Two interesting new articles start with the premise that the aid system needs to be overhauled, and then reach radically different conclusions about what this means in practice.
First up, Roger Riddell says we need a radical rethink of foreign aid:
The gap between what it does and what it could do is widening fast. … The central problem of the aid system is that there is no system. … Almost since official aid was first given, politicians have both warned of aid’s systemic problems and proposed alternatives. These include raising aid funds through an automatic compulsory mechanism based on the ability to pay; pooling aid resources and allocating them on the basis of need; and, if there are grounds for believing that the recipient government is unable or unwilling to use the aid funds transparently, “ring-fencing” the aid in a fund to be administered independently.
Most of these good ideas have been eclipsed by the focus on increasing aid levels. A common response to anyone advocating these solutions to aid’s systemic problems is the counter-argument that they are part of the very nature of the aid system, and that it is naive to suggest that it can be changed. They warn that if governments are unable to decide for themselves how to give aid and then check on its use, then they simply won’t provide it.
There are two ways to respond to these arguments. One is to point out that that aid’s systemic problems are getting worse and fast and frustrating progress on the core objective of ending extreme poverty. Resolving key systemic problems would probably have a greater effect on extreme poverty than expanding the amount of aid given. The other is to draw attention to high-level discussions where the sorts of changes needed to fix aid are being presented as politically viable.
The authors of Philanthrocapitalism, Mike Green and Matt Bishop, also think that the aid system needs reform, but they have a very different view of the direction of travel:
Like it or not, we have to find new ways of making the aid money go further and find new ways of financing development that do not depend on the political will of a few rich countries. Philanthrocapitalism, by tapping the expertise, creativity, money and other resources of the private sector, has to be central to a new development strategy. First, to pilot and test ideas to make aid smarter and more effective. Second, to leverage more private capital – full for-profit, ethical investment and donations – to fill the gap.
As we have argued before, this means thinking about aid not as the exclusive preserve of government but as a partnership with philanthrocapitalists, rich and less rich alike. This challenge is urgent and the rich countries are being slow to take it up - Britain’s new government, in particular, seems set on business as usual (although there are plenty of disgruntled voices on the right who would like to see an axe taken to the aid budget).
Both arguments start from the view that the challenges to aid are the result of political pressures in donor countries. Roger Riddell argues for a more centralised, technocratic aid system which can be isolated from undue political influences. Mike and Matt want to see much greater involvement from a range of other actors, especially the big philanthropic foundations.
I think they are both partly right, and both partly wrong.
Roger Riddell is right to say that the systemic problems of aid are the result of politics; and he is right to disagree with the pessimistic idea that these problems are insurmountable. But he wants to address these problems but putting the aid system at arm’s length. I don’t think this is a viable solution: it wishes the problem away. It is like saying that we can solve the global climate change problem by handing over control of energy policy to an international panel of wise people. The politics matters, and we can’t make them go away by asking technicians to give us the answer; so we have to figure out how to change the politics.
The aid system today is characterised by aid institutions (official aid agencies, international organisations and charities) trying to mediate between the preferences of the people who give them money and their view of the interests of people in developing countries. Aid agency staff typically want to do as much as they can for people in developing countries: if you ask most aid agency staff who their “client” is, they will tell you it is the world’s poor, not their own taxpayer. But they feel they can’t do many of the things they would like to do (such as improve the allocation of aid, reduce conditionality, make long-term commitments, scale back paperwork and process, focus more sharply, untie aid etc) because they have to take account of the preferences of the people whose money they are spending. They see themselves as a firewall, serving the interests of the poor by protecting the aid programme as best they can from what they consider ill-informed or selfish wishes of their taxpayers. This behaviour is not confined to official donor agencies: many NGOs say one thing to their supporters, and do something quite different (think, for example, of the difference between what Kiva actually does and what most people think that it does). In my view, trying to deliver effective aid despite public opinion is fundamentally misconceived and unsustainable; this model is beginning to fray at the edges, and could well fall apart.
