1. Aid and Governance
in
Lao People Democratic Republic (Lao PDR)
Phanthanousone (Pepe) Khennavong
PhD candidate - Public policy programme
Crawford School of Economic and Governance
1
Supervisory panel
1. Mr. Stephen Howes – Principal Supervisor
2. Mr. Sean Burges
3. Mr. Andy Kennedy
3. I. Introduction
1 Research questions - Have aid donors to Lao PDR been able to
influence governance, and, if so, how?
2 Aid and governance
• During 1950s and 1960s, - potential contribution of aid to filling
investment savings and export-import gaps in developing countries
• During 1970s and 1980s, a shift of donor practices for aid disbursement
- imposed ‘structural adjustment’ conditions on economies of
recipient countries
• From 1990s to present, the focus of aid has shifted from targeting
standard policy reforms toward building effective institutions and the
quality of recipient government functions, including the delivery of
basic services
3 The concept of governance by Kaufmann et al (1999a and 1999b) has
been widely used in the foreign aid system.
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4. I. Introduction (Cont’d)
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Process by which
governments are selected,
monitored, and replaced
Capacity of the government to
effectively formulate and
implement sound policies
Respect of citizens and the state for
the institutions that govern
economic and social interactions
among them
1) Voice and accountability:
Various aspects of the political
process, especially civil liberties,
political rights, and independence
of the media
3) Government effectiveness:
The quality of public service
provision, the quality of the
bureaucracy, the competence of
civil servants, the independence of
the civil service from political
pressures, and the credibility of the
government’s commitment to its
policies
5) Rule of law:
The incidence of both violent and
non-violent crime, the effectiveness
and predictability of the judiciary, and
the enforceability of contracts
2) Political stability:
The likelihood that the
government in power will be
destabilized or overthrown by
possibly unconstitutional and/or
violent means, including
terrorism
4) Regulatory quality:
The incidence of market-
unfriendly policies such as price
controls or inadequate bank
supervision, as well as burdens
imposed by excessive regulation in
areas such as foreign trade and
business development
6) Control of corruption:
Corruption, conventionally defined as
the exercise of public power for
private gain. This ranges from the
frequency of ‘additional payments to
get things done’, to the effects of
corruption on the business
environment, to ‘grand corruption’ in
the political arena or in the tendency of
elites to engage in ‘state capture’
5. II. Country context
1 Land locked country – per
capital income $986
2 74% of population living below
$2 a day
3 1975 – transition year from
Kingdom of Lao to Lao People’s
Democratic Republic (Lao PDR)
4 Since 1975 – one party state
ruling by the Lao People
Revolutionary Party (LPRP)
5 1986 – introduction of New
Economic Mechanism
6 85% - foreign aid share of
government public investment
programme
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6. Technical Cooperation (TC) and aid for governance
in Lao PDR
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Description Year (Amount in million USD)
2002 2003 2004 2005 2006 2007 2008 2009
Total ODA to Lao PDR 278.48 301.06 269.9 301.94 363.71 396.12 495.6 419.98
Technical Cooperation ODA 31.24 27.19 31.97 64.29 67.68 92.44 76.38 88.2
Percentage of TC 11% 9% 12% 21% 19% 23% 15% 21%
Source: OECD DAC database
Source: OECD DAC database
1
8 7 8
13 13 13
27 25 25 26
32
44 44
35 36
-
10
20
30
40
50
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Aid and governance in Lao PDR since 1995
(Amount is in million USD)
7. 7
Kaufman’s results do not show much improvement in governance but this does not prove that aid has
been ineffective:
1. What is the counterfactual
2. They are relative rankings
3. They are based on cross-country surveys which may or may not be reliable
0
10
20
30
40
50
60
1998 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Percentile rank of six Kaufmann et al.’s governance indicators for Lao PDR
Percentile rank indicates the percentage of countries worldwide that rate below Lao PDR.
Higher values indicate better governance rating
Voice and Accountability
Political Stability
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
8. III. Literature review
Three categories of the arguments against the proposition that aid can be used
to improve governance
1 Domestic institutions change slowly, and are largely determined by domestic
politics, something over which donors have traditionally had little influence
2 Tools donors have for addressing government often have little influence.
For example, criticisms of conditionality and technical assistance.
