My new working paper, Beyond Planning: Markets and Networks for Better Aid is on the Center for Global Development website in the innovations in aid series.
In the paper I argue that more planning and coordiation among donors will not overcome the political constraints that prevent better aid. The aid system is in a political equilibrium which we need to try to change; we won’t solve aid’s problems by trying to move away from the equilibrium. This means making more use of market and network mechanisms to change incentives within the aid system. We need to stop thinking of grand new designs of the aid system and start putting in place mechanisms that force evolution in the right direction.
I’ve listed a set of measures, from the commonplace (untying aid, for example) to the unusual (tradable missions permits, or a tax on proliferation pollution) to illustrate the ideas.
I’ll be discussing the paper at the Overseas Development Institute (ODI) on Friday, and on a forthcoming episode of Development Drums.
I’m looking forward to comments and feedback.
Have a look at this video produced by the International Budget Partnership.
The video is about the way that a civil society organisation in Kenya, MUHURI, has enabled a local community in Mombassa to hold their government to account.
(Disclosure: I work on aidinfo – a small research team which promotes the adoption of open standards for the publication of detailed information about foreign aid, to enable people in developing countries to hold governments and donors to account.)
There are bad reasons and good reasons for supporting the use of innovative finance for development. Unfortunately, some development advocates seem williing to back any proposal that they think might raise more money for development, instead of focusing on mechanisms that will improve the way that money is used.
When is innovative finance good?
Innovative finance can improve the effectiveness of aid spending. There are at least four ways this can work.
First, innovative finance can improve intertemporal optimisation. Aid budgets are often given from year to the next, which makes it difficult to spend the money at the best time. For some spending, it makes sense to spend today to save money tomorrow (for example, spending money to eliminate smallpox reduced the need for health care spending later on). It is not always sensible to bring forward spending – particularly if you believe that there are diminishing returns to some kinds of aid spending. The International Finance Facility for Immunisation is a good example of how spending tomorrow’s aid today can be sensible, because future generations benefit from the increase in herd immunity in today’s beneficiaries.
Second, innovative finance can create a commitment technology. There are many benefits to being able to make commitments – which is why in normal life we have mechanisms such as contracts and warranties. We need commitments to deal with dynamic inconsistency and to allocate risks. But constraints on aid agencies make it very hard for them to make commitments about aid. A good example of an effective forward commitment is the Advance Market Commitment, which guarantees manufacturers a more lucrative price if they develop and produce a new medical product for developing countries. Forward commitments enable governments to invest in reforms which have costs over several years, or firms to invest in new products for developing countries.
Third, innovative finance can change incentives both for donors and recipients. For example, funding schemes that link payments to results may reduce the incentives of donors to micromanage the way aid is used. If payments to organisations are linked to demand (eg through a virtual voucher scheme) they may improve their services for beneficiaries.
Fourth, innovative finance can improve the allocation of risk. Insurance pools may diversify risk, and permit rapid increases in funding in the case of disasters. We can pool medicines, for example, so that they are available to whoever needs them first. Stabilization funds with automatic disbursement criteria can ensure that finance is rapidly available, without strings, where and when it is needed.
In each of these four cases, well-designed innovative finance can increase the productivity of aid spending. As aid becomes demonstrably more effective, so in the long run we can make the case for greater investment.
When is innovative finance not good?
While there are excellent reasons to identify innovative ways to give aid, the need to increase funding is not one of them. I am in favour of a large increase in aid, but not in favour of achieving it by distorting rational decision-making on taxation and spending. Many development advocates support schemes to tax financial transactions (a so called “Tobin Tax”) or airline tickets, or a new global lottery (a tax on the poor), if these are used to pay for increased foreign assistance. I understand the desire to get aid any way we can, but I don’t respect this kind of opportunism.
We should determine the structure and level of taxes on the basis of evidence about the most effective (or least damaging) ways of raising the revenues we need; and we should decide the level of spending on the public’s various priorities based on how we will do the greatest good. Linking a particular kind of spending to a particular revenue cannot improve choices about spending or tax, and may unnecessarily constrain them.
Conclusion
Some particularly misguided proposals involving introducing taxes on goods or services we would not normally considering taxing (such as investment in information technology). By linking these proposal to the (rightly appealing) goal of increasing aid spending, we are in danger of being seduced into doing the wrong things for the right reasons.
Innovative finance holds rich possibilities for accelerating poverty reduction by making aid money work better. If we can find ways to relax the institutional constraints on spending money at the right time, or increase our ability to make rational commitments, we can make aid money work harder. In time, this may mean that taxpayers and donors are willing to spend more. But we should not invent mechanisms whose main effect is to bypass our existing processes for making sensible decisions about tax and spending.
