Public Choice and Economic Aid

Abstract

A major development in the analysis of government economic policies in the developed countries has been the rise of the public choice school. The essence of this approach is the application of the same basic assumptions that are used in the study of consumers and producers to political decision makers. In the public choice approach, decision makers in the public sector are assumed to be trying to maximize their personal benefits similarly to consumers and firms. Imputing utility maximizing behavior to public sector decision makers does not automatically lead to the conclusion that they will not act in the general interest; rather, whether they do or not becomes a question of the system of rewards and constraints they face. As Adam Smith demonstrated for firms, self-interested parties will act in the general interest if properly constrained and rewarded. However, the public choice approach does imply that public sector decision makers will act in the general interest only if the constraints and incentives on their behavior make serving the general interest also in their interest. It would appear that development economics, which is highly concerned with government policies, could benefit from the application of the public choice perspective. This article attempts to do this with respect to the effectiveness of economic aid in promoting economic growth. There is an extensive literature that discusses theoretically the effectiveness of aid and a more modest literature that attempts to estimate empirically the impact of aid on growth. The literature was recently surveyed by R. Riddell.' He surveys the views of the major proponents and critics of aid. Marxist critics of aid reject the market and the notion of a neutral state pursuing the general interest. There seem to be no studies of aid that adopt the public choice approach, which both accepts the efficiencies of the market as an instrument for economic growth and also assumes government officials are utility