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Archive for the ‘Aid’ Category

On the CGD blog, Nancy Birdsall proposes “Ten Actionable Ideas … for a 21st-Century Global Development Agenda”

What are examples – some realized and some on the table but untested – for practical action in the interests of global prosperity? Where do good ideas come from? How do they get translated into action?

Nancy’s ten:

1. More AMCs for vaccines and green technology
2. Protect some aid from security and political objectives
3. Independent evaluation agency
4. More representative G-20
5. Visas for people from poor countries
6. Duty free, quote free access to all markets
7. Per capita distribution of net income from non-renewables
8. Reform of selection of heads of international agencies
9. World Bank to have a global public good window
10. Petrol tax in the US

Ever fizzing with ideas, Nancy throws in a few others: endow think tanks in low-income countries; increase capital at development banks; Climate Investment Funds to bring private investment money;  Cash On Delivery Aid; new insurance and risk management instruments at the multilateral development banks.

Well I agree with all those, of course (and not just because I’m a visiting Fellow at CGD!).   She asks for other suggestions.  Here are my ten:

1. Global standards for transparency and traceability of all aid to increase accountability and effectiveness
2. Climate justice – every person in the world to have equal, tradeable, carbon emission rights, capped overall at the level scientists tell us is safe
3. Global information sharing among tax authorities to prevent tax evasion
4. Unbundling of aid funding from aid delivery, complete untying and global standardised output and outcome indicators to enable cost comparisons
5. A global minimum income guarantee backed by cash payments to the world’s poorest people
6. Product traceability from sweatshop to supermarket using barcodes
7. A complete ban on exports of small arms
8. A standing, professional  UN peacekeeping force to be deployed by a reformed Security Council
9. Reform of intellectual property to permit free access in the lowest value markets
10. Increasing the share of aid to LDCs from 38% of global aid today to 90% by 2012.

Update 25 February: On Twitter, Nancy Birdsall (@nancymbirdsall) says: “@OwenBarder has 3 more actionable ideas (and 7 dreamy ones)”.  This is a good game: which of these does Nancy think are actionable and which are dreamy?  My guess is she thinks (1), (3) and (9) are actionable and the rest dreamy.   But what do you think?

I think they are all realistic – but then I’m with John Lennon: “You may say that I’m a dreamer, but I’m not the only one. I hope some day you’ll join us, and the wo-o-rld will live as one”.

No less a scholar than Bill Nighy urges us to support a “Robin Hood Tax” to take money from the bankers and speculators and give to the poor.

The Robin Hood tax appears at first sight to be a way to kill three fairly succulent birds with one stone.  It offers an attractive combination of:

1. Higher taxes on the wealthy, so reducing inequality
2. A curb on speculation and financial market excesses
3. More money for global public goods and aid.

All these are worthy objectives, but Robin Hood tax is not a good way to achieve any of them.

Branding a financial transaction tax as a “Robin Hood tax” which takes from the rich and gives to the poor is a brilliant piece of communications.  (Imagine if it had been called a “Class War tax” – this says more or less the same thing but somehow seems less appealing.)  A Robin Hood tax lures many people who care about social justice, and want to spend more on international development, into opportunistically supporting the introduction of a tax on financial market transactions.  But before we are seduced we should take a hard look at whether it will achieve what we want.

Stand and Deliver!

The campaign would like us to believe that this tax will be paid by speculators.  That isn’t true, of course.  It is like thinking that beer duty is paid personally by the barman in the pub, or that Richard Branson personally forks out for your airline passenger duty.  The people on whom a tax is levied generally pass it on to someone else: their customers, employees, suppliers or shareholders.  We don’t know who will end up bearing a financial transactions tax, but it is likely to be all of us who meet the costs, as customers of firms that use financial markets, or savers whose money is invested in financial assets.  You should not assume that it will mean less champagne for people who work in the City: they may be in-bred aristocrats but they are probably smart enough to figure out quite quickly that they should pass on the cost to someone else.

If we want to tax the rich more, there are much more effective ways to do it than to tax financial transactions – ways which might actually fall on the rich, and catch a much bigger spread of rich people than a transactions tax.  For example, you could raise much more money from the rich by extending National Insurance charges to all capital income (eg interest, capital gains, dividends and rent) rather than imposing it only on labour income.  You could also abolish the upper earnings limit on National Insurance.  You could close loopholes for non-domiciles and people who use trusts to avoid inheritance tax; or simply raise the top rate of income tax.  You could treat all inheritance as income in the hands of the beneficiary, and tax it accordingly.  Any of these would be a more targeted and fairer way of increasing taxes on the rich than a financial transaction tax.

Reducing volatility

Financial markets play an important role in the real world by channelling our savings to investments with higher returns and enabling us to share risks.  In well-functioning markets, allocating money to businesses that meet the needs of their customers and so make a good return tends to benefit all of us – whether we are investors, customers or employees of these firms.  For this allocation of resources to happen well, the prices of financial assets had better reflect their true underlying value, at least most of the time, and we are all worse off if financial asset values deviate for long periods from what the underlying businesses are really worth.  But there are plenty of structural problems in the financial services industry that make it likely that financial assets may in fact be mispriced some of the time.  These include the incentives created by bonuses (for example, linking bonuses to the value of a deal as predicted by firms’ financial models rather than the value that is eventually realised) and the rise of institutions that are “too big to fail” and therefore enjoy the implicit subsidy of a public guarantee.

However, it is hard to see how the existence of speculators, arbitrage and – most of all – liquid and highly traded markets make financial markets less effective.  In most cases, we would expect markets with lots of buyers and sellers to do a better job of identifying the underlying value of assets than markets with relatively few transactions.  Speculators generally make money when they correctly assess that a market price does not reflect the real value of the asset. George Soros made money from Black Wednesday when he judged that the value of the pound in the Exchange Rate Mechanism did not reflect what it was really worth (because the government was trying to sustain a higher value for the pound).   By betting on that judgement, Soros helped to bring about the change in price that he was predicting, and so accelerated the alignment of the asset price with its true underlying worth.

A small turnover tax is likely to deter the small-scale arbitrage that helps to reduce the short-term discrepancies between prices, making markets marginally less transparent and  slightly less efficient.  It probably won’t make any difference to the big misalignments, such as asset price bubbles. The short term gains to traders from buying in a rising market will far exceed the cost of any turnover tax, so they’ll continue to get behind bull markets. Their behaviour is only likely to be moderated if they can be made to bear some of the costs of the future correction, instead of just getting the rewards when the bubble inflates.  It is theoretically possible that a reduction in turnover will make a market more stable and less volatile (this was James Tobin’s point about “throwing sand in the wheels”), but it is the less likely outcome; more likely the opposite is true.

If we want our financial markets to work better, we should be looking at the causes of the volatility and misalignments.  It is not the number of speculators, or the number of transactions in which they engage, but rather the incentives they face. Asymmetric bonuses which reward gains but do not punish losses encourage risk taking and short-termism.  Institutions that are too big to fail will take bigger risks than they would without the implicit guarantee of a bail out. Insufficient competition between financial firms allows rent-seeking by monopolists.   The privatisation of gains but socialisation of losses creates perverse incentives.  If we want to tackle financial instability and misallocation of resources we need to address the root causes, not reach for a tax on transactions which is likely to hinder, rather than help, the ability of markets to correct themselves.

Raising money for good causes

So by now you think I’m being prissy.  So what if a new tax does not redistribute money from the rich or make financial markets work better?  It will raise a shed-load of money by taxing transactions in a way that nobody will notice, and we can use that to do good things on poverty and climate change. If taxation is the art of plucking the goose with the minimum of hissing, surely this is a sure fire way to get some money out of the system to spend on development which is woefully underfunded?