Over on Huffington Post, Seth Berkley and Orin Levine make a plea for the United States to consider an Advance Market Commitment for an AIDS vaccine:
Traditionally it has taken up to 20 years for new vaccines to reach children in developing countries. The AMC can fix this inequity. Through the pneumococcal AMC, and with the support of the GAVI Alliance which administers it, children in Rwanda and the Gambia are benefiting from pneumococcal vaccines even before children in wealthy countries such as Austria and Japan. What’s more, the mechanism is spurring development and deployment of two newer vaccines that extend protection against strains of pneumococcal disease most common in the developing world. Thanks to such advances, the accelerated use of pneumococcal vaccination is projected to save 5 to 7 million lives by 2030.
The idea (which is mainly down to Michael Kremer at Harvard) is simple: donors promise in advance that if somebody invents and delivers a vaccine that meets certain requirements, then donors will pay for it to be bought in large quantities. That promise may provide sufficient certainty for the private sector to invest in developing new products, and to build large-scale manufacturing facilities. Take a look at this video to see what a difference Michael’s idea is already making.
From a public policy point of view, a nice feature of this schemes is that if it doesn’t work, it doesn’t cost anything. If you make a promise to purchase an AIDS vaccine when one is developed, but scientists are unable to crack the puzzle, then you have not spent a dime. You are only committed to buying an AIDS vaccine when it is developed – which, let’s face it, you would have done anyway. By making a firm commitment in advance, you change the incentives for the private sector. (The economics is set out here in an article in The Economists’ Voice.)
This scheme is designed to tackle an economic problem that runs deep in most market economies. We typically set up incentives for firms to innovate by promising them a temporary monopoly (through patents) if they are successful. This enables a firm to charge a premium for a limited period to recoup its investment and to compensate it for the risk it has taken. But this scheme only works if the consumers are willing and able to pay that premium. (And even then, it has a social and economic cost because it excludes consumers too poor to pay the premium). The scheme doesn’t work at all for products most of whose consumers are very poor – such as people who get malaria or who need cassava plants that are resistant to attack by the mosaic virus. That’s why firms spend ten times as much hunting for a cure for baldness as they do hunting for a cure for malaria. The Advance Market Commitment makes investment in those products much more attractive to the private sector, because now there is an opportunity to charge a premium (paid by the donors) even though the ultimate consumers are poor.
We will be in a better position to judge the effectiveness of the pneumococcal AMC when kids are actually getting injections paid for under the AMC. An important test will be whether we see pharmaceutical firms returning to the development and large-scale production of vaccines for developing countries (and there are some early signs that this is happening).
But the Pneumococcal AMC has already taught us that it is possible to navigate the legal, financial, commercial and political waters to put in place a legally-binding multi-donor commitment to buy a future product. This is the result of outstanding work done by the Center for Global Development (in which I am proud to have played a small, walk-on part). Early nay-sayers complained that an AMC was theoretically attractive but impossible in practice. CGD played a critical role by developing a practical way of implementing the idea, which opened the door to the implementation of the pneumo AMC.
Now that it has been shown that an AMC is technically possible, we should be looking at:
- designing an AMC for an “early stage” vaccine such as AIDS;
It is occasionally said that an AMC works for a late stage product – ie one that has already been largely developed but needs incentives to get it produced – but that it would not be appropriate for products still requiring substantial research and development. There is no logic to this argument. The original modelling for an AMC was done for an early stage vaccine, and I have never seen a cogent case against using the approach (alongside conventional government funding for basic research) for products at an early stage of development. - how to get the United States involved
This approach – of providing incentives for private sector entrepreneurship and risk taking to be involved in products for developing countries – ought to appeal to US policy-makers, and I have never understood why the US stood aside from the first AMC. There are some technicalities involved making commitments in the US budget process but these are not insurmountable. Let’s hope the US will be part of the next AMCs. - using the AMC approach for other health products
In principle, the AMC could be used to encourage the development and manufacture of a range of other health products such as drugs, diagnostics and surgical instruments - using the AMC to promote other forms of other research and development
we should consider whether the AMC might be a good approach for donor funding of other forms of research and development for products mainly used in the developing world, such as new agricultural varieties, solar energy products, and ways of providing clean water. - the possibilities for other forms of “pull” incentive for research and development
The AMC is not the only possible pull mechanism to incentivise research for products needed in developing countries. For example, donors might set up schemes to buy out patents, prizes or other rewards for success (e.g. payments linked to DALY’s averted or social rates of return). We should look again at the costs and benefits of these different ways of getting the private sector involved.
Tim Harford has an interesting article in this weekend’s Financial Times about private health and education in developing countries:
Imagine that your daily earnings were less than the price of this newspaper. Would you consider buying private education and private healthcare?
Before you make up your mind, here are a few considerations: government healthcare and primary education are free; the private-sector doctors are ignorant quacks and the teachers are poorly qualified; the private schools are cramped and often illegal. It doesn’t sound like a tough decision. Yet millions of very poor people around the world are taking the private-sector option. And, when you look a little closer at the choice, it’s not so hard to see why.
Now there is a dilemma here.
