International Aid And Principal-Agent Relationship: Evidence From Bosnia And Herzegovina.pdf

Despite high levels of aid, B&H ranks low among European countries in economic development indicators, particularly in small and medium-sized enterprise (SME) growth. The authors argue that structural reforms were not effectively implemented due to the international aid structure, which led to poor economic outcomes.

Key Arguments:

1. Principal-Agent Relationship: The paper introduces the concept of principal-agent relationship within the context of international aid, suggesting that this dynamic contributed to the ineffectiveness of aid in B&H.

2. Microfinance Sector: Specifically, the microfinance sector is examined as a case study. While initially intended to stimulate economic growth and poverty reduction, the authors find that the microfinance model in B&H did not achieve these goals due to inherent principal-agent problems.

3. Comparison with Venture Capital Model: The paper compares the microfinance model to the venture capital model in the U.S., emphasizing the different incentives for actors in each system. It concludes that the microfinance model is susceptible to exacerbating poverty because it does not adequately incentivize sustainability and commercialization of startups.

Research Hypothesis:

The failure of international aid to significantly reduce poverty in B&H can be attributed to principal-agent relationships within the aid structure, particularly in the microfinance sector, where incentives for actors did not align with long-term poverty alleviation goals.

Methodology:

The analysis combines theoretical frameworks from economics and political science with empirical data on B&H's economic development, aid inflows, and microfinance sector performance.

Conclusion and Recommendations:

The study concludes that the current approach to international aid in B&H needs reevaluation, emphasizing the importance of structural reforms and alternative financing models like venture capital to foster sustainable economic growth.