Multilateral vs bilateral aid: addressing some puzzles.

AuthorAndreopoulos, George
PositionReport
  1. INTRODUCTION

    International assistance is one of the most discussed topics in development economics, politics, and international affairs (Alesina and Dollar; Easterly; Hubbard and Duggan; Moyo; Sachs). One interesting and less examined aspect is the differences between bilateral and multilateral aid. With the exception of the OECD and the World Bank, the literature, in general, discusses these differences at the theoretical level only. Our approach is different: we decided to carry a comparison between the two types of aid at both levels, theoretical and empirical. The scope is to see if the theoretical expectations are confirmed by the empirical investigation or, if, on the contrary, some unexpected results will emerge.

    The outline of the paper is as follows. Section one provides an introduction, section two discusses the differences between bilateral and multilateral aid at theoretical level, section three provides an empirical investigation on both multilateral and bilateral aid, and section four summarizes the main conclusions.

  2. THE THEORY OF MULTILATERAL AID

    The main difference between multilateral and bilateral aid is related to the way in which funds are transferred. In bilateral aid, it is country to country, and in multilateral, it is unearmarked aid from countries to multilateral agencies, such as the Word Bank, European Union, and the United Nations, and then to recipient countries. This is a crucial difference because in the case of bilateral aid individual countries are the only one to decide whom to give money to, and for which purpose.

    Given the different nature of these two types of aid, one expects that multilateral aid is more appropriate for developing purposes for the following reasons:

    --Higher participation and resources: Multilateral aid encourages donor countries to get together and donate. Small donations by itself maybe insignificant at the global scale, but when combined with donations from many countries through international organizations can become significant and help those countries in need.

    --Political neutrality and needs-driven: Multilateral aid tends to be less tied to the political and strategic interests of individual donor countries and consequently is able to focus more on the needs of poor countries. One can expect that multilateral aid will help, in particular, in fragile and/or post-conflict societies, especially when it takes the form of humanitarian assistance and post-conflict reconstruction.

    --Global governance: Multilateral aid, when delivered through international organizations, will tend to adhere to widely-shared principles, standards, and procedures. This will deepen the understanding that many of these problems are not local, but global, and therefore have to be tackled by the corresponding institutions and mechanisms. A corollary to that is that these institutions and mechanisms will have to be strengthened, so as to be able to perform effectively the assigned tasks.

    Concerning other aspects mentioned in the literature it is very difficult, at theoretical level, to say if multilateral aid is better than bilateral for development proposes. For example it has been said that multilateral aid allows for a more efficient allocation of resources than bilateral aid. This is mainly due to the fact that international organizations possess specialized professionals in the field which are unmatchable by any single country in the world and this will allow for reduction in time and costs. However, this is questionable because the cost of running a large scale organization can be extremely high because of the high level salaries required to pay the trained personnel and the expenses of keeping the organization running. In addition, turning to the time dimension, when aid funds are collected and managed by an international organization some of these funds are often delayed and less of the funds reach the intended destination.

    The literature also states that multilateral aid is better that bilateral for development proposes because it tends to avoid...

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