Decentralized Aid and Democracy

The last three decades have seen an important surge of the non-governmental sector in the provision of foreign aid. Using NGOs to deliver aid can be a solution to bypass corrupt authorities, avoiding that aid resources are captured by local elites. However NGOs may also act as surrogates for governmental provision of public goods. This implies that citizens make their own governments less accountable. In democratic countries, this can reduce electoral support for provision of public services by the state and harm the poor that don't directly benefit from the NGOs' projects. We develop a theoretical model of vote over public finances to analytically characterise the effect of decentralised aid on welfare. We find that non-governmental aid can harm the poor, weaken governance and aggravate inequalities by crowding-out governmental expenditures. These inefficiencies occur even in a flawless institutional context. We also find that the crowding-out effect can be mitigated if NGOs target countries with low income inequalities or by focusing on humanitarian-oriented missions.