Poverty alleviation: Aid and social pensions

Transaction costs” are commonly referred to in the recent literature on aid effectiveness. The shift to a new partnership aid paradigm (cf. the Paris Agenda) is grounded on the desire to render aid more effective, notably through reducing the high transaction costs generated by the project approach. Aid transaction costs, however, have neither been consistently defined nor measured. In this paper, we propose a definition of aid transaction costs, based on Transaction Cost Economics. We define aid transaction costs as all the economic costs associated with aid management that add no value to the aid delivery. This enables identifying the “net” transaction costs that impede aid effectiveness and should be minimised. We then develop an analytical framework for assessing these costs. This allows the effectiveness of different aid modalities to be compared, according to the context and characteristics of the aid transaction. We show that the choice of aid modality should depend on the aid transaction characteristics and therefore, that the minimisation of transaction costs should not be an end in itself.