On the one hand, we know that charging even a very small amount massively reduces the take-up and impact of services such as health and education. (This survey by Holla and Kremer summarises the evidence.) So charges excludes many people from access, and it seems likely that the poorest and most vulnerable will be excluded most of all.
On the other hand, we know that public services in developing countries are often poorly managed and badly delivered. That’s why, as Tim points out in his FT article, many of the very poorest people choose to go private instead.
Apologies if this is anecdotal, but I see this dilemma in practice every day. My partner works for Marie Stopes International, which operates 21 clinics for women (providing contraception and abortion) here in Ethiopia. They charge their clients for services – a small amount which is just enough to pay for the cost of running the clinics. The result is that they are very focused on delivering services that will bring their clients into the clinics every day – that is, services that they actually need, at a price they can afford. My feeling is that, as a result, they are more focused on their customers than most public services in developing countries, and indeed in some developed countries, whether financed by aid or by taxation.
So how can we disentagle ourselves from the horns of this dilemma? Here are three thoughts:
- First, we should take seriously Tim’s observation that “a little accountability goes a long way” and think much harder about how we can make public services more acountable. You have probably heard about the way more funding reached Ugandan schools as a result of greater transparency (though the details have been disputed (pdf)). The work of my team on aid transparency is a modest contribution to this effort.
- Second, we should not be ideological about whether the public or private sector actually provides services, as long as the government takes steps to ensure that there is universal access. For example, governments (with the support of donors) might issue vouchers to the poorest, enabling them to choose for themselves whether to use public or private services.
- Third, in the long run this problem will be reduced if and when there is equitably shared economic growth which gives people sufficient incomes for these kinds of choices to be more reasonable.
For two years I worked at the Center for Global Development on Michael Kremer’s idea that donor nations should create stronger commercial incentives for drug companies to develop and manufacture drugs and vaccines needed for developing countries by guaranteeing to pay for them if they are produced.
On 12th June, a group of donors signed the first Advance Market Commitment. Here is the Wall Street Journal
The $1.5 billion program marks a departure from previous charitable efforts to increase poor countries’ access to vaccines. Instead of buying existing drugs and giving them away, the donors will guarantee pharmaceutical companies a future market big enough to justify developing and manufacturing new vaccines needed in nations too impoverished to afford them on their own.The donors — Italy, the U.K., Canada, Russia, Norway and the Bill and Melinda Gates Foundation — plan to announce the initiative Friday on the sidelines of a meeting of top finance officials from the Group of Eight major industrial powers, according to Italian officials.
The first target will be a vaccine to prevent pneumococcal disease, which kills 1.6 million people in the world a year, the majority of them young children in the developing world.
The scheme is projected to prevent between five million and eight million child deaths by 2030.
The Center for Global Development has played a remarkable role shepherding the idea from concept to practical scheme to launch. For me it has been a great privilege to be involved. As well as the possible direct benefits of this particular commitment – perhaps saving millions of lives – we have helped to think about new ways in which the rich can support people in developing countries, in this case using financial incentives to help stimulate the private sector to meet the needs of people in poor countries.
Forgive the puff for my day job – aidinfo works to make aid more transparent and accountable.
Our web guy has done a great job on our website: http://www.aidinfo.org.
Also you can subscribe to our RSS feed.
In the FT debate on aid, Dambisa Moyo, author of Dead Aid, seems to be adjusting her position:
To focus on the five-year aid-reduction example that my book offered as an illustration of an exit strategy deliberately misses the point, which is that Africa desperately needs to wean off aid. Obviously, a blanket five-year plan imposed on countries with different challenges and different circumstances would be ridiculous!
One can only interpret the fact that my detractors took the five-year example at face value as wilful blindness or a complete unwillingness to see Africa in any other light than a basket case. An aid exit might take 10 years, it might take 15, but after 60 years of the aid-regime (with no concomitant job creation) surely it is better to start the conversation (and the strategy) of aid exits than not.
Indeed, cutting off aid in five years would be ridiculous. On that we are agreed. I don’t know anybody involved in aid who does not fervently wish for the day when countries are rich enough to do without aid, and who wants to give aid in ways that bring that day forward. If Dambisa Moyo is simply saying that we should all work towards removing the need for aid, then I am not sure why there is such a fuss.
So what made us think that Dr Moyo was advocating a five year plan to reduce aid? Perhaps it was remarks like these in just about every known newspaper:
In the book I actually prescribe that they should, with immediate effect or in the very near foreseeable future, implement a five-year plan where they systematically reduce aid to these countries.
Or perhaps it is because she says this in Dead Aid (p144):
What if, one by one, African countries each received a phone call (agreed upon by all their major aid donors – the World Bank, Western countries etc), telling them that in exactly five years the aid taps would be shut off, permanently? Although exceptions would be made for isolated emergency relief such as famine and natural disasters, aid would no longer attempt to address Africa’s generic economic plight.
You can see why some people got the impression that Dr Moyo was proposing that aid should be shut off after 5 years. But it is reassuring to know that this was not her position, or at any rate it is no longer her position.
