Another development strategy tries to ensure that development aid is spent most effectively. In an influential research paper published by the World Bank in 1997 entitled “Aid, Policies, and Growth,” two economists showed that development aid was most helpful when given to countries that had sound fiscal, monetary, and trade policies. Aid given to poorly run countries, on the other hand, had no effect on economic growth.

This research spurred the idea that aid should be given selectively, only to countries that implement good economic policies. The idea has had a major impact on aid programs. In January 2004, for example, the U.S. government announced the establishment of a new fund for international development, called the Millennium Challenge Corporation. The Corporation will distribute up to $5 billion per year to countries that the U.S. government judges to be fighting corruption, improving social services, and adhering to the rule of law and human rights.¹

Another element of this strategy, to help move along good governance, is the idea of “institution building.” The growth of many developing countries is constrained, the idea goes, by the capacity limitations of their government agencies. To combat this problem, projects to strengthen institutions are directed at developing countries’ government agencies to improve their technical abilities and increase their operational efficiencies in areas such as the legislatures, courts, government bureaucracy, law enforcement, and regulatory agencies.

For example, USAID has helped legislators in El Salvador, Bolivia, Nicaragua, Guatemala, and Mozambique modernize their lawmaking processes through assistance in drafting budgets, defining legislative goals, and interacting with citizens.

To learn about the economic problems that arise from poor governance, please read the following news analyses:

- Case Study: From Revolutions to Elections, the Arab Autumn

-  Africa Rising: Myth or Reality

- Failed States: Insight into Two of the World’s Most Broken States

- Upholding Niger’s Constitution

1 Esther Pan “Foreign Aid: Millennium Challenge Account.”

Next: Sustainable Developmentdevelopment that meets the needs of the present without compromising the ability of future generations to meet their own needs.