The alternative approach is for aid agencies to recognize that the public wants to see aid used as effectively as possible; and to build an informed conversation about how that can be achieved. The stakeholders see the issues from different perspectives: for example, the public sees the benefits of spreading its aid across many countries and sectors, while aid agency staff see the ineffective duplication this creates. The solution to this is to share information and build a common view, not to try to disempower the public. If the aid bureaucracies believe that long-term commitments of aid to strengthen national systems is more effective in the long run than the series of smaller ad hoc projects that the public seems to prefer, then they should produce the analysis and evidence and persuade their stakeholders. Both Roger and I believe that more aid should be given to the poorest countries; he believes that this decision should be taken out of the political process, while I believe we have to win the public round by explaining why that would be better.
In the long run, public opinion will determine how much aid is given, to whom, and by what means: we cannot and should not try to sidestep the argument by putting the administration of aid beyond the reach of public opinion. The only sustainable way to make aid more effective is to change the political pressures by producing persuasive evidence and analysis. If Roger’s approach is to insulate aid from political pressure, my approach would be work to align those political pressures with more effective aid by making aid more transparent and accountable.
By contrast, Mike Green and Matt Bishop want to improve aid, and attract more resources, by making more use of the expertise and money of the private sector. I agree with them that there is huge potential for the growing diversity in the aid system to improve the effectiveness of development system, if different organisations focus on the contributions that they can make. Foundations could act like venture capitalists: taking bigger risks but leaving long-term financing of scaled up successes to official aid donors. Private aid could focus on achieving community and individual level results. Specialised global organizations could provide particular expertise not available through generalist support. The diversity of official donors could provide innovation rather than a monoculture of ideas. Official aid agencies could focus on long term funding and resource transfer, and support for institutional change.
Unfortunately it is not clear that all these different actors really are focusing on their strengths, and there is nothing in the aid system that pushes them to do so. The foundations do not display the higher risk appetite that we would expect them to have (despite their rhetoric). The approach of official aid agencies to the division of labour does not appear to be intended to drive specialisation (from which the benefit of division of labour derives) but simply to limit spread. Diversity of approaches and innovation are essential, but this must be accompanied by mechanisms which kill off bad innovations and take good ideas to scale; otherwise the effect is simply to add to costs and fragment systems.
In their book, Philanthrocapitalism, Mike Green and Matt Bishop give several examples in which philanthropic foundations have made significant and worthwhile contributions. The role of the Rockefeller Foundation in promoting the Green Revolution is a compelling example. But from these successes they extrapolate a wildly rose-tinted view of the work of foundations. As with official aid, there are successes and failures; there are good practices and bad.
My impression is that, at their worst, foundations are much less effective, and behave even worse than official donors. For example, I have seen:
- massive unpredictability and volatility of foundation grants; many foundations make grants worth 5% of their capital asset value each year, which is the minimum imposed on them by US tax authorities. In years when asset prices are volatile, many foundations pass on this volatility to grantees – they do not (as they could, if they chose) use their capital to smooth out the grant-giving and make it more predictable and stable. In 2009 I know of some foundations which imposed in-year cuts exceeding 25% on their grantees, leading to cuts in services and imposing huge costs in developing countries just at the time when the world economic crisis created needs for additional funding;
- reinventing the wheel and failure to learn – it is one of the advantages of foundations that they can be innovative and unconventional; unfortunately, both the benefactors and staff of many foundations suffer from an inflated sense of their own abilities, and foundations often repeat basic mistakes that have been made for many years, rather than building on the experience and wisdom of organisations that have made these mistakes before;
- capriciousness and personality-driven priorities – both the staff and benefactors of foundations get ideas into their heads from which they cannot be dissuaded. There are many examples of ludicrous decisions and instructions from foundation staff to grantees based on nothing more than their prejudices or personal preferences.
