Aid and Institution Building in Fragile States: A Case Study on Papua New Guinea

Abstract

The aim of this thesis is to examine the economic and development aid policy literature that builds on the central tenet that the quality of institutions are the single most important element of successful development. It is primarily concerned with exploring the emergent fragile states paradigm that is advocating a policy framework to aid donors of 'engaging differently' in states with declining governance and development indicators. This thesis assesses this framework and argues there is a major inconsistency within the fragile state paradigm. The hard end advocates a state-building approach based on propping up a state to avoid failure, whilst the soft end adopts a longer term incentive-based approach more consistent with the economics literature. In practice these approaches can be contradictory and undermine program outcomes. The case study of Australian aid to Papua New Guinea is illustrative of the application of both soft and hard end approaches and demonstrates how the net macro effect of aid interventions can be reduced by these contradictory approaches. An economic model of aid sector failure is applied to assess the marginal social costs and benefits of additional aid in fragile state environments. Acknowledging the geopolitical realities of aid, it advocates a policy of the "least worst" interventions in order to optimise the positive and negative effects of global aid. A framework has been proposed to help guide interventions and may assist aid practitioners to make more informed decisions about the objective of aid interventions, and the scale of its costs and benefits on a recipient country. The case study on PNG argues that Australian aid has not sufficiently focused on development of the underlying social and economic foundations that are prerequisites for the development of a modern state. It concludes that although Australia has made admirable attempts to apply incentive-based approaches, aid on the whole has been overly targeted to propping up the state and its' own core arms at the expense of enabling broader human and economic capacities that build the foundations of a society and the state. Although critical of Australia's approach, this thesis argues that there is no blueprint to resolve the pressure for aid donors to simultaneously pursue geopolitical and longer term development objectives of aid. It advocates acknowledging these dual objectives of aid, and locating equilibrium between interventions at either end of the fragile state paradigm in order to minimise the perverse incentives that interventions can create over the long-term.