Do No Harm: Aid, Weak Institutions, and the Missing Middle in Africa

The implicit assumption of the donor community is that Africa is trapped by its poverty, and that aid is necessary if Africa is to escape the trap. In this working paper, CGD president Nancy Birdsall suggests an alternative assumption: that Africa is caught in an institutional trap, wherein a robust middle-income population contributing to the creation and sustenance of healthy institutions - particularly healthy institutions of the state - is largely lacking. She offers recommendations to donors about how to help bolster the middle-income population, chief among them: Donors should take more responsibility for reporting and monitoring aggregate inflows of aid to recipient countries, and aid increases in already aid-dependent states should probably be explicitly planned to be more gradual. Donors should minimize poaching of skilled workers, including by the NGOs they finance. That means paying closer attention to their collective impact on local salaries (and housing and other costs); putting more donor resources into adequate compensation for government staff; and ensuring they are funding local competitive contracting whenever possible. Donors should ensure that aid inflows that are less volatile. Unpredictable aid further complicates management and coordination of fiscal and monetary policy, and reduces whatever fragile confidence of small private investors in future relative prices responsible governments are trying to achieve. Donors need to ensure that increases in aid inflows do not discourage restructuring of tax systems to make them less reliant on the trade sector. Otherwise aid sustains tax regimes that are likely to be burdening disproportionately job-intensive export sectors, including agriculture and small industry.