Incentive Engineering 101

People respond to incentives. And some development experts believe that when engineered correctly, incentives can ameliorate foreign aid.

Lawrence MacDonald and Ayah Mahgoub at the Center for Global Development discuss Cash on Delivery Aid (COD Aid), a spanking new aid delivery modality that pays aid recipients for progress on a single quantifiable development goal; e.g., primary school completion rates, number of households with access to potable water. In order to ensure transparency and accountability, a third party will conduct independently verification.

Its hands-off nature grants recipient governments total flexibility in deciding exactly how they will raise completion rates. CGD President Nancy Birdsall, who co-authored a book on COD Aid, observed that COD Aid is in exact alignment with the Paris Declaration’s first principle of country ownership: “COD Aid is an attempt…to transfer the accountability that governments feel [from donors] back to their citizens.”

To illustrate, Malawi, whose current primary school completion rate hovers around 35%, has expressed interest in test-driving COD Aid as a component of its education reform. In the case of Malawi, the Ministry of Education would be paid $200 for every primary school graduate who has taken a standardized test. Ministry of Education brainstorming has yielded innovative and custom tailored solutions such as allotting a portion of the $200 to local governments in an effort to inculcate the value of education in them. (According to Mahgoub, Malawi is the ideal pilot country because it already has a standardized tests and an education management system.)

As a matter of fact, COD Aid has been discussed by prominent bloggers outside the international development blogosphere. Felix Salmon, for example, acknowledges the potential of COD Aid. He points to the success of Advance Market Commitments (AMCs), an arrangement that uses cash incentives to motivate scientists to develop vaccines for pneumonia, malaria and HIV/AIDS—diseases primarily affecting the Base of the Pyramid—and thus lack market value.

The international development community still nurtures a hankering for the fabled silver bullet. COD Aid is certainly not meant to be a panacea to poverty; it is meant to complement the status quo of aid delivery.

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