Even with her new cuddlier policy of turning off the taps more gently, there is still a lot of wild and unsubstantiated garbage in her book – for example, this:
The problem is that aid is not benign – it’s malignant. No longer part of the potential solution, it’s part of the problem – in fact, aid is the problem.
Here is my review of Dead Aid. Here are some other reviews. Andrew Pickering at Global Dashboard has a good summary of the debate so far.
Cashewman quotes a friend:
“You can give a man a fish, and he’ll eat for a day. You can teach a man to fish and he’ll eat for a lifetime. But did you ever ask him if he wanted a fucking fish in the first place? And it’s not as simple as a fish anyway.”
My day job is leading the aidinfo team working to improve the transparency of international aid. Why? Because we think that when aid is more transparent it will be more effectively used and it will help people in developing countries to hold their governments to account. We also believe that if taxpayers can see where aid is really going, and see what a difference it makes, they will support more of it.
So I was dead pleased to see this by David Cameron in today’s Guardian
Transparency tears down the hiding places for sleaze, overspending and corruption. Soon enough all MPs’ expenses are going to be published online for everyone to see: I and the rest of the shadow cabinet are already doing it. And if we win the next election, we’re going to do the same for all other public servants earning over £150,000. Just imagine the effect that an army of armchair auditors is going to have on those expense claims.
Indeed, the promise of public scrutiny is going to have a powerful effect on over-spending of any variety. A Conservative government will put all national spending over £25,000 online for everyone to see, so citizens can hold the government to account for how their tax money is being spent. And we will extend this principle of transparency to every nook and cranny of politics and public life, because it’s one of the quickest and easiest ways to transfer power to the powerless and prevent waste, exploitation and abuse.
Yes, yes, and thrice yes, as Mark Kermode would say.
What’s more, with current technologies, we can do this quite easily, and unleash the creative power not only of armchair auditors, but of millions of people who are not in armchairs but are directly experiencing the effects of that spending and who can help us to understand what is working and how it can be made to work better.
Kudos to the US Government for giving food aid to Ethiopia. This is good:
USAID has provided an additional 87,910 metric tons of emergency food aid, valued at approximately U.S. $50 million, to the Joint Emergency Operational Plan in response to the Ethiopian Government’s January 2009 appeal. This emergency food aid will provide a full ration to 1.18 million beneficiaries for four months in 72 woredas in the most severely impacted regions – Afar, Amhara, Oromiya, Somali, Southern Nations, Nationalities and Peoples, and Tigray Regions and in Dire Dawa Administrative Council.
That’s good, but it could better.
The US imports food aid to Ethiopia. It is bought from American farmers and shipped by boat to Djibouti, then brought by road to where it is needed in Ethiopia. The cost of all this works out at $568 per metric tonne. Here in Addis Ababa, today’s market price of wheat is $489 per metric tonne. It is cheaper out of the capital. So America’s generosity could buy 16% more wheat if it were bought locally. From that difference alone, another 190,000 people could be given a full ration of food for four months. Furthermore, buying the food locally would increase the incomes of farmers either in Ethiopia or in neighbouring countries and the improve livelihoods of other parts of the economy (e.g. haulage companies) needed to make the agriculture market work. Their livelihoods, which are undermined by imported food aid, would be improved if the food were bought locally. If there is sufficient supply response among local farmers (which there probably would be) so it does not have to be imported, then the generous aid would also provide $50 million of much needed foreign currency for Ethiopia.
This is not possible at the moment because American legislation requires that food aid be bought in the US, that 50 percent of commodities be processed and packed in the US before shipment, and that 75 percent of food aid managed by USAID and 50 percent of the food aid managed by the US Department of Agriculture be transported in “flag-carrying” US-registered vessels. The result is that only 40% of money spent on food aid by the US actually goes towards buying food; the rest goes to US transport companies.
Buying the food locally would be better, but best of all might be something even more radical. Why not give the money itself to people who are hungry? Amartya Sen’s groundbreaking study of famine, Poverty and Famines: An Essay on Entitlement and Deprivation
Starvation is the characteristic of some people not having enough food to eat. It is not the characteristic of there being not enough food to eat.
People are usually hungry because they are too poor to buy food. (They are often reduced to this poverty by the failure of their own harvest. But that does not mean that there is not enough food for them.) If we give them money (or vouchers, if we really have to) they can buy food locally. Food growers elsewhere will grow food, and traders will bring it to them. It will be the food they prefer and know how to eat (NB this often means not wheat). This will not only help to protect people from starving, it will support local and regional food producers, and other local businesses.
US food aid is all in bags labelled “From the American People”. It is a generous thought, but it might be less misleading if it were labelled “From the American People, mainly to the American People”.
… I lost my young sister. She died of HIV-related complications. She should still be alive today since she was on ARVs.
But ARVs go hand in hand with good nutrition. My sister could not afford proper daily meals since she was looking after a large extended family. Besides her three children, she was looking after six double orphans that our elder brother left behind.
