Is Foreign Aid Compatible with Good Governance?

Is foreign aid compatible with good governance? Using the case of irrigation aid in the Philippines, I hypothesize that aid is embedded in a perverse set of incentives that could undermine the application of good governance principles espoused by donors. My findings suggest that the moral hazard problem and aid fungibility are embedded in irrigation aid and that these incentives also drive the vicious cycle problem in irrigation commonly found in many developing countries. These findings indeed suggest that incentives structured into the relationship between donors and the irrigation agency may undermine the application of some principles of good governance espoused by donors.