3 Far from improving governance, aid can in fact make it worse. For example:
• Poorly designed and implemented aid can lead to increased rent-seeking,
corruption or even violence.
• Poor aid can also weaken accountability to domestic voters, which can have
an adverse impact on performance.
The first two arguments still allow for aid to have an influence on the margin, even
if it is not decisive. The third, however, suggest that aid in fact will have a negative
influence
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9. III. Literature review (cont’d)
Most of the evidence in support of the negative influence of aid on governance
comes in the form of cross country regressions.
• Knack (2000) - one of the earliest and influential authors for this proposition -
Aid could potentially exacerbate corruption and has negative impact on the
rule of law and bureaucratic quality
• Aleina and Weder (2002) also argue that high level of foreign aid in poor
countries can increase the level of corruption.
• Djankov et al (2008) also argue that high level of foreign aid in developing
countries undermines their institutions
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10. III. Literature review (cont’d)
There is a significant body of literature critiquing cross-country aid regressions and their lack
of reliability. In particular, Ear (2007) critiques Knack (1999) and argues that “the causal link
between aid dependence and worsening quality of governance may be tenuous at best and
sensitive to alternative specifications”. The alternative approach is one based on case studies.
Case study 1 - Ear (2007) - The political economy of aid and governance in Cambodia
• Key findings – Aid failed to improve governance except for political stability and may
have worsened corruption
Case study 2 - Huges (2009) - The politics of aid “Dependent Communities: aid and
politics in Cambodia and East Timor
• Key findings - the policies of Western aid organizations tend to stifle active political
engagement by the citizens of countries that have been torn apart by war – Cambodia vs
East Timor
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11. III. Research gap
The current literature on the impact of aid on governance seems to have two
key limitations.
1 It is heavily biased in the direction of cross-country regressions, which
may well be unreliable. It often assumes that that the impact of foreign aid
on quality of governance is likely to be homogenous across countries
2 There are very few case-studies, and those that are lack direct insight
into the perspectives of government officials. Ear (2007)’s findings, for
instance, very much based on perspectives from donor community (84% of
the survey’s respondents worked for donor agencies and Non-Profit
Organizations (NGOs))
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12. IV. Research methodology
Approach - A qualitative case study
1) Survey
- Replicated Ear’s (2007) elite survey on aid and governance based on Kaufmann et al.’s six
dimensions of governance
- Extended to a larger group of respondents especially more government officials
2) Semi-structured in-depth interviews
- Mostly open ended questions
- Looked for justification on the ratings by research participants
3) Ethnography and observation
- Worked two days a week with Ministry of Planning and Investment for six months in
Laos managing UNDP supported program for aid coordination and aid effectiveness
4) Analysis of reports and documents
- Reviewed Government documents and donor briefings, evaluation and reports
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13. Survey
I. Survey launched at the end of September 2011 – closed in late July 2012
Key question - For each of six dimension of governance, please indicate whether you
believe that the donor community as a whole has succeeded in stimulating positive
changes in the quality of government in Laos.
II. Rating on donor success
- Ratings on donor success on the quality of the government – negative, no influence,
poor, medium, positive and strongly positive
- To avoid response or acquiescence bias, rating included a ‘not
sure/don’t know’ option
III. The response rate was 75% of the relevant informed population of 80
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14. Respondents for Ear’s study = 43 (84% of them are representing donor agencies)
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Descriptions Number Percentage
of total
research
participants
Male Female Average
working
experience
Median
Total research participants
60 39 21 17 15
Government officials 31 52% 21 10 18 15
Donor representatives 29 48% 18 11 15 15
Government officals in total 31 52% 21 10 18 15
Gov't Official - Senior (58%) 18 30% 12 6 24 23
Gov't Officials - Manager (26%) 8 13% 7 1 12 12
Gov't Officials - Technical (16%) 5 8% 2 3 6 6
Donor representatives in total 29 48% 18 11 15 15
Officials working with donor agencies (48%) 14 23% 9 5 14 15
National expatriates working with the Government (28%)
8 13% 4 4 17 15
International expatriates working with the Government (14%)
4 7% 4 0 18 15
Non-Government Organizations ( NGOs) (10%) 3 5% 1 2 13 10
Composition of respondents
17. V. Findings and discussion
I Donors and government officials do not differ much in their rating the influence of
donors on the quality of government in Lao PDR. Ratings by all research participants
seem to be consistent across all sub-groups although government officials are more
optimistic
II Both donors and government officials are prepared to be negative about the
influence of aid. This suggests that they are speaking frankly
III Two clear clusters of results
1. Positive influence – research participants felt that donors have successfully
influenced voice and accountability, government effectiveness and rule of law
with rates from medium to strongly positive of 80%, 85% and 90%, respectively.