Well, not really.  Good taxes are not just taxes that nobody notices, but taxes that tend to discourage people from doing bad things and encourage people to do good things; which add to rather than subtract from economic efficiency.   There are lots of taxes that citizens don’t pay directly – such as corporation tax and employer national insurance contributions – which nonetheless add to the burden on ordinary taxpayers and the size of which is a matter of political debate.  Adding a new tax is not going to make citizens more willing to see an increase in the overall tax burden.

Aid spending is pitifully small relative to need.  As a nation we are spending much less than we should if we want to live up to our commitment to spare no effort to ensure that poverty is reduced, that mothers do not die while pregnant, that children go to school and that everyone has access to the water and health care that they need.

The amounts in question are tiny relative to total government revenues. Aid is a small fraction of overall spending and could easily be increased without any new taxes.   The limit to aid is not lack of available money, but the lack of agreement that this is a priority for spending more of the nation’s money.  Too many people believe – wrongly, in my view – that aid is not effective; that it transfers money from poor people in rich countries to rich people in poor countries; that much of it is lost in corruption or waste; and that it does as much to hinder as to help countries to grow and lift themselves out of poverty.  Those attitudes are not going to change because we have introduced a new tax.

The development industry is right to say we should spend more on aid, but we are losing the argument.  Instead of addressing the criticisms by demonstrating how aid is effective (and taking steps to make it more effective where it isn’t) we are turning to a Robin Hood tax apparently in the hope of bypassing public opinion.   Because the chattering classes (which clearly includes me) have failed to persuade enough men and women that it is a good idea to spend more money on aid as well as on the National Health Service and schools, we are apparently hoping to go over their heads, by setting up a source of funding over which ordinary people will have no control

But that is not how the system works, nor should it be.  The nation’s willingness to give money for development will be decided by whether we demonstrate the results, and whether we can really convince people that their money is being properly used.  Introducing a new tax dedicated to what we think are good causes may give aid a temporary boost, but if people are not convinced that they want their money to go on aid they will quickly demand that budgets elsewhere are reduced accordingly.   In the long run, this will have the opposite effect: a tax part of which is dedicated automatically to development will engender even more complacency in the development industry about the need to demonstrate to taxpayers how their money is being used.

Building support for development is not merely a communications challenge, as is often implied by the hand-wringing of the big aid agencies: it is a reality challenge.  Not only do we have to show people how their aid is used, we actually have to make aid more effective, more transparent and more accountable, so that we drive up performance.

Dambisa Moyo is right that bad aid does not work; but she is wrong to claim that all aid is bad aid.  She is wrong to claim that aid does more harm than good. There is a lot of hugely effective aid which transforms people’s lives every day.  But the aid industry lacks sufficient mechanisms to drive bad aid out of the system, to spend more money well, and to be able to demonstrate conclusively its results.  This, rather than a Robin Hood tax, should be the agenda for genuine progressives who want to see more money being spent on international development.

I have explained here before another reason why a Tobin Tax is a bad way of raising money for aid.  Financial markets tend to be highly cyclical – there is a lot of turnover in rising markets in economic booms, and the markets tend to go quiet in recessions.  So the revenues of such a tax would be highly cyclical – more money for development in global economic booms, less in global downturns.  Yet aid should be the opposite. It is needed most of all to protect the weak and vulnerable from economic downturns.  Aid is already too cyclical, exacerbating the impact of global economic fluctuations on developing countries, reinforcing the effects of changes in revenues from commodities, investment and remittances.  The last thing developing countries need is for aid to become even more cyclical than it is today.

Conclusion

The backers of the Robin Hood tax are on the side of good and there is no denying their commitment to social justice, nor their genius for communications and popular engagement.  We certainly need what the tax seems to offer: more redistributive taxation, a curb on financial market excesses, and more money for aid.

My reservation is not that the Robin Hood tax is too ambitious or that it cannot be negotiated. It is that it is the wrong way to address these problems.   Each of the three objectives is better addressed directly than through the blunt instrument of a tax on financial transactions.  We need to build a consensus that there are minimum standards of living below which no person anywhere in the world should be allowed to fall, and that those of us who are fortunate to live comfortably should all make a modest contribution to that.  This should be part of the social contract in a democratic society, and it should be part of the mainstream system of taxing and spending.   Robin Hood stole from the rich and gave to the poor at a time when we lacked institutions to tackle poverty and redistribute income.   A Robin Hood tax is no more a lasting solution to financing poverty reduction than was the approach of Robin Hood himself.

Update:  Duncan Green from Oxfam has responded here.  We agree that this is not a good way to curb the excesses of the financial services industry.  Duncan reckons “the banks” will pay a good part of the tax: presumably he means the shareholders.  If so, why not just levy an additional profit tax on banks?  I think his strongest argument is that in a world of second best, this is the best available option for raising more money.   I think that is a mistake. We can and should make the case for aid to be financed properly; and I do not believe that raising money this way will add additional funding to development in anything but the very short tem unless we address rather than try to sidestep people’s concerns.

John Gershman offers a reading list on “What to Read on Foreign Aid” in Foreign Affairs.

I’m obviously pleased that my paper, Beyond Planning, and the amazing work of my colleagues at aidinfo, are included in the list.

Does anyone reading this blog have anything to add to or delete from John Gershman’s list?

Emmanuel Frot and Javier Santiso write about why fragmentation is a problem for international aid:

.. the real issue at the heart of fragmentation is too little competition. Numerous donors only multiply monopoly costs, without bringing the benefits expected from competition.

This has implications for how the donor community tackles fragmentation. The current approach is institution-based. Donors and recipients meet in international meetings, and pledge to act. Progress is monitored by a multilateral institution (OECD’s Development Assessment Committee) that cannot constrain donors to implement their pledges, except through a delicate game of naming and shaming.

We wonder about the efficiency of this approach. To deal with a too heavy administrative weight by creating new administrations is somehow ironic. It remains to be proven that these new institutions will lower transaction costs and manage to implement a labour division that donors are often reluctant to effectively achieve. The problem with this approach is that it basically ignores why aid is fragmented. It does not attempt to change the incentives donors and recipients face, and so is unlikely to radically change their behaviours. In particular, it disregards the lack of competition that creates fragmentation.

I think this is exactly right. Fragmentation is a good example of a more general problem, which is that there are insufficient forces within the aid system to force it to evolve towards better arrangements. Evolution requires both variation and selection, and while fragmentation may be conducive to more variation, there are no forces that then drive out the bad and expand the good.

On January 13th, a leader in The Times and Kevin Watkins in The Guardian attacked the development policies of the UK Conservative Party, from opposite sides of the political spectrum.  The Times Leader says that the Conservatives are wrong to commit themselves to increase aid to 0.7% of GNI; and Kevin Watkins says that the Conservatives are wrong to want to reform the way aid is given.   Both attacks appear to be bone-headed efforts to make political mischief by undermining not just Conservative party policies but the mainstream consensus on development. Neither attack does credit to its perpetrator.

The Times criticizes the Conservative Party for their commitment to maintain the planned increases in development spending. The leader recycles discredited assertions about the negative effects of aid rather than offering solid analysis.  There isn’t a single reputable econometric study showing that aid causes harm through  exchange rate appreciations, corruption or slowing progress to democracy.   Peter Bauer, whom the leader article quotes, was criticising Cold War foreign assistance programmes which bear little resemblance to aid programmes today. Aid today is increasingly practical, targeted and measurable, just as The Times says it should be, and it works.

Britain was one of 147 countries which pledged we would “spare no effort” to meet the Millennium Development Goals. As The Times implies, we should not be judged on what we spend but on what we achieve. On this basis we are not yet doing enough to achieve the goals to which we are committed.  That is why it is important that Britain should continue to increase its world-class development programme, and press other nations to increase their spending too.  To resist this on the grounds that 0.7% is an arbitrary figure is a clever-sounding point for a debating society, not a reasoned argument against the commitment of all the main political parties to meet Britain’s international promises, and to press other countries to do the same.