Her story is commonplace in Zambia. The HIV and AIDS pandemic can be mitigated by people having proper access to medicines and food. Both have become bigger problems in the current world economic crisis.
It is such situations that prompt those of us in civil society to redouble our efforts to do more advocacy work, asking our governments, in Africa, not only to be accountable to the people, but to prioritise issues of poverty and unemployment in their economic policy frameworks.
Our governments, though, are also limited in their capacity to cope with the severe effects of the global economic crisis. This is where the rich countries come in. They should remain committed to their aid promises.
So asks Chris Blattman:
I seldom fly business myself, even on Bank and UN consultancies, mostly to conserve my project funds for research assistants and survey expenses. My incentives are just right: money I spend on me comes out of money I’d spend making my research projects just a little better. Not so the rest of the agency?
I also hold back from business for another reason: $6000 for a single ticket? When the purpose of your trip is to contribute (however little) to ending poverty, something about that price tag just doesn’t seem right.
The Bankers and UNers have a good response: I’m only there for a week, and I’m much more productive if I can sleep on the plane.
To which I reply: your productivity for a 0.5% of your time is worth 4% of your annual salary?
In some cases, I might add: what development assistance exactly is achieved in a week?
In an age of diminishing aid and global belt-tightening, now seems an opportune time to change this little practice. Mr. Zoellick? Mr. Ki-Moon?
The answer is obvious: of course not. The staff of aid agencies should fly economy class.
Business class flights are not the only expensive perks. Why do World Bank and IMF staff visiting Addis Ababa stay in the Sheraton, which is one of the most luxurious and vulgar hotels in the world, when there are very good hotels down the road for one fifth of the price? Why do international aid agency staff living overseas have such luxurious houses, with allowances for gardeners and domestic staff? Why do some aid agencies pay to fly their belongings to Addis Ababa air freight, when it could come by sea for a fraction of the price? Should staff be allowed to ship cars from home, at public expense, duty free, and then sell them locally at a profit?
A good start would be to make all this transparent. As we are seeing with the row over MPs’ expenses in the UK, sunlight is a good disinfectant. If all these expenses were individually and separately itemised and published, I suspect many aid agencies would soon decide that they are difficult to defend.
The senior staff of the Canadian aid agency, CIDA, are required by Canadian policy to publish their travel and hospitality expenses. Here are the returns for the first quarter of this year. That’s a good start. But I’d like to even more detailed figures published for all staff of aid agencies. I suspect quite a lot of this stuff would stop quite quickly.
Paul Kagame, the President of Rwanda, writes about aid in today’s Financial Times:
Dambisa Moyo’s controversial book, Dead Aid, has given us an accurate evaluation of the aid culture today. The cycle of aid and poverty is durable: as long as poor nations are focused on receiving aid they will not work to improve their economies. Some of Ms Moyo’s prescriptions, such as ending all aid within five years, are aggressive. But I always thought this was the discussion we should be having: when to end aid and how best to end it.
… Often, aid has left recipient populations unstable, distracted and more dependent; as Ashraf Ghani, the former finance minister of Afghanistan, has pointed out, it can even sever the relationship between democratically elected leadership and the populace.
It seems to me that Dambisa Moyo has set up a false dichotomy between aid and entrepreneurship. Many of the things Moyo would like to see – better access to financial services, a better business environment, lower tariffs – can be (and are) supported by aid. We can and should use aid to support the growth of an entrepreneurial society; and we can and should use aid to support people in developing countries to enable them live better lives while the benefits of that economic growth are coming through.
My review of Dead Aid is here.
Kagame’s position is more nuanced than Moyo’s argument. He seems to be calling for a different kind of support from outside:
We appreciate support from the outside, but it should be support for what we intend to achieve ourselves. No one should pretend that they care about our nations more than we do; or assume that they know what is good for us better than we do ourselves. They should, in fact, respect us for wanting to decide our own fate.
… While this is encouraging, we know the road to prosperity is a long one. We will travel it with the help of a new school of development thinkers and entrepreneurs, with those who demonstrate they have not just a heart, but also a mind for the poor.
This is striking stuff from the President of one of the most aid dependent countries in the world, in which foreign aid is about $55 per person per year, or more than 25% of GDP.
It would be nice to think that rich countries could help the poorest countries develop faster.
In the 1960s, they thought that an injection of capital would increase growth. Then in the 1980s they decided it wasn’t just investment, but the quality of economic policies that determined growth. That was where the Structural Adjustment Programmes came in. In the 1990s they decided it was not just economic policies but the institutions of the state more generally – such as property rights and the quality of the civil service – that determined how quickly the country would develop. And this decade, we have concluded that those institutions are themselves a consequence of more fundamental determinants such as conflict, natural resources, population, and the capacity of civil society. Policy-makers in aid agencies are scratching their heads thinking of ways to put these problems right.
This search for the ultimate causes of poverty is understandable and well-meaning. We keep hoping that if we can find the underlying reasons why some countries are still poor, we can use our money and expertise to remove those reasons and set the countries on the path to economic development.