2. No influence - political stability, regulatory quality and control of corruption
were rated as the three dimensions that donors have not been able to effect change
with ratings from no influence to poor of 82%, 73% and 92%, respectively.
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18. V. Findings and discussion (cont’d)
IV Reasons for positive influence
1. The reform has been perceived by the Government as no harm to the current
Lao political regime.
2. Being more responsive to the reform is a Government strategy to increase
donor support and to sustain the Party’s legitimacy.
3. Donors seem to pay more attention to voice and accountability, government
effectiveness and rule of law compared to other three dimensions.
V Reasons for no influence
1. The ruling Lao People’s Revolutionary Party (LPRP) has monopoly power
over all political spectrum in Lao PDR
2. Application for becoming a World Trade Organization (WTO) member has
prompted the Government to improve the regulatory quality rather then donors’
influence
3. Corruption is in the “too hard” basket. Government does not want an external
pressure on this and donors put this issue to one side.
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19. V. Comparison with the results by Ear
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Description Dimensions of governance
Rating (Medium to Strongly positive)
(Laos vs Cambodia)
Similar results • Regulatory quality
• Control of corruption
• 27% vs 29%
• 8% vs 7%
Different results
• Voice and accountability
• Political stability
• Government effectiveness
• Rule of law
• 80% vs 47%
• 18% vs 67%
• 85% vs 30%
• 90% vs 12%
Key explanation for these results is that expectation which seems to be higher
in Cambodia compared to Lao PDR
20. V. Comparison with the results by Ear (cont’d)
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Governance Dimensions
No
influence
to Poor
Positive to
Strongly
positive
Medium to
Strongly
positive
Key development that donors can
influence
Voice and accountability
Lao PDR 20% 50% 80%
One-party state – but the party is
convinced to revitalize the current voice
and accountability framework.
Cambodia 53% 12% 47%
Electoral democracy – but donors are
skeptical over the process
Political stability
Lao PDR 82% 2% 18% Monopoly power by the Party
Cambodia 33% 36% 67% Resolution of the 1997 crisis
Government effectiveness
Lao PDR 15% 53% 85%
High priority for both donor and
government to maintain its relevance and
authority .
Reform to keep the flow of external
assistance
Cambodia 70% 2% 30%
Donor salary supplement – brain drain
issue
21. V. Comparison with the results by Ear (Cont’d)
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Governance Dimensions
No
influence
to Poor
Positive to
Strongly
positive
Medium to
Strongly
positive
Key development that donors can
influence
Regulatory quality
Lao PDR 73% 3% 27% Donors have less concerns
Cambodia 71% 7% 29% Donors have less concerns
Rule of law
Lao PDR 10% 55% 90%
High political will – treaty to six out of
nine core UN treaties – first ever legal
sector master plan up until 2020
Cambodia 88% 2% 12%
Low political will – WB suspended the
legal reform program
Control of corruption
Lao PDR 92% 0% 8%
Sensitive issues and strong partnership is
important for other areas
Cambodia 93% 2% 7% Aid seems to make corruption worse
22. VI. Conclusion
1 Results of the survey suggest balanced views over the influence of aid on governance
in Lao PDR
II Key results – aid has effect in some areas and not in others
Positive influence
• Voice and accountability
• Government effectiveness
• Rule of Law
No influence
• Political stability
• Regulatory quality
• Control of corruption
III Implication
1. Be careful of cross-country generalization
2. The influence of aid depends on types of government – to be further explored
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