From the other end of the political spectrum, Kevin Watkins in The Guardian seems to be determined to use development to score party political points – and to do so he has had to put himself in the strange position of arguing against the country-led approach to development which is supported by all main UK political parties.

Under the Labour Government Britain has helped build an international consensus that aid works best in support of a country’s own development strategy; that policies imposed from outside rarely work; and that governments should be accountable to their own citizens for their policies and actions.  Kevin Watkins rightly supports these points in other contexts. Yet he apparently won’t entertain the idea that other countries may have different views from his (and mine) about the best way to organise and fund public services.

I’ve read the Conservative Green Paper and it does not call for state services to be rolled back in developing countries. It says that governments should guarantee access to education for all their people; and that donors should fund that guarantee and support and encourage governments to choose whatever path enables them to expand education provision fast and effectively.  It does not propose or advocate market-based solutions in education: it says explicitly that the Conservatives would work with the public, not-for-profit and private sectors.

Kevin Watkins quotes the Green Paper saying “We bring a natural scepticism about government schemes“; this is the entire basis of his claim that “the Conservatives will use aid to roll back the state in key services“.  But it is clear when you read this sentence in context that the Conservatives are questioning the role of the government in aid, not planning to tell other countries how they should manage their public services.

There is now a valuable cross-party consensus on the need to use aid money to support countries’ own development priorities and programmes.  The challenge today is how to bring public sector reform to the aid business – including the possibility of some market-like disciplines to make aid more effective and accountable.  There are proposals in both the Government White Paper and the Conservative Green Paper to make aid more transparent and accountable and to link it more closely to results. Kevin Watkins might have used his space to tell us what he thinks about these ideas instead of trying to score party political points on development.

(By the way, I admire Kevin Watkins, but I’m not comfortable with the fact that a UNESCO official, paid from public funds, is using his position to make highly partisan and inaccurate attacks in the newspapers on the main UK opposition party. )

I’ve got no party political axe to grind: my interest is in supporting the best possible policies to accelerate development, so that the world is a fairer, happier and safer place for everyone.  It seems odd that the Conservatives should be attacked from both left and right for articulating development policies which seem to me squarely in the mainstream of development thinking.

The cross-party consensus that the UK’s development budget should continue to increase, and that British development policy is amongst the most effective in the world but nonetheless there is room for improvement, should be a matter of shared national pride, not scorn and sniping from whichever direction.  Let’s sustain that consensus, and not allow development policy to be used as a political football even in the heat of an election campaign.

Update: see Kevin’s reply in the comments.

Jeff Marlow writes in the New York Times about Koraro, a Millennium Village Project village in Northern Ethiopia:

As the project’s first five years wind down, its ultimate goals remain elusive, and the five-year initiative has swelled to 10. The extension, naturally, will require more spending: The financial injections to date—over $5 million per year in a mix of cash and non-cash contributions—have not abolished poverty. Improvements in the five sectors targeted by the MVP are readily apparent, but their sustainability is still up in the air.

There are many people in the development set who are sceptical about the utility of the Millennium Village Project, for good reasons and for bad.  Village-level interventions have had a chequered past, and the conventional wisdom today is that development assistance should help to build capable and accountable states which can deliver services, from agriculture and education to security and health, and not provide these separately from the systems that are being established.

I don’t know as much about Koraro as Jeff, but G and I did visit the town, unannounced, one day when we happened to be driving past.  We struck up a conversation with a local shopkeeper which went like this:

O&G:                 What is it like being a Millennium Village?

Shopkeeper:    Very good. We have lots of things.

O&G:                 Does everything work well?

Shopkeeper:    No, not all of it.  But we are much better off now.

O&G:                 Who decides what to change? Do you have a village council, or is there an Elder who decides?

Shopkeeper:   It is all decided by a Professor in New York.

O&G:                 Really? Do you know his name?

Shopkeeper:   No. But he is a very famous man

I don’t have the same ideological objections to Potemkin Villages the Millennium Villages Project as some other people. As both Jeff Sachs and Nick Stern have arged, it seems plausible that there may be significant complementarities between interventions which mean that programmes work better if there are other successful programmes at the same time.  For example, there may be little value in increasing agricultural productivity to generate surpluses if there is no way to get those surpluses to market, which requires infrastructure.  That suggests that each community may need a big heave:  ensuring that all these things come in together may be more effective than a series of uncoordinated interventions spread thinly.

For me the most disappointing aspect of the Millennium Villages Project has been the steadfast refusal to subject it to rigorous evaluation.  (Their evaluation programme is described here.)  The most detailed study so far has been conducted by the Overseas Develoment Institute.  The problem is lack of a proper basis of comparison.  Ethiopia is changing quite rapidly, and Korkora would have changed with or without the Millennium Village Project. For example, there has been a 51 percent reduction in malaria cases in Koraro, Ethiopia. This has been touted as a success by the supporters of the project; and it sounds impressive until you find out that malaria cases have been more than halved across the whole country, not just in Koraro.  The improvement in the Millennium Village is apparently no greater than anywhere else in the country.

To evaluate the project, Millennium Villages need to be compared with some suitable control group, ideally through randomised controlled trials.   Ideally, the individual components of the project would also be randomised to test the hypothesis that the effects of interventions are complementary.  (It follows that I don’t agree with Chris Blattman’s view that it would be too hard.)

It would, as Chris says, be pretty surprising if the Millennium Villages Project does not make a difference. After all, it is spending money roughly equivalent to 100% of the villagers’ income. Furthermore, it has benefited from close personal attention from the Prime Minister, other ministers and officials, researchers and academics (and, of course, a famous Professor from New York).  A rigorous evaluation would help us to know how big that improvement is, and and what cost.  It might also give us insights into whether any particular parts of the progamme are particularly important.

Lindsay Morgan describes the problem of unpredictable aid:

And although more aid, even disbursed on short notice, might seem like a good thing, it’s difficult for governments to spend on useful things when they can’t predict what next year’s aid will amount to. For example, governments can’t hire teachers with a boost in aid this year, when they don’t know if they will have money to pay them next year.

I am grateful to Oxfam’s Duncan Green for his fair and thoughtful review of my paper about improving aid, Beyond Planning: Markets and Networks for Better Aid.

I’m glad that Duncan and Chris, his Oxfam colleague,  endorse a key argument of the paper, which is that the development industry will improve through evolutionary change rather than grand design; and that a driver of this change will be better mechanisms feedback from the citizens of developing countries about what is working. The paper points out that this kind of evolutionary change comes from variation and selection – and that the aid business does not have enough of either to ensure evolution towards more effective aid.

Duncan and Chris  have reservations about the word “beneficiary” to describe the people in developing countries whom aid is intended to support.  I think that is a good point, and I’d be happy to use a different word if we can find a suitable alternative (I don’t think that “primary stakeholder” or “rights holder” takes the trick, since neither is sufficiently specific about who we mean).

I don’t want to put words in Duncan’s mouth, but I detect from his review that he is more sceptical than me about the value of markets. He dismisses without much fanfare the  the idea of giving more choice to the, er, “intended beneficiaries” (aka primary stakeholders and rights-holders):

Where I think he is wrong is a largely market based philosophy for creating incentives based on New Public Management theories of expanding choice more than voice. … This in turn requires some quite fundamental organisational change with in aid agencies, as well as establishing more citizen to citizen links possibly using new social media.’

That is an unfair characterisation of my view: I am in favour of choice AND voice.  A large part of the paper, especially when talking about networks, is precisely about how citizens can have more voice, and I talk explicitly about citizens links through new social media.  But there are huge problems to overcome in achieving this, because the “intended beneficiaries” are geographically and politically remote from decision-makers in aid agencies, which means their voice is dimly heard, if at all.

