States, Markets, and Foreign Aid by Simone Dietrich

Abstract

Developing countries face multiple challenges. Beyond lacking resources, their governments may be corrupt or of low capacity. This poses risks for donor states, whose financial aid might not help those who need it most. However, donors do not handle the risk identically: some continue to funnel much aid through those governments, others redirect large portions to nonstate actors. When facing similar risks, why would donor states deliver foreign aid differently? According to Simone Dietrich's book States, Markets, and Foreign Aid, the answer is donors’ ideological differences, long enshrined in their aid institutions. Some donors are ideologically more “statist,” others are more “neoliberal.” Statist donors tend to have an active public sector themselves, and when distributing aid internationally they favor public-sector partners. Neoliberal donors tend to have active nonprofit and private sectors, and when distributing aid internationally they favor nonstate partners. Moreover, whereas neoliberal donors emphasize shorter-term poverty relief, statist donors aim for longer-term state capacity. Over time, these diverging ideologies have shaped domestic institutions, with donors’ aid systems becoming more incentivized toward particular delivery modes. Institutionalized incentive structures constrain current aid officials: even when a recipient government has corruption or capacity problems, individuals working in a statist system cannot easily bypass it. Similarly, even when breaking poverty's vicious cycle would require building state capacity, individuals working in a neoliberal system cannot easily redirect resources that are usually channeled through nonstate partners.