Of course, official aid agencies also suffer from these problems to some extent. But they also benefit from a degree of public accountability which puts them under pressure to be more effective. I think Matt Bishop and Mike Green underestimate the problems that foundations suffer as a result of their lack of accountability. In many cases benefactors became rich in markets; and they often trusted their instincts. But when they got a judgement wrong they were soon punished by the market, and they were able to change course. Now that they are philanthropists, they do not have any such feedback. When they make the wrong decision, everyone is too afraid to tell them, for fear of losing the opportunity to apply for the next grant. There is no mechanism for identifying and rewarding their most effective staff; nothing that forces foundations to concentrate on what they are really good at.
In many ways we have the worst of all worlds: with some notable exceptions, foundations do not in practice take enough advantage of the opportunities that their lack of accountability give them (for example, taking bigger risks, or supporting unpopular causes) but they do suffer from the weaknesses that lack of accountability imposes on them.
So I think Mike and Matt are right to say that development relationships should not be the exclusive preserve of government, and that is should increasingly be an effective partnership with philanthrocapitalists, NGOs, private sector organisations and individuals. But without some more effective governance arrangements in the aid system, we will not reap the potential benefits of this partnership. We need stronger pressures for the different partners to make their specific contributions effectively, which in turn demands greater transparency and stronger accountability for all organisations.
Both articles start from the premise that the aid system needs to be improved; on this I think we all agree. But Roger’s solution – putting aid beyond politics – is unlikely to be effective, and is undemocratic. If we believe that politics constrains effective aid decisions, we should square up to trying to change the politics, not trying to insulate ourselves from it. And Mike and Matt’s answer – passing the baton to very rich Americans – is no answer either. These stakeholders certainly have a contribution to make, but to be effective their contribution must be part of a system that is likely to get the best from all partners working together, and holds everyone to account; otherwise we risk having all the disadvantages of the free market with none of the benefits of market discipline.
Disclosure: the organisation for which I work receives grants from the Gates Foundation and Hewlett Foundation.
A new Oxfam paper, written by the excellent Jasmine Burnley, looks at 21st Century aid. Here is a good summary paragraph:
“We are now at a crossroads. On the one side, is politically motivated or ineffective aid – much of which still exists today. On the other, and looking to the future, is aid fit for the 21st century. Twenty-first century aid is liberated from rich countries’ political incentives and is targeted at delivering outcomes n poverty reduction. Twenty-first century aid innovates and catalyses developing country economies, and is given in increasing amounts directly to government budgets to help them support small-holder farmers, build vital infrastructure, and provide essential public services for all, such as health care and education. Twenty-first century aid is transparent and predictable. It empowers citizens to hold governments to account, and helps them take part in decisions that affect their lives. In recent years we have seen more of this good 21st century aid but we need to see a lot more still, and soon.”
There is a lot to like in this paper:
- the combination of making the case for more aid, and for making improvements in how it is delivered;
- the emphasis on making aid more predictable, transparent and accountable
- the focus on helping to support the evolution of effective institutions, particularly state institutions
- a whole chapter devoted to addressing the critics of aid
- the call for developing countries to do more to end corruption and increase transparency and freedom of expression
- a clear case for giving more aid to reach the Millennium Development Goals.
It is an interesting straw in the wind that the paper does not dwell on the Paris and Accra agendas for aid effectiveness. I see this as growing recognition that while the objectives of of those declarations are laudable, the top-heavy, committee-led process for achieving them is unworkable and ineffctive. I wonder if transparency and accountabilty would have featured so much in a paper written even one or two years ago.
Yes, and …
Writing a paper about everything in development would have been an impossible task, even for someone as talented as Jasmine. So when I say that there are points I would have liked to see made more prominently, or done differently, I do not mean this as a criticism of the paper, but rather some nuances and reflections that I would like to add.
First, there is only a brief acknowledgement (p15) of the importance for development of policies other than aid. My view is increasingly that the most important levers for industrialised countries to help accelerate development are changes in policy (eg trade, climate change, migration, intellectual property, corruption); and that contribution of aid is likely to be modest. Even so, I think aid makes a huge difference to improving people’s lives while development is happening, and that this is reason enough to increase and improve it.