While I agree with Duncan on the need to ensure that people have voice, I find it surprising that he (in common with many people who regard themselves as progressive) is so reluctant to give choice where possible as well.   Duncan’s (excellent) book is called From Poverty To Power – and I believe that giving people direct control of resources and allowing them to choose what services they want, and from whom, can be one of the most important ways of empowering people.  Duncan calls this a “technocratic/new labour enthusiasm for using market mechanisms” – but the idea of giving the poor more direct control of resources goes back long before New Labour:  Oxfam’s honorary President, Amartya Sen, got a Nobel prize for his 1982 book, Poverty and Famines: An Essay on Entitlement and Deprivation, which argued that it would be better to give people money than food in a famine.

I have not swallowed the New Public Management story hook, line and sinker, but I do believe that there have been positive experiences (for example, from the publication of league tables, and the distinction between purchaser and provider).  While I think we should learn from new public management, my paper describes in some detail the shortcomings of a market-only approach, especially as it relates to foreign assistance.  I hoped my paper would be an elegant synthesis of some of the best (and proven) tools of this school of thought with lessons from other approaches, especially the use of complementary mechanisms of networks, voice, regulation and planning.

The aid industry has almost entirely evaded the reform of public services over the last decade.   There is no measurement of results; no distinction between purchaser and provider; no customer choice.  Presumably the lack of reform is partly because the shortcomings of the industry are felt by people with no political power or voice in the political systems of donor countries. The incumbent service providers are politically powerful, well organised, and deeply conservative about any change that affects their interests.  The aid system has, over time, drawn to it people who are sceptical about the value of markets and choice, saddling developing countries instead with five year plans and long coordination meetings.  No politician in a donor country is enthusiastic to take on these vested interests, in order to improve services for people they will never meet and who have no vote in the election.

This post is cross-posted on the aidinfo blog.

My colleague Judith Randel has made a very interesting point about aid transparency.

It was not long ago that donors conducted Consultative Group meetings in Paris about their planned aid to each developing country. Representatives of the recipients were not invited (they were subsequently given observer status to some of the meeting). That seems very strange today, as we know that development must be a country-led process. Donors aim to support the plans of developing country governments.

Yet today donors give aid to developing countries without publishing detailed information about what aid they are giving, to whom, for what, and with what effect. You can find out some general information a few years after the event, but the aid relationship is essentially a black box between donors and recipient countries. In a few years time, this will seem just as bizarre as donor-only Consultative Group meetings.

The people of a developing country – citizens, parliamentarians and civil society – have a right to know what is being spent in their country and how resources are being used. That is essential to making sure those resources are properly used, and to building the accountability of governments to their own people. Aid agencies are increasingly coming under pressure from taxpayers to publish details of how aid is spent, and there are some tentative steps towards greater transparency.

Aidinfo is working to ensure that the information is provided in a way that is accessible by, and useful to, the people of developing countries, and not just to donors.

Whenever anybody makes a suggestion for improving foreign assistance, there is a long queue of vested interests thoughtful people ready to pour scorn on it offer constructive criticism.  To save everyone effort in future, here is a cut-out-and-keep, one-size fits all template for criticising every possible aid proposal.  I hope you will find it useful for criticising any ideas that people suggest in the coming year.

• This project may solve some problems but it won’t solve every problem.
  Your proposal may help some people but it will not solve the terrible plight of people in post conflict states / fragile states / small island states / good performing countries / Africa / Asia / middle income countries / people with AIDS / marginalised communities [delete as applicable].  The future of these people is essential to progress towards the MDGs.  Why are you proposing something that will not address their needs?
• Your proposal does not focus on the real priority.
  It is shocking that you should be proposing to spend money on this when it is clear that any additional money should go to (select one):
  • agriculture, because 80% of the world’s poor live in rural areas
  • health, because without our health we cannot be productive and it is a basic human right
  • education, because nothing is more important than educating our young; look at Asia etc
  • infrastructure, because you need roads and electricity for economic growth
  • water, because without water there isn’t life; women have to walk for 4 hours a day, etc
  • climate change adaptation, because the sea is rising and we are all doomed
  • women, because they raise the family, do all the work, educate the family, etc
  • capacity building, because you can give a man a fish and feed him for a day or teach him how to fish and feed him for a lifetime
  • small businesses, because we like small business which is folksy but not big business which is sinister; women’s handicrafts are especially good;
  • microfinance, because Mohammed Yunus is very impressive and saintly and microfinance sounds like it is a form of self-help
  • population control, because the problem is that there are just too many of them;
  • donkey sanctuaries – have you seen how the donkeys are treated? It is so sad.
• Your proposal is unsustainable. Your project may help people in the short term but aid cannot be permanent.
  Because aid cannot be permanent, poor people should be expected to pay for everything themselves after a few years, especially all the things that our governments provide for us like health, education, transport, research and development, infrastructure, security etc.  If we go on helping the poor they will become lazy and helpless and then they won’t be like us.  We must make them stand on their own two feet. The best way to do this is to make it clear that any help is only temporary.  Your idea won’t work when the outside funding stops so it is “unsustainable”.
• It is a new idea, and that will mean a lot of work.
  Everything that should be done is already being done, which is why everything is going so well in developing countries (well, apart from the poverty, hunger etc).  Therefore no new ideas are needed.  I am too busy managing existing aid programmes to give serious consideration to whether yours will work.  If you really want to help people in developing countries you should support existing programmes such as mine.
• Everybody in development is corrupt and lazy.This does not apply to anybody that I know personally but it is true of everyone else. So your aid project won’t work.
  It says in the Daily Mail is well known that all governments are corrupt and inefficient; all international organisations are run by self-enriching and lazy bureaucrats; all aid agencies are run for the benefit of the donor country; all NGOs are small and inefficient and often corrupt too. Therefore your aid project won’t work.  I know this wonderful NGO which is run be saintly people who do amazing things but there are no others like that.
• Rich countries should open their markets to exports from developing countries. Therefore your aid project won’t work.
  Rich countries do things which are very bad for poor countries, like erecting trade barriers, buying oil and enforcing intellectual property rights. This is unassailable proof that aid does not work.
• Jeff Sachs used to work on Bolivia and Dambisa Moyo is from Zambia. Therefore aid does not work.
  Jeff Sachs thinks that aid should be trebled and everybody knows this is a bad idea because he had something to do with free market reforms in Bolivia and then he changed his mind. So he is wrong.  Dambisa Moyo says aid causes great harm and although she hasn’t got any proof she is both a woman and from Zambia (and she is quite presentable on the TV).  These facts prove that aid does not work.

In Business Day, Adekeye Adebajo, the executive director of the Centre for Conflict Resolution, Cape Town, takes the gloves off in criticising Dambisa Moyo’s book, Dead Aid:

… This is a work of self-flagellating simplicity, totally devoid of any thinking by leading African research centres or scholars, making the book often read like a Harvard Masters syllabus or a World Bank report. Moyo reveals her ignorance by incredibly charging that “scarcely does one see Africa’s … officials … offer an opinion on what should be done”. …

Moyo employs crude stereotypes of “tribal conflict” to depict African wars, and recklessly suggests that aid is “an underlying cause of social unrest, and possibly civil war”. Such an absurd link would, of course, involve a huge leap of logic, and the author’s ignorant blaming of Somalia’s civil war on competition for food aid completely ignores the decade-long homicidal campaign of US-backed autocrat, Siad Barre, which eventually led to rebellion in 1991.

Read the rest here.

My own review is here (pdf) – also critical, but less vituperative.

More reviews (including some which are less negative) of Dead Aid here.

