The Principal-Agent Problem in Development Assistance and Its Negative Impact on Local Entrepreneurship in Africa: Time For New Approaches

Abstract

The following article describes the principal-agent problem in international development assistance. It shows how this problem leads to a top-down approach in development projects which may discourage local entrepreneurship and ultimately undermine sustainable poverty alleviation strategies. The author argues that African countries suffer most from this problem because of their high level of aid dependence. A change in the rules of the game of project-oriented development assistance could help tackling the issue by setting the incentives right. Entrepreneurship and technology may then become tools of social, economic and political empowerment and facilitate more endogenous development that is driven by successful local initiatives rather than foreign aid programs.

Keywords: Principal-Agent Problem, Development Assistance, Entrepreneurship, Empowerment