AIDING STATE FRACTURE
How Donor-Funded Projects Erode State Capacity

SUMMARY

For over 75 years, the foreign aid architecture born of the Marshall Plan and the Bretton Woods institutions absorbed criticism without fundamental change. Questions about effectiveness, warnings about dependency, and charges of neo-colonialism were voiced by academics, practitioners, and activists. Yet the system adapted and persisted. That changed in the past year, when the system did not reform but virtually collapsed. Major donors slashed budgets, with the United States going as far as shuttering its aid agency, withdrawing from international organizations, and overhauling how it delivers aid. Recipient countries will now be forced to rely on alternative sources of development finance in a world of tightened budgets and heightened geopolitical competition.

The past year has also forced a reckoning with assumptions that have guided development assistance since its inception, chief among them the expectation that aid, as it was structured, could deliver lasting state capacity in recipient countries. This premise has been the subject of fierce debate in academic literature, with some arguing that aid can deliver democratic governance, growth, and improved service delivery and other arguing that aid exacerbates corruption, entrenches authoritarians, and weakens institutions. These arguments, focused on macro-level observations, have paid scant attention to the micro-dynamics of implementation, undertaken by bureaucratic organizations. These organizations are at the heart of state capacity and development programming, yet we know relatively little about how they are impacted by aid. By tracing how donor-funded projects reshape bureaucratic incentives and organizational structures, this book opens the black box of the administrative state to explain why aid inadvertently erodes state capacity.

I argue that project-based aid, now the dominant modality of foreign aid delivery, alters fundamental attributes of bureaucratic work through a sequence of distortions. Projects enter government agencies largely on donor terms, bypassing recipient government systems and creating parallel implementation structures within the bureaucracy. Assignment to these projects then becomes a site of organizational politics, as coveted positions are allocated through a mix of formal criteria and informal patronage. These processes reshape bureaucratic incentives at both the individual and organizational levels. At the individual level, aid projects change financial incentives, implementation discretion, and goal ownership. At the departmental level, they shape donor exposure, pay equity, and coordination among colleagues. These changes generate trade-offs that drive bureaucrats to redirect effort from routine government functions toward donor-funded programs, undermining state-led programming and the organizational cohesion necessary for lasting state capacity.

I test this argument through interviews, surveys, and survey experiments with over 600 Ugandan government officials across ten central government ministries, interviews with donor officials and civil society actors, and cross-national analyses across over 150 aid-dependent countries. The evidence reveals important dilemmas generated by project aid: although bureaucrats have strong preferences for the social dimensions of their job—ownership and discretion—they are only willing to increase effort on projects for monetary benefits. Moreover, these monetary benefits increase bureaucrats’ willingness to divert effort away from their core government duties and toward aid projects. At the organizational level, bureaucrats prefer equitable and well-coordinated departments, and are willing to apply more effort in these departments. However, they are also willing to work in donor exposed departments where these features are undermined. These findings explain why project aid dependency is associated with lower bureaucratic quality in cross-national analyses. In effect, I show how project-based aid purchases bureaucratic effort to enable project success while imposing organizational costs that do not appear in evaluations. Project evaluations typically measure whether targets were met, outputs delivered, and funds properly spent. By these metrics, projects often succeed. But this success is purchased through monetary incentives that pull bureaucrats away from their regular duties, create inequities within departments, and undermine the coordination necessary for effective government. These organizational costs are largely invisible to standard evaluation frameworks, which treat the project as the unit of analysis rather than the department or ministry in which it is embedded.

The book contributes a micro-level explanation for macro-level observations that aid can undermine state capacity, extends principal-agent frameworks by incorporating international donors as external principals, and explores implications for reform in a rapidly shifting aid landscape. As debates intensify over foreign assistance amid shrinking budgets and great power competition, understanding how aid reshapes recipient states has become ever more crucial.