Second, I would have been interested in some reflections on how the role of aid should change in the face of broader changes. What are the implications for the way we use aid of of the rise of philanthropic foundations? What difference is made by the emergence of new donors such as China? What is the role of business, corporate social responsibility and social entrepreneurs? How does aid fit with other financial flows, including remittances and direct investment? My own view is that we should focus aid more sharply on reaching the parts that other flows won’t reach: the poorest countries, the chronic poor and marginalised within those countries, and investments with no immediate financial return, but the paper could have put aid more clearly into this context.
Third, I think those of us who want to see more and better aid should recognise more explicitly the serious challenges that the aid system now faces. As Duncan Green says “the pro-aid camp is fearful of giving fuel to the enemy if it acknowledges the failings of aid.” The paper suffers from a certain amount of self-censorship of this kind. There are scattered references to the problems, such as this:
“Aid that does not work to alleviate poverty and inequality – aid that is driven by geopolitical interests, which is too often squandered on expensive consultants or which spawns parallel government structures accountable to donors and not citizens – is unlikely to succeed.”
I would have liked a more thorough examination of these (and other) problems. We have to acknowledge that some of these problems are getting worse, not better. (In places it reminded me of the way that some politicians appear on TV when things are going badly wrong, with a talking point that says “things are pretty good, though of course we could do even better; but we really need to get our message across better”.)
On his blog, Duncan Green makes much of the point that this paper sets out the case both for increasing aid and for making it work better. I don’t think this is as unusual as he suggests (“More and better aid” was one of the demands of Make Poverty History, for example). But I do agree with him, and with Jasmine, that this is the right position.
Despite those quibbles, I thought this was a very good paper. It explains the debate about aid clearly, and it sets out very well coherent and plausible agenda for why aid should be increased, and how it should be improved. But I’m not sure who Oxfam thinks will read it, and unfortunately I doubt if it will change anybody’s mind in either direction.
I’ve been gratified by the number of people who have contacted me (by email, twitter and on facebook) to say how much they liked one of the slides in my recent presentation on aid effectiveness.
The slide borrows a format from Wired Magazine – it shows what I think is expired, tired and wired in foreign aid.
Of course, some of this is a bit exaggerated but I think it makes the point. As I argue in the presentation (you can click it then jump forward to slide 20), the items in the Wired column aim to put power in the hands of citizens in developing countries, and to enable them to put pressure to improve the services they get and the way that the aid system works.
Further suggestions please in the comments below, preferably in the Wired | Tired | Expired format.
The Donors’ Assistance Group in Ethiopia (the country heads of 26 aid agencies working in Ethiopia) had an awayday yesterday, and I was invited to speak to them about the future of aid effectiveness.
The Deputy Finance Minister addressed the donor heads before me. In a very dignified way, he delivered the blunt message that the donors are not living up to their commitments in the Paris Declaration on Aid Effectiveness. That was the perfect platform for my presentation which argued that aid effectiveness matters, that there are good reasons why the Paris Declaration is not going to bring about more effective aid, and that the donors in Ethiopia should work differently to improve aid effectiveness.
You can view and listen to my presentation by clicking the image below. This narrated presentation lasts 20 minutes (beware: when you click you’ll start to hear my voice, so don’t do this if you are in a meeting!).
Alternatively you can download the presentation as a pdf here.
The donors seemed to find the ideas in the presentation interesting. There was little dispute with the analysis that it is very hard to make progress on the Paris agenda as it is currently conceived, though some scepticism that it would be possible, in practice, to change the incentives enough to change behaviour. There was also some instinct to blame the Ethiopian government for things that don’t work very well. I didn’t really get the sense that they had taken to heart just how bad things are at the moment.
Please let me know in the comments what you think. Is Paris going to work?
What are good ways to get feedback from the intended benefiaries of an aid programme? Can we use text messaging and other technologies to crowdsource monitoring?
VirtualEconomics is an unusual blog because it is maintained by someone in the front line of designing and delivering an substantial aid programme in one of the big bilateral donor agencies: Matt is the head of economics for the UK aid program in India.