The Center for Global Development is working on an idea which they call Cash on Delivery aid, in which donors make a binding commitment to developing country governments to provide aid according to the outputs that the government delivers. I think this is a good idea in principle, and hope that it can be tested to see whether and how it could work in practice.  The UK Conservative party have said in their Green Paper that if they are elected they will use Cash on Delivery to link aid to results.

Linking aid more closely to results is attractive from many different perspectives.  My own view is that linking aid directly to results will help to change the politics of aid for donors. Many of the most egregiously ineffective behaviours in aid are a direct result of donors’ (very proper) need to show to their taxpayers how money has been used.  Because traditional aid is not directly linked to results, donors end up focusing on inputs and micromanaging how aid is spent instead, with all the obvious consequences for transactions costs, poor alignment with developing countries systems and priorities and lack of harmonisation.  If we could link aid more directly to results, I think donors will be freed from many of the political pressures they currently face to deliver aid badly; and it would be politically easier to defend large increases in aid budgets.

Other people support Cash on Delivery aid for other reasons.  Ministers and officials of developing country governments see it as a way to access more money without the attendant costs of conditionality and foreign interference in domestic policy.  Some people see results-based aid as a way to restore the accountability of developing country governments to their own citizens, a social contract in which aid donors too often inadvertently interfere.  Especially in the US, some people believe that linking aid to results can create stronger incentives for developing country governments to deliver high quality public services.  Others support Cash on Delivery because it will improve the allocation of aid resources, since money flows to the places where services are being delivered and away from the places where money is being wasted. With all these complementary reasons there appears to be the possibility of a broad coalition of people in favour of moving ahead with testing whether Cash on Delivery aid can work in practice.

But there is one group of people for whom these ideas seem to be quite unsettling: development professionals in aid agencies and NGOs.

I recently wrote a response to a brief by CAFOD about some possible concerns about Cash on Delivery aid.  As I was doing so I realised that the questions asked by some development professionals reveal some discomfort about the possible impact of results-based aid on the quality and content of their jobs.  The “risks” identified in the CAFOD brief are not primarily about the consequences for development but rather risks to the privileged position enjoyed by professional staff in aid agencies and NGOs.

You can judge for yourself whether I am caricaturing the risks set out in the CAFOD paper, but they essentially amount to this: under Cash on Delivery aid money would flow to those governments best able to make use of it; governments would have freedom to decide which services to provide and to whom; governments would be able to decide how to use resources; governments would be accountable for their choices and the results; and progress would be measured according to internationally-agreed targets for impact rather than inputs and intermediate targets negotiated behind closed doors.

All these are necessary steps towards the internationally-agreed agenda for more effective aid set out in Paris and Accra, and necessary for the emergence of capable, accountable and responsive states.  Yet when a mechanism is proposed that tries to organise the aid system in a way that means these things could start to come about, these consequences are described as “risks”.

At the heart of these anxieties, it seems to me, is a question about what sectoral advisers in aid agencies are meant to be doing.  Take education advisers, for example (I am not picking on this group in particular, but it happens that the current proposals for Cash on Delivery aid are being developed looking specifically at education.)  Many people who work for aid agencies managing aid programmes for education are themselves education professionals, often former teachers.  Deep down (sometimes also on the surface) many of them want to be educators, not managers of aid programmes.  They want to be involved designing the curriculum, reforming the pedagogic approach, training the teachers, buying textbooks, or improving the education management information systems.  But it is the job of a community to educate its young, not foreigners.  As managers of aid programmes the staff of aid agencies should be ensuring that aid is delivered in ways that increase the accountability of central and local government to the nation’s citizens, keeping transactions costs to a minimum, delivering aid in ways which support the evolution of country systems and priorities, ensuring that the money is used for the purposes intended by the funders, and showing what results have been achieved.

In short, managers of aid programmes should be focusing on the effectiveness of aid, not education policy.  If governments need technical advice on education, they can procure that separately, and get advice from people who are more trained to build capacity and who are properly accountable for doing so, not get it as a bundled free offer-that-they-cannot-refuse from the people managing their aid.  If it works as intended, Cash on Delivery aid would change the relationship between donors and governments and would turn development professionals back into aid managers instead of would-be educators.  And it is this consequence which, I believe, some people find unsettling.

Many of my best friends are development professionals, and I know that everyone who works in development (well, nearly everyone) has the interests of the poor at heart. They often genuinely believe that they need to retain a degree of  influence to ensure that developing countries make the kind of progress towards development that they (and I) want to see.  There is quite a close parallel with the evolution of the attitudes of politicians, some of whom I also know well and have known since they were young, idealistic students.  Nearly all politicians enter politics for the noblest of motives: to contribute to the improvement of the society in which they live.  To a very large extent they retain those values through their political career. But over time there can be a gradual erosion of the distinction in their minds between their own interests and the service they give to others: some politicians gradually come to think that increasing their own power is the service of others, because they believe that they will exercise that power better than anyone else.

Politicians are, of course, at their most dangerous when they can no longer distinguish their own interests from the interests of the people they are meant to serve.  Similarly we should be concerned when we hear development professionals identifying themselves as speaking for the poor, and arguing that they must retain influence (i.e. power) – purchased by the relative wealth of their country – to promote strategies which the country would not pursue on its own.

To be fair, I also know some development advisers who are focused on improving the effectiveness of aid, who are rightly aghast when they are asked to double up by providing advice on how to manage an education or health system.   If I may be permitted a partisan aside, my observation is that DFID sectoral advisers tend to be more respectful of the need to promote effective country systems for policy-making and accountability than professionals from some other donor organisations (both NGOs and official aid agencies), and they are less likely to interfere in the country’s policies and strategies.

This may seem like an elaborate point to build from an innocuous and fairly sensible CAFOD brief about Cash on Delivery aid.  But the risks identified by CAFOD, and the questions that have been raised elsewhere, would apply to any system of results-based aid that makes substantive progress towards giving governments more freedom to choose how to deliver their development programmes and making them more accountable to their own citizens for their own success and failure.   I think these concerns actually reveal a deep-seated tension between the internationally-agreed agenda for improving aid effectiveness, and the views and interests of development professionals charged with designing and implementing those reforms in practice.

A few years ago, Nancy Birdsall and I proposed that donors might consider a scheme to give aid to developing countries based on the services they actually deliver. For example, donors could promise to pay $100 for each additional child who completes primary school and takes a standardized competency test. The Center for Global Development has worked further on this idea, and rebranded it as “Cash on Delivery aid“.  CGD will soon be publishing a book setting out how the idea might work in practice.

The Conservative Party have said in their Green Paper on international development that they will pursue this approach if they form the next government in the UK. They say:

We will link aid directly to independently-audited evidence of real progress on the ground. Increasingly, we will pay ‘cash on delivery’: giving an agreed amount to a recipient government for every extra child they get into school or every extra person who receives decent healthcare. This will give British taxpayers confidence that their aid money is buying specific successful outcomes.

In October, CAFOD published a briefing note about Cash on Delivery aid which is a helpful summary of the proposal, and is also a useful compilation of some questions that have been raised about the idea.  It lists nine “risks” of Cash on Delivery aid which it says should be addressed.

I have written a response to the CAFOD brief which addresses each of the nine risks in turn.  I regard nearly all of the issues raised by CAFOD as features, rather than risks, of Cash on Delivery aid.

You can download my response to CAFOD here (pdf).

My article on OpenDemocracy today discusses whether aid works.

Some supporters of aid have made what seem to me to be extravagant claims that aid should aim to bring about economic and social transformation of developing countries, so accelerating economic growth and industrialisation.  But this is a very high bar to set.  Aid may well help to increase the probability of economic take-off but there are lots of other conditions that need to be in place for the transition to an industrialised market economy to happen, and aid is not a sufficient condition (nor, probably, a necessary condition) for it to occur.   Even if aid does play an important contributory role, it would be statistically very hard to demonstrate a link between aid and economic growth.