In the meantime, twenty thousand people a day die of easily preventable causes. Mothers are condemned to watch their children die. Those children, if they survive beyond their fifth birthday, may not be able to go to school, because they are needed to work on the farm, or because the school is too far away or too expensive. In hard times, families may have to make do with one meal a day, or none at all.
If we can find a way to help countries to develop faster, we should. But in the meantime, there is a lot we can do to enable people to live better lives. We can pay for vaccines, or for the costs of school teachers. We can provide income to people to enable them to buy enough food to eat. Taking money from the rich and giving it to the poor is a worthy activity.
But as my new paper published by the Center for Global Development argues, the development community has been seduced by the rhetoric of transformation and sustainability. In every programme we design we have to argue that it will lead to economic growth, that it will be financially sustainable, and that we have an exit strategy.
A few years ago I was involved in ideas for making vaccines more available in developing countries. There was a lot of pressure from donors to show that reducing the number of people suffering from these diseases would lead to higher productivity and economic growth, so that the intervention would pay for itself in a few years. We had to explain how subsidies for vaccines would not be needed after a few years, because the price would fall or the developing country would be able to buy the vaccines itself. Nobody was prepared to say that we should pay for these vaccines now and for the forseeable future.
Sometimes these exit strategies can be damaging. Some donors have required governments to introduce user fees for health and education, to make these services financial sustainable – which denies access to the basic services for the very poorest. Maintenance of capital equipment like wells or roads is handed over to local communities or government, which are not equipped to maintain them. The result is that these aid programmes are not as effective as they could be. Worse, there are some aid programmes that make perfect sense which are never started, because nobody can see what the exit will be in the next decade.
None of us wants developing countries to be dependent on aid forever. If there is a way for us to accelerate development, we should do what we can to support it. But we should not allow poverty reduction to be defined in these narrow terms. There is much that we can and should do to support people in developing countries which will help them to live better lives while that development is taking place.
The Center for Global Development has a new series of papers on Innovations in Aid.
The first paper, “The End of ODA” by Jean-Michel Severino and Olivier Ray, proposes a new concept of “Global Policy Finance”, to supplement (not replace, as you might think from the title of the paper) the idea of ODA.
ODA is currently defined as:
Flows of official financing administered with the promotion of the economic development and welfare of developing countries as the main objective, and which are concessional in character with a grant element of at least 25 percent.
There is both a reactionary and a progressive case for changing the definitions of aid.
The reactionary agenda is to dilute the concept of development assistance, by claiming as “aid” all sorts of other spending such as military aid or commercial loans. For example, Carol Adelman at the Hudson Institute Center for Global Prosperity likes to include all kinds of flows in her measure of US foreign assistance – including the cost of State Department Diplomats and money sent by workers in the US to their families in developing countries. She uses this to claim that Americans are the most generous nation (by contrast, on the measure of ODA as a share of national income, the US ranks close to the bottom of industrialised countries).
Measuring these broader flows is interesting, but we should not allow these flows to crowd out foreign aid whose purpose is to improve the lives of the poor. The unattractive implication of Carol Adelman’s argument is that there is no need for the US to increase its foreign aid, conventionally defined, because on her measure the US is generous in other ways (eg sending military aid), and so she excuses the richest nation on earth for its relatively stingy contribution to feeding the hungry or sending children to school.
There is, however, a progressive case to be made for looking again at the definition of ODA. In particular, the definition reinforces the notion that there is money we spend on us and money we spend on them. On this view, ODA is the spare change that we toss the poor as we pass them by. But this distinction is less and less meaningful. There is a huge debate at the moment about whether and how spending on climate change adaptation and mitigation should count as aid. Some of that spending will help people in developing countries, either directly (e.g. flood barriers) or indirectly (e.g. clean burn power stations). Some will help people in poor countries only (e.g. new crop varieties) and some will help everyone (e.g. investment in renewable energies). So which of that should count as aid? Our difficulty in answering that questions alerts us that there is a problem with the increasingly old-fashioned idea that there is a clean distinction between spending for ourselves and spending for others. When we spend money to prevent or reduce conflict, or to tackle the opium trade, or to help young men in Pakistan to get a good education, we are achieving a variety of objectives at the same time, and it is hard to be sure whether this should or should not count as ODA.
There are other, more technical problems with the definition of ODA. In particular, the 10% discount rate used to calculate whether a loan is sufficiently concessional to count as aid is ludicrously large – with the result that a lot of non-concessional loans can be counted as aid.
My only reservation about the argument put by Severino and Ray is that we may open Pandora’s Box. There is a queue of people ready to argue that all sorts of other spending should be counted as aid (and hence take donors closer to meeting their commitment to spend 0.7% of GDP on aid). If we concede that point, then we will lessen the pressure to spend more on aid that makes a difference to the lives of the poor. But equally, there is a progressive agenda for change. Severino and Ray argue that we should keep the existing definition of ODA, but supplement it with a broader measure. That seems to me to be a sensible way forward.
