Any leader of an organization or a state is selected by a winning coalition within a selectorate. In a democratic nation, the selectorate is the electorate. For the election of a new pope, it is the College of Cardinals.
A government does three things,
- Picks a tax rate
- Provides public goods
- Provides private goods for members of the winning coalition
Autocratic leaders of poor countries are dependent on small winning coalitions. The leader of the government only depends on the leaders of military, the police, and parts of the civil service. When the coalition is small, it is efficient to spend money on private rewards and privileges, corruption, bribes, etc.
If the winning coalition is very large, as in democracies, it is more efficient to provide public goods that also benefit the average voter.
In the rich, democratic countries, there is a demand for helping poor people. A leader in a rich country will give money to the government of a poor country in return for policy concessions.
However, since the winning coalition in the poor country is very small, the rational leader should pay off his coalition, not spread the money around. Indeed, if he tried to avoid paying off his cronies, his coalition would defect and look for a new leader.
Foreign aid therefore works for the winning coalition in the rich country, it works for the donor government of the rich country, it works for the recipient government of the poor county, but it doesn’t work for the poor people in the poor country.
Foreign Aid therefore works just like the Resource Curse. It is money that goes to the recipient government, which it will spend on its small winning coalition, its cronies. There is no need to build a a functioning economy with proper institutions and a system of taxation.
I haven’t read the book yet. Judging from the talk, it is another example of how useful game theory is. Other interesting recent books using game theory include Avner Greif, Institutions and the Path to the Modern Economy: Lessons from Medieval Trade and Daron Acemoglu & James A. Robinson, Economic Origins of Dictatorship and Democracy: Economic and Political Origins.