Although the effect of aid on economic growth is uncertain, there can be no doubt that aid makes a huge difference to people’s lives.  Aid provides food, health care, education, clean water, financial services, and modest incomes which transform the lives of the people who receive them.   You can see this both in individual families – like the girl I met in northern Amhara, pictured here, who has health care and education because of aid – and in the overall statistics, which show that there has been a vast improvement in the quality of life on almost every measure other than income.

Aid may not always transform societies, but it does enable people to live much better lives while those transformations are taking place.  And that represents a huge increase in the sum of human welfare.

I believe aid could and should work much better.  Living in a developing country, I see all kinds of waste and inefficiency in the aid system that makes me angry. But it makes me angry because I also see how much difference aid makes when it is used well.  I would like to see aid becoming much more transparent and accountable, so that it becomes subject to evolutionary pressures to improve.

This means, by the way, that I do not subscribe to the view that the aid system should be regarded as temporary.  In the UK we hope that people will be on unemployment benefit temporarily before they are able to get back to work, but we don’t expect the system as a whole to come to an end.  So I think that we should expect that at least for our lifetimes, it will be right and necessary that we transfer income from the richest people in the world to the poorest people in the world.  I do not know which countries will be rich, on average, in fifty years time, and which will be poor; but I expect that the world will still need, and I hope it will still have, a permanent system to help those temporarily in need wherever they happen to be.

Aid would work better in future if we accept that we will need a permanent system to provide temporary help to those who need it, and set about designing a better system to do that.

Read the full article here.

Related reading:

• Phil Vernon at openDemocracy (to which my article was a reply)
• Roger Riddell at openDemocracy
• Ranil at AidThoughts
• Chris Blattman – Could Aid Slow Growth

The Independent reports Bob Geldof’s recent trip to Ethiopia:

Though 35 per cent of Ethiopian children are malnourished, and 40 per cent are stunted when they start school, the number who die below the age of 5 is down 40 per cent on what it was 15 years ago. A shocking 381,000 children died from preventable causes last year but there is clear progress. Cases of malaria have been reduced by two-third since 2006, with the number of deaths halved thanks to the government spraying a million houses and the Global Fund and the Gates Foundation distributing a massive 20 million bednets.

“Who says aid doesn’t work,” spluttered Geldof as he leaves the clinic.

I like GAVI (the Global Alliance for Vaccines and Immunization) a lot. Childhood immunization is a hugely cost-effective way to help people in developing countries, and GAVI does very good work helping to get vaccines to children in developing countries.

And it is because I like GAVI that I was alarmed to read this recent statement of their business model:

GAVI’s business model is based on the expectation that rising demand for immunisation in developing countries induces more companies to produce vaccines, thus creating competition and driving prices down.

Why this is not their business model

Read that sentence again and you will see that it makes no sense.  If prices are going to fall, why would more companies enter the market and create the competition that forces prices down?  (Perhaps they don’t read GAVI’s website and so they don’t know what is in store for them?)

Let’s go back to the supply and demand curves of undergraduate economics (see diagram).  If you move the demand curve out (“rising demand for immunisation”) then quantities and prices will both increase.

The very best you could hope for is that supply of vaccines is very elastic (it isn’t, sadly); in that case the supply curve (the blue line) would be quite flat and the rise in price would not very large when demand increases.

But supply curves are not flat (at least, not in the short run) and they certainly do not slope downwards, so prices ain’t gonna fall when demand goes up.

I defy GAVI to produce an analytical model that underpins their “business model” as they describe it above.

So what should GAVI’s business model be?

There are two ways that GAVI can bring down the price of vaccines: one bad, one good.

GAVI can work with UNICEF to drive down the price of vaccines by using the market power of a monopoly buyer (a “monopsonist”).   When vaccine manufacturers make a sale, there is something in it for the seller (profit) and something in it for the buyer (the vaccine is worth more to them than they pay for it).   The division of these benefits (the “surplus”) depends on the bargaining power of the parties.  If GAVI and UNICEF can use monopsony powers, they can extract more of the surplus, by driving down the price and hence the profits of the vaccine manufacturer.

In the world of development advocacy, pharmaceutical companies are pantomime villains, making outrageous profits at the expense of the poor.  So reducing their profits and holding down prices must be good, right?

Well yes, if you don’t want pharmaceutical companies to invest in research and development for future medicines for developing countries, if you don’t want them to invest in manufacturing facilities big enough to produce in large volumes for these markets, and you don’t want them to spend time and money getting their products regulatory approval in those countries, then driving down their profits is exactly what we should be trying to do.  Of course, Big Pharma can look after itself, and that is what it does. When we take away their profits in developing countries then they will go and make profits somewhere else.  Dastardly villains.

Driving down the commercial viability of medicines in developing countries may not be our best plan. It may feel good in the short term sticking it to Big Pharma, but that is not necessarily good public policy. The anti-pharma campaigners should be glad they won’t be the ones who have to  explain to a woman comforting her child dying of malaria why there is no vaccine for this disease.

This isn’t a theoretical risk: it is what has actually happened to the vaccine industry over the last 40 years.

Although this is not a great strategy, is is the approach being pursued by some global foundations such as the Clinton Foundation.  The UNICEF procurement division has similarly long had the objective of driving down prices, without regard to the long-run viability of the businesses developing and supplying pharmaceuticals to the developing world.

But GAVI can do something which benefits both developing countries and the pharmaceutical industry, increasing quantities and reducing prices.  It can help to reduce the cost and the risk of producing vaccines for developing countries. By pushing down these costs, the result can be higher volumes and lower prices, in a way that does not simply transfer the surplus from producers to consumers.

One way that GAVI can (genuinely) reduce costs without damaging the industry is by entering into long term contracts for vaccine purchases.  Both the International Finance Facility for Immunization and the Advance Market Commitment are excellent examples of this approach [UPDATE: in the light of David Roodman's comment below, let me clarify that GAVI is already doing this, which is excellent.  My view is that they should do more of it.]  Long-term commitments enable manufacturers significantly to increase production volumes and reduce unit costs (because the large fixed costs are spread over more units).

It is the ability to make commitments, not the increase in demand, that is important here.  Long term commitments are important because without them, vaccine manufacturers are vulnerable to “hold up“, a problem familiar in the economics literature on industrial organisation and utility regulation.  Manufacturers face the risk that, once they have invested in developing a new vaccine, getting regulatory approval, and spending hundreds of millions of dollars putting in place large-scale manufacturing capacity, the donors will then gang together to use monopsony purchasing power to drive down the price to around the marginal cost, ignoring the sunk costs of developing and producing the vaccine. At marginal cost pricing, the manufacturer never recovers the cost of their investments.  After the vaccine has been manufactured, this is a rational thing for donors to do, since it reduces the price to a level at which the largest number of vaccines can be purchased.  But before the vaccine is manufactured, the vaccine companies anticipate the likely future behaviour of donors, given the donors’ incentives; and this undermines the investment case for developing and producing vaccines for the developing world.   Donors can avoid this by entering into a long-term commitment which prevents them from driving down the price later on.

GAVI can also use its expertise and connections with government to streamline and simplify regulatory processes, which are a big cost driver.

Costs will fall, and demand will rise, as a result of this approach.  But this is the opposite way round from GAVI’s current (economically illiterate) business model: under this approach the rise in demand is a consequence of the fall in prices, not the cause of it.

So GAVI can have most impact by doing the opposite of what many people think it should do (and the opposite of what some other global funds try to do).  Rather than using its market position to drive down prices, damaging the long-run viability of the vaccine industry, it should use its position to enter into long-term contracts which enable manufacturers to produce at high volumes and low unit costs.

