flows out of these observations. Really this is more of an appeal to expand our understanding of the ways in which development work is structured. Incentives are just one aspect of this, but looking at them in a little detail demonstrates how murky the process of determining the distribution of aid flows is. If we’re serious about improving the impact of aid, this is just one of the difficult issues we need to address. Who knows, we might even conclude that the entire system of dispensing aid needs to be overhauled.

3 thoughts on “Dirty Words in Development: Incentives

  1. J.

    August 24, 2009 at 1:08pm

    I think that this is an excellent post. I do also think, though, that we should not minimize the importance of incentives of those on the delivery side: aid agencies, NGOs, and even individual aid workers. In my opinion, you’d want to include analyses of the incentives for these actors as you look at those forces which shape the flow of aid overall.

  2. Ranil Dissanayake

    August 24, 2009 at 3:05pm

    Very true. I speak very briefly of the incentives relating to individuals at the end, but yes, they do need more analysis. I focused on the institutions because it seems to me that donor agencies (and critics of them) talk about the way they distribute their aid without really getting into the root causes for this.

    NGOs, donor country office and individuals all also have their own incentives that do their bit to shape the way aid is allocated, and this is worth commenting on. For example, if a donor country office (and its head) is assessed by their HQ based on the results of their programmes, they have an incentive to retain control of delivery as much as possible, with detrimental effects on capacity building, since if they delegate actions, more can go wrong, with an ultimate effect on the country office evaluation.

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