This is a summary of a longer (8 page) review which you can read in full here.
Dead Aid should have been an interesting and challenging book. Moyo is originally from Zambia, she has degrees from Harvard and Oxford, and she has worked at the World Bank and at Goldman Sachs.
Disappointingly, while the book is about some important questions, it makes no useful contribution to the debate. Moyo’s arguments and her use of evidence are at best lazy, and at worst mendacious.
There are three parts to Moyo’s case. She says that aid has demonstrably failed. Second, she says that aid has contributed to poverty. Third, she says that there are other, more effective ways of accelerating development.
Moyo’s evidence that aid does not work amounts to no more than this: Africa’s growth has decreased while aid has increased. This is a strangely naive argument – it is like saying that because the US spends $2 trillion a year on health care, mainly on the sick and dying, and yet people still get sick, we can conclude that health care does not work. The evidence linking aid to growth is handicapped by the weakness of our statistical tests, but if anything it does seems to show that aid is correlated with growth.
Many reasonable people believe that bad aid can be harmful. The conceptual arguments for this tend to be more persuasive than the evidence, but there is certainly a case to be made. Sadly, Moyo does not make it. She just asserts that aid causes corruption, bottlenecks, losses of competitiveness and erosion of accountability. This last concern, in particular, merits thorough consideration which it does not get here. Moyo does not support any of this with any evidence, and – more alarmingly – she misrepresents the academic literature to pretend that it supports her conclusions.
Even if Moyo had succeeded in making the case that aid can be harmful, her story would require her to make two further arguments. First, she would have to show that the harm outweighs the good. Second, she would have to show that donors could not improve the way they give aid and so minimize the harm while retaining the good. Moyo skips both issues, jumping from her view that aid can do some harm to the conclusion that donors should declare that they will stop giving aid over the next five years.
Moyo proposes other ways that developing countries can move forward, by raising money in capital markets, attracting foreign direct investment, reducing restrictions on trade and promoting financial services for the poor. It does not appear to worry Moyo – or perhaps it does not even occur to her – that the evidence for the impact on growth of foreign investment and improved financial services is no better than the evidence for the benefits of aid. As with aid, we can show that there are gains for the direct beneficiaries, but unlike aid, nobody has yet shown any correlation between these measures and overall growth and development. (By contrast, there is good evidence for the development benefits of trade.) Nonetheless, they seem reasonable enough policies – and they are already being widely pursued. What Moyo proposes is conventional wisdom in development economics. Moyo’s book does not make a convincing case for these approaches to be adopted as an alternative to aid, rather than working alongside it.
Moyo has the front to accuse people working in the aid industry of promoting their own interests, and then – as an investment banker at Goldman Sachs – to advocate instead that the poorest countries should be encouraged to borrow more in private capital markets.
There is a debate to be had about aid, but Moyo’s book, sadly, does not advance it. Dead Aid is poorly researched, badly argued, mendacious in its use of evidence, and pedestrian in its suggestions for alternatives.
(For more detailed arguments and references, please read this longer version of this review.)
Dambisa Moyo’s book, Dead Aid, has had a lot of attention in the media.
I’ll post my own, excessively long review of the book here on the blog. In the meantime, h
ere are some other reviews:
Broadly unsympathetic
- My review
- Adekeye Adebajo in Business Day
- Michael Clemens in Finance And Development
- David Roodman at CGD
- Briefing note by the One Campaign
- Paul Collier in The Independent
- The Economist
- Zambian Economist (highly recommended)
- Madeleine Bunting in The Guardian
- Parminder Bahra in The Times
Broadly sympathetic
- Michela Wrong in The Spectator
- Patrick French in The Sunday Times
- Matthew Rees in The Wall Street Journal
- Sonia Shah in The Nation
Bill Easterly and Laura Freschi at Aid Watch lay in to British Government aid for giving financial support directly to governments:
In 2007, the UK gave 20 percent of their total bilateral ODA in the form of budget support to 13 countries: Tanzania, Ethiopia, Pakistan, Ghana, Uganda, Mozambique, Vietnam, Malawi, Zambia, India, Sierra Leone, Nepal, and Nicaragua.
Of this list, only Ghana and India were classified as “free” by the annual Freedom House ratings on democracy (according to either the 2007 or 2008 rating). For the 11 other countries that did get British budget support, how much is there “country ownership” when the government is not democratically accountable to the “country”?
… There is nothing that says you have to give aid meant for the poorest peoples directly to their governments, if the latter are tyrannical and corrupt. With the examples above, which side are UK aid officials on, on the side of poor people or on the side of the governments that oppress them?
With all due respect to Aid Watch, I don’t think they have got this right.
For example, they say:
Ethiopia’s autocratic government, which is inexplicably the largest recipient of UK budget support in Africa, won 99% of the vote in the last “election”.