This means that rather than trying to drive down prices by increasing competition, GAVI’s business model should be to lower prices and so increase the amount of vaccines bought and used, while promoting the long-run health of the vaccine industry, by helping to reduce costs and risks for producers.

On 29 September 2009, Gordon Brown told the Labour Party Conference: (my emphasis)

And let me say what was once an aspiration – 0.7% of national income spent on international development aid, has become with Labour a promise, and will in future become a law. We will pass legislation that the British government is obliged to raise spending on aid to the poorest countries to 0.7% of our national income. Others may break their promises to the poorest, with Labour Britain never will.

Unfortunately, he forgot to mention his promise to the Queen who offered only this in the Queen’s Speech (note to foreign readers – the Queen’s Speech is written by the Government, not the Queen):

Draft legislation will be published to make binding my Government’s commitment to spend nought point seven per cent of national income on international development from 2013.

Note the phrase “draft legislation will be published“.   That means somethinig quite different from the key phrase “My Government will legislate to …” that you find elsewhere in the, er, Gracious Speech.  It is Whitehall code for “we did not make room in the legislative programme for …“.   It is quite different in meaning from the Prime Minister’s promise less than two months ago:  “We will pass legislation that …“. The most positive interpretation is that the Government hopes that a friendly back-bencher might pick up the draft legislation and push it through as a Private Member’s Bill (which would not be a bad legacy for an MP who expects to leave Parliament at the next election).

On the subject of promises, the UK agreed on 24 May 2005 as part of a joint EU commitment that it would increase ODA to 0.56% of GNI by fiscal year 2010/11 (and reach 0.7% in 2013).  In 2008, the UK’s ODA/GNI ratio was 0.43% of GDP.  Even when you take account of the possibility of a contraction of GNI from 2008 to 2010, meeting this promise will require an increase in British aid over the next two years of about 33% in real terms. A European Commission report is warning that only five EU governments appear likely to meet or exceed the 0.56% target: Sweden, Denmark, the Netherlands, Ireland and Luxembourg.

Here’s my idea. Though there was no room in the legislative programme for a short bill to legislate for aid to reach 0.7%, the Government did manage to find room for a Fiscal Responsibility Bill.  Perhaps this bill could include – either in the Government’s draft or as a result of a backbench amendment – a clause requiring aid to be increased to 0.56% in 2010 and to 0.7% of GNI by 2013, and to remain above that level thereafter?  Investing in global social justice is as much a matter of “fiscal responsibility” as ensuring that domestic borrowing does not exceed investment (the grotesquely mis-named “Golden Rule” which is neither golden nor a rule).

I’m sure Gordon Brown will want to keep his promises, after all. This seems a good opportunity.

Aid budgets are limited by the amounts that rich countries are willing to allocate for foreign assistance.  There are limits to the generosity of parliaments, finance ministries and taxpayers.  At the same time, in developing countries there is not enough money to pay for everyone’s basic needs for food, water, shelter, health and education.

Because the total resources available are less than the needs, it is very important how they are used.  If poor decisions are made about the allocation of precious aid resources, the result can be additional suffering and death for millions of people.

This post why I think that attempts from outside to argue for aid to be earmarked for particular causes can lead to unnecessary deaths and suffering.  Aid works, but it could work better, and many sectoral advocates are not helping.

***

A striking example is the amount of money donors earmark for spending on HIV and AIDS here in Ethiopia.

Government spending on health in Ethiopia comes to about $4 per person per year.  According to OECD/DAC data, foreign aid for health in 2007 added about $5.15 per person to the government’s resources, bringing the total of government and aid resources to about $9 – $10 per person per year. (As an aside: health spending per person per year in the UK is about $2,000 per person per year; in the US it is about $4,500.)

According to the World Health Organisation (WHO), in Ethiopia about 65% of the population (52 million people) live in areas at risk of malaria. Malaria is the leading cause of health problems, responsible for about 27% of deaths; and malaria epidemics are increasing. The HIV/AIDS prevalence rate among adults is 2.1% (2007) – that’s about 1.6 million people living with HIV.

Of $5.15 per head provided in aid for health to Ethiopia in 2007, about $3.18 per head was earmarked for HIV  while about $0.26 cents per head was allocated to malaria control.  Given the relatively low burden of HIV, earmarking 60% of health aid for HIV is excessive relative to other needs for health spending.

Of course it is right that we should try to make sure that everybody with HIV has access to medicines to keep them healthy, and we should work to prevent spread of the disease. But we should also make sure that people have bednets and drugs to stop malaria, provide childhood vaccination to prevent easily preventable diseases, ensure access to contraception and safe abortions, and, above all, enough funding to provide basic health services that would save thousands of lives and suffering.  Yet we are not willing to provide enough money to do all of this.  It is in this context that it is damaging to earmark 60% of health aid to HIV.

This excessive funding of HIV relative to other health needs is damaging in at least three ways.

First, aid money is not being spent in ways which would yield biggest impact. Take this analysis from the Open Budgets Blog:

Using these estimates, it would cost an additional US$29.7 million to treat all of the 540,000 kids who died from pneumonia/diarrhea in Nigeria and Ethiopia. Were this money to come out of the HIV budget, it would reduce the number of HIV patients that could be provided treatment by about 61,240. So, using these admittedly very rough estimates, our current allocation of resources from the pot of money for disease treatment suggests that we value the life of a person with HIV at 8.8 times the value of the life of a child with pneumonia.

Another way of looking at this is that reallocating resources from HIV to treating pneumonia and diarrhea in Ethiopia and Nigeria alone would have saved nearly half a million additional lives in one year.

Second, the misallocation of aid money sucks scarce resources (administrators, doctors, political attention) from other programmes which would have more impact. As Rakesh notes:

In Tanzania, I have seen any number of health centers which lack water and toilets, where women cannot deliver their babies safely, but which has a new building with 4 air conditioners and 2 Land Cruisers and weekly workshops on AIDS.

I wrote about this problem in 2007 after visiting a clinic in Burkina Faso which had been starved of medical workers by the recruitment drive by the local PEPFAR-funded clinic. And Laurie Garrett wrote in Foreign Affairs about the impact on basic health facilities of funding linked to specific diseases.

Third, the misallocation of aid money creates perverse, possibly lethal, incentives.  Here in Ethiopia the existence of huge amounts of aid money for AIDS chasing too few people with HIV means that there is a kind of welfare state emerging for people with HIV.  It is not perhaps the welfare state we see in many European countries, but it is much better resourced than is available for people without HIV.  As well as free health care, people living with HIV are supported to find work, and their children get free education.  NGOs fall over themselves to get people living with HIV and their families onto their lists.

The result is that some Ethiopians emerge from being told the results of their voluntary HIV tests in tears because they don’t have the disease and so do not qualify for this assistance. The quality of life for them and their families would be better if they did; and their life expectancy could well be higher, given the access to health services that would be unlocked.  There are even rumours here in Addis Ababa that some people are deliberately getting themselves infected, so that they can give their children a better start in life.

***

I have used the example of HIV because the misallocation is particularly egregious here in Ethiopia (as it is in some other countries in sub-Saharan Africa). But I do not want this to be misunderstood as an attack on AIDS activists, or on funding for HIV in particular.  Some of my best friends – indeed, some members of my family – are AIDS advocates and they are among the most committed and well intentioned development advocates.  If they had been listened to earlier, a great deal of suffering in sub-Saharan Africa and elsewhere could have been avoided; and the path to development would not have been so long and arduous for the countries most affected by AIDS.  These advocates are merely one group among many making the case (and earmarking funds) for their cause.

Look, for example, at this recent paper by ODI on education (funded by the Hewlett Foundation) which complains that while funding for basic education has grown in real terms it has not grown as a share of total aid. The paper is all about how education advocates can do more to “capture” the global stage and compete with health spending. (“Capture” is their word, not mine).  And I am not picking on education either.  There are endless demands from activists to commit more money to agriculture, microfinance, water, maternal mortality and a long list of other important issues.

