Foreign aid transaction costs

Frieda Vandeninden


The term 'transaction cost' has been widely mentioned in the recent literature on aid effectiveness. In fact, the shift into the aid delivery system (see e.g. the Paris Declaration on aid effectiveness) has been justified among others by the high transaction costs generated by the previous aid modalities. In this paper, we first want to understand what the notion of transaction costs means in the context of aid delivery and give a typology of the possible costs. We also develop an analytical framework to evaluate them. This framework appears to be a relevant tool to compare the effectiveness of aid modalities. We finally apply this analytical framework in Mali: we look at the evolution of the foreign aid transaction costs in two sectors (health and education) with the introduction of sector-wide programmes.

Key words: aid modalities, aid effectiveness, transaction costs

JEL Codes: O20, O22, D23

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