Nice point, except:
a. according to the official results of the 2005 election, the ruling party won 59.8% of the votes; the Coalition for Unity and Democracy got 19.9% and the United Ethiopian Democratic Forces got 9.5%. I have no idea if those accurately reflect how people voted, but it is nonsense to say that the government received 99% of the vote;
b. the UK does not give budget support to the Federal Government of Ethiopia. Through the Protection of Basic Services scheme, which was introduced after worries about the election, the UK Government provides finance to local government (albeit through the existing financial transfer mechanism via central government). As well as funding health and education, the project includes significant components to increase transparency and accountability of federal and regional parliaments.
Aside from getting the facts wrong, Aid Watch seem to be criticising this form of aid by slinging mud rather than by way of a proper analysis of the advantages and disadvanges. We should be asking what benefits arise from giving aid through government, and what harm may come from it. Aid Watch acknowledge the possible benefits: lower transaction costs, more coherence in development policies, building capacity of government. There is another crucial possible benefit: putting money through government budgets is also a way to make the government more accountable to its own citizens, rather than to a bunch of foreign donors.
But Aid Watch don’t try to spell out what the harm might be if aid is given to governments with unpleasant records on human rights or corruption. I personally think there is a case to be made against giving money to many governments, for example if there is reason to believe that the money will not be spent on poverty reduction, or if it will sustain in power a government which might otherwise be booted out of office. But let’s set out these reasons coherently, and let’s try to assess their importance relative to the possible benefits. Aid Watch seems to suggest that guilt-by-association is enough to damn the whole enterprise.
As it happens, the governments mentioned in this piece (Ethiopia, Vietnam and Malawi) all make demonstrably good use of the money they have received. Here in Ethiopia the expansion of public services such as free education and publich health workers financed by Protection of Basic Services is transforming the quality of lives across the country; and Vietnam has made quite staggering progress in bringing down poverty. Personally I think there are important questions to be answered about the quality of democracy in both countries: but that doesn’t mean I want to kill some of the citizens of those countries, or deprive them of basic services, by giving less effective aid.
The British Government’s approach of giving some aid in the form of budget support (too little, in my view) is motivated by evidence that in some circumstances this is an important way of building more effective, responsive and accountable institutions. Developing countries don’t want to receive aid forever, any more than industrialised countries want to give it forever. Building effective and accountable public services is a way of financing the delivery of public services in the short run, while at the same time making it more likely that countries have an exit strategy from aid in the long run.
That is not preferring governments to poor people: it is preferring poor people to giving aid in a way which maximises the publicity you get and covering your back but doing little to build accountable and sustainable public services.
Giving aid as budget support should not be promoted ideologically: it should be used where the advantages (in terms of better service delivery and the long term benefit to accountability and institutions) outweigh the disadvantages (such as the risk of sustaining a bad government in power). Equally it should not be opposed ideologically. Budget support has not been shown to be at any greater risk of corruption or of fungibility than other forms of aid (these are the two main arguments that are offered against budget support). It should be assessed case-by-case. Where it can be used, it represents a very powerful mechanism for both the short term benefits of service delivery and the long term benefits of institutional development. Where it cannot be used, donors should be focusing on what they can do to help create an environment where it can be used in future.
If Aid Watch want to be taken seriously as an aid watchdog, then (a) they’d better get their facts straight and (b) they need to do some proper analysis of the costs and benefits of different choices for aid delivery in different contexts, rather than simply asserting that it is wrong to give aid to and through governments of which they disapprove.
Incidentally, last year Easterly and Pfutze (“Where Does the Money Go? Best and Worst Practices in Foreign Aid.”) ranked the UK as the best bilateral donor. That doesn’t mean that the UK is perfect, by any means, and it doesn’t mean that they get every judgement right; but it does suggest that UK aid officials might not deserve the allegation in this blog entry that they prefer poor governments to poor people.
Declaration of interest: I used to work for the UK Department of International Development.
(Updated 23 March.)
Update: Kudos to Aid Watch. They have given me space on the Aid Watch blog to post this reply (the same as the post above) on their blog. You might also want to check out the comments there.
Interesting idea from Homi Kharas at the Brookings Institution
That is why the G20 should consider declaring a development emergency for 2009. They should urge aid agencies to take every step possible to accelerate the disbursement of already approved funds. They should support staff and managers for taking risks to speed up the flow of money. Their representatives on the boards of these agencies should monitor progress. Poor countries need the money, and they need it now. Rich countries have already paid for this. Now they just need to demand speedier results.
I can see how that would help in the short run (though presumably the financial crisis may be leading many aid agencies to do the exact opposite – shifting expenditure “to the right” is one way that donor countries may be coping with fiscal effects of the crisis.
But I can’t see how that would help in the long run. What we need is an automatic fiscal stabiliser that increases aid to poor countries in a crisis. One way to do this would be set up entitlement programmes – safety nets below which nobody can fall – and accept that the cost of these programmes will automatically go up when the economy turns down.
Some rights reserved
Recent Comments