Can foreign aid be used to enhance good governance in recipient countries? This paper looks at the history of donor efforts to strengthen public institutions in developing countries, and how these have evolved in response to accumulated learning, changing fashions and donor interests. Systematic evaluation is lacking, but overall, the impact of donor assistance has been modest. In response to this finding, a new conventional wisdom is emerging among development practitioners, which recognises the need for much better understanding of political and institutional context, and more effort to nurture local ownership and demand for reform. However, the critical question is what donors will do with these insights. Will they be absorbed into current ways of thinking (which assumed that the solution lies in capacity building of formal institutions), or will they stimulate a much more fundamental reappraisal of how to get better governance? The paper suggests that the latter would involve adopting a different working hypothesis, namely that getting more effective, accountable public institutions requires a political process of bargaining between the holders of state power and organised interest groups in society. A major cause of bad governance in many developing countries, is that incentives for the political elites to engage with local interest groups - for example over tax - is relatively weak, since they have access to external rents and support from rich countries. Rethinking governance in this way is difficult for donors, because it highlights the scale of the challenge, the limitations of what external actors can contribute, and the lack of knowledge about how to get better governance. It would require significant changes to the way donors operate, including: prioritising action to restrict the access of political elites in poor countries to rents and military support, by curtailing the involvement of OECD states, businesses and individuals in corrupt business practices, and the arms trade; getting serious about rationalisation (not just harmonisation) of donor activity. Becoming much more alert to the impact of aid, and of different aid modalities, on local incentives and capacity for progressive change; playing a more indirect role in supporting long-term processes of change, instead of trying to set the policy agenda.
