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The discussion of the effectiveness of foreign aid has reached a high pitch. This paper assesses the sorry past and present key arguments for a potentially more effective and sustainable method of aid delivery. A key ingredient is to shake off the vestiges of structural adjustment and move towards true recipient country ownership complete with 'self-conditionality' with aid recipients formulating their own reform packages. This means donors become much more passive, act like a bank and respond to proposals which concentrate on a few critical areas over a three to five-year period. Policy-based program lending should respond to packages put together by the main domestic stakeholders with the help, if necessary, of independent third parties. There should be no compulsion to lend; indeed, an aid hiatus is an indication that the new system is effective. What is required is for donors to stop using aid as a short-term foreign policy tool and for recipients to accept the notion that aid provides the opportunity to reduce the inevitable adjustment pains caused by real reforms.

Vertical decentralization, either at the deconcentration, delegation or, more rarely, the devolution level, has been instituted in most countries of Sub-Saharan Africa. It usually has the effect of increasing the quantity as well as the quality, in terms of health and education, of public goods. More neglected in the literature is the issue of horizontal decentralization, shifting the decision-making power from the central ministry of finance to the ministries of education and health, as well as strengthening the legislative and judicial branches of government. We examine the relationship between horizontal decentralization with its important ethnic dimension and vertical decentralization. Local governments are accountable to the center under vertical and to democratic forces and civil society under horizontal decentralization. Smaller local units are more likely to be more homogeneous ethnically, leading to a larger quantity and higher quality of public goods.

This paper reviews the literature on the impact of ethnic diversity on economic development. Ethnically polarized societies are less likely to agree on the provision of public goods and more likely to engage in rent seeking activities providing lower levels of social capital. Initial conditions are important determinants of adverse development outcomes. The role of decentralization, democracy and markets as potential remedies are discussed. The paper then presents a number of preliminary hypotheses on the relationship between diversity and instability in order to stimulate future research.