Can Indicator-Based Competition Make Foreign Aid Work?
Foreign aid programs of the past decades have attempted to reduce poverty while introducing necessary reforms in recipient countries through “conditionality”–the practice of requiring economic or political policy changes in exchange for aid. It is now generally agreed that these programs have failed. Recipient governments have pretended to reform, and donors have pretended to penalize them, while poverty has gotten worse. Two key lessons have emerged: aid cannot reduce poverty in the face of bad governance, and policy reforms only take hold when they are locally owned. Recent efforts build on these insights by using indicators to make policy shortcomings more visible and aid allocation more competitive. Created in 2003, the Millennium Challenge Corporation–the first major innovation in the U.S. aid system since the Kennedy administration–allocates aid according to a series of indicators that measure governance, social service provision, and economic freedom. Only countries that scor