The development industry seems to be riddled with people whose main job is to divert money  to their good cause.   The advocates are united by a strong belief in the priority that should be given to their sector (education, water, AIDS etc). They convince themselves that they are speaking for real interests of the poor, which they consider to be unaccountably neglected by everyone else. Within many aid agencies there is a permanent state of low intensity bureaucratic warfare for resources, sucking up the time and attention of staff as they fight to defend and expand funding for the causes they work on.  They deliberately stoke up pressure in private alliances with civil society organisations – many of whom they fund – to raise the political stakes through conferences, international declarations, and publications with the aim of committing funders to spend a larger share of aid resources on their issue.  Territory is captured and held by way of international commitments in summit communiques.  But for the aid budget as a whole these are zero sum games, and everyone would be better off – and many lives would be saved – if it stopped.

The advocates might defend themselves by saying that they are trying to bring more money into development, not to reallocate aid from one cause to another.  But as they know, or ought to know, that is not how development budgets work.  The UK commitment to spend $15 billion on education by 2015 does not advance by one day the path to UK aid reaching 0.7% of GDP.  Either the commitment is meaningless, because that much money would have been spent on education anyway; or it has resulted in a reallocation of aid within a fixed total to education from something else which would otherwise have been a higher priority.

The earmarking of funds within a fixed total takes money from one good cause and puts it into another. If the money moves to a lower priority, the result is additional suffering, more deaths, a longer journey to economic development, and the need to give more aid, for longer, than if choices were driven by locally-determined, well-informed, evidence-based decisions about needs and priorities.

Here in Ethiopia, the Minister for Health is very clear sighted and articulate about the health priorities for his country, and the need to allocate resources to building effective basic health systems.  Within the limited resources it is able to control, the Ethiopian health ministry makes intelligent decisions about priorities, understanding the variations within the country as well as between countries.  They have much more detailed and specific understanding of the issues that affect people here than well-meaning activists in Europe or America.  Furthermore, it is their country and their path to development, not ours.

***

What do we need to do differently? I set out in a recent  CGD Working Paper the need to address the political economy of aid.

First, we should be much more rigorous and systematic about defining and measuring results from aid so that well-informed choices can be made.  There is a huge and expensive industry of “monitoring and evaluation”, most of the results of which is worth less than a pitcher of spit. We should dismantle it, and use a fraction of the money to fund a smaller, more sharply focused, more rigorous, international, independent collection of real evidence about the cost effectiveness of development interventions.  (Tentative steps in this direction are, of course, being fiercely resisted by the trade union of evaluators.)

Second, we should try to stop earmarking aid; we should make more use of results to demonstrate that aid is effective. The Paris and Accra agendas for aid effectiveness, which have been agreed by all the donor nations, require donors to respect the development priorities of aid recipients.  But there has been almost no change on the ground in this direction.  One step towards doing this is to put in place simple but rigorous ways to measure and attribute results, so that donors can be confident about  (and can explain to taxpayers) how their aid has been used.  If we cannot produce compelling evidence about what aid has achieved, it should be no surprise that ministers and taxpayers want to determine in advance how the money will be spent.

Third, we should stop creating global funds, and merge or close the ones we have got.  The existence of bureaucracies whose raison d’etre is to spend money in a particular sector or in a particular way creates incentives to promote resource misallocation because it protects jobs and institutional budgets.

Fourth, we must massively increase the transparency of past, present and future aid, so that informed decisions can be taken about how resources are allocated (not just between countries and sectors but within them).  Under current arrangements, donors publish details of their aid up to 23 months after it has been spent. Donors need to publish detailed information about their current and planned future activities so that governments, donors and the private sector can identify the gaps where additional resources would have most effect.

Fifth, we should, as a development community, heap scorn and opprobrium on anyone caught advocating for more resources in their sector.  We need stronger social norms in development that frown upon this kind of anti-social behaviour.

***

You may think that this is all a bit over the top.  Arguments about the architecture of aid may sound rather abstract and rarified, but aid is a scarce, precious resource and it is no exaggeration to say that if we spend it badly, the result is the avoidable deaths of literally millions of people.

Here is a new paper by Channing Arndt, Sam Jones, and Finn Tarp on whether aid leads to economic growth. The econometrics are done carefully, and it finds that aid inflows of about 10 per cent of GDP lead to an increase in economic growth of about 1 percentage point. (Reassuringly, this is also broadly consistent with a common sense calculation of the sort of effect that aid ought to have.)   They also find evidence of bigger, more positive effects of aid, consistent with positive effects of aid on productivity.

I’m not a fan of these aid-growth regressions, because they are technically difficult to do well (see David Roodman’s article on the problems.)  But they are important for one reason: they are a more systematic way of doing the popular “folk regression” offered by authors such as Dambisa Moyo and Bill Easterly.  When Moyo and Easterly point out that countries that have had high levels of aid have also suffered from slow growth, they are implicitly pronouncing on whether there is a statistical relationship between aid and growth.  But of course you would expect to see a lot of aid going to poor countries (rather as ambulances tend to be present at the scene of road accidents)  so these simplistic comparisons do not tell us very much about the effect of aid on growth. The more careful question to ask is whether, other things being equal, aid leads to higher or lower growth, and that is what this kind of statistical analysis investigates.  It is good to have confirmation that the folk regressions are wrong and that aid does, as best we can tell, lead to economic growth.

There are a few other interesting things about this paper:

• the paper uses the same data as the infamous and oft-cited Rajan and Subramanian paper which claimed that there was no effect on growth (which I criticised at the time here) and finds that, if the regressions are done more carefully, those findings were not correct;
• the effect of development aid on growth is probably understated by this analysis because it includes all aid (unlike the paper by Clemens, Radelet, and Bhavnani, which subtracts humanitarian aid and other aid which is not intended to lead to economic development and finds – as you would anticipate – much larger effects of aid on growth from the subset of aid that is actually intended to promote development);
• there is no sign of diminishing returns to aid in this analysis. (This is an unusual finding – generally studies have needed to include a diminishing returns term to generate a statistically significant relationship between aid and growth).
• the study uses donor-specific fixed effects (the only study to do so, as far as I am aware). I’m looking forward to looking at these in detail, as the estimates will give us an insight into which donors are the most effective.

(h/t Chandan)

Update: David Roodman, whom I regard as an authority on these matters, thinks that I am wrong and Bill Easterly is right.

One of my favourite scorecards is the Commitment to Development Index produced each year by the Center for Global Development.  The 2009 index was published on Thursday.

What I especially like is that this analysis does not focus only on aid.  Too often, we measure the extent of our international solidarity by the amount of aid we give, and not by all the other important things that rich countries do (or don’t do) which affect developing countries at least as much as – probably much more than – giving them money.

Apologies for parochialism, but I was struck that the UK has fallen this year from 6th place to 12th place, out of 22 countries.   David Roodman, the uber-geek (and I mean that in a good way) who designed and runs the index, said this:

“The U.K.’s aid giving slowed in 2007, the latest year for which complete data are available, while its exports of arms to undemocratic regimes such as Pakistan and Saudi Arabia ticked upward.”

The UK scores in the Commitment to Development Index are depressed by the index’s judgement that there is insufficient rigor in tackling corruption by UK firms operating overseas, a high level of arms exports to undemocratic and poor countries, high agricultural subsidies, tight controls on immigration from the poorest countries, and restrictive intellectual property laws on plant types and data.

Officials from other  countries sometimes think the UK is a little too pleased with itself about development.  I wonder if they will think that, now that UK finds itself in the bottom half of the league table, having been overtaken by six countries (New Zealand, Spain, Australia, Austria, Finland and Canada), the UK should focus a little more on how its own policies affect the developing world.