Matt is interested in how to get feedback from the people who are the intended beneficiaries of aid:
New technologies for crowd-sourcing significantly bring down the transactions costs for collecting and ‘mashing’ data from many stakeholders. Examples include SMS-based systems (e.g. Ushahidi’s crisis reporting), smart-phone systems (e.g. Kenyan crop insurance) and web-based systems (e.g. eMoksha’s Fix Our City). What other examples are there?
So a question for us all to consider, how would you go about designing a simple platform for the Papua New Guinea public to provide reliable feedback on whether kids have received their textbooks? What’s the best solution?
As well as Ushahidi, another promising approach is Daraja in Tanzania which is going to use SMS messaging to provide feedback about which water points are working (full disclosure: I am on the board of Twaweza which is a partner of Daraja).
With changing technology and attitudes, we seem to be on the brink of a revolution in getting information from prospective benefiaries of aid. Do you know of any existing, working programs like, or promising new approaches?
I’ve closed the comments here: if you have suggestions, please add them to Matt’s post.
Christopher Fabian tells the story of something that happened yesterday. Somebody came up with a not-very-good idea for foreign aid: “Let’s collect 1 million t-shirts from the US and send them to Africa.”
The idea was discussed on twitter and on the blogs (including Aid Watch, Aid Thoughts, Tales from the Hood, Amanda Maculec, Siena Anstis, Texas in Africa, and Project Diaspora). A fuller list of reactions is here. Christopher Fabian explains what happened next:
Within a day a development concept has been aired. It has been discussed. Literature has been created around it. Sources cited. Histories referenced. A community built.
Real-time input, from “the field” has just become an actor in “aid/charity/development.” Voices from places which otherwise would never be represented spoke. People in “the place” (“Africa”) where the “aid” was going got to weigh in. Experts who had not met each other were able to share experience, synthesize and create new literature on giving, aid, and development theory.
And it happened in a few hours.
I don’t know what the t-shirt guy will do. I don’t know what his motivations are. It doesn’t really matter, because I have just seen the avalanche start.
Imagine if a large organization could put out its project plans in a way that was as appealing to comment on as this.
Imagine if there was the same transparancy and accountability of ideas in development.
Imagine if there was the same involvement of donors and implementers – and (watch out!) the beneficiaries of projects.
Imagine if we could actually ask people in the developing world what they thought of projects before we started them.
And most importantly, perhaps, imagine if we could fail quickly enough at the beginning of a project to not pour in the resources, ego, and time that sometimes gives otherwise bad ideas an unstoppable, zombie-like momentum.
But wait. We can. And it just happened, right in front of you.
This is indeed pretty interesting: it is the first time that the appraisal an aid project has been crowd-sourced.
It would be even better, of course, if some of the intended beneficiaries had a say.
Subjecting projects to scrutiny by this particular crowd is not ideal: for who are the people doing the scrutiny? The kind of people who comment on twitter and on blogs are not the intended beneficiaries. They are not even typical experienced aid workers (most of the people I know working hard in the field don’t have access to, or time for, twitter and blogs.)
Though on this occasion, the consensus in the crowd was pretty clear that this was a misconceived project.
For all that this is not the ideal crowd to provide scrutiny, it is better than making decisions wholly in private. This invites the question: why aren’t all aid projects subject to this kind of scrutiny, before anyone spends any money on them?
The question of whether and how donors might try to create incentives for politicians in developing countries lurks behind many of the debates about how to give foreign assistance. It has come up for me twice in recent days:
- First, I was talking on Thursday evening with a donor agency official in Tanzania, who was explaining to me that her agency gives budget support in order to exercise policy influence with the government of Tanzania
- Second, in the context of Cash on Delivery aid, several people have argued that the whole concept is flawed because it relies on the idea that a promise of more aid will create incentives for developing country governments, and this is unlikely to be true.
I think it is worth establishing two points about the use of aid to create incentives. First, donors are almost never able to use aid to create incentives that work for developing countries, and they probably should not try. Second, I am in favour of piloting Cash on Delivery aid, not because I think it will create stronger incentives in developing countries, but rather because I think it will create better incentives for donors (and it might at the margin increase the accountability of developing countries to domestic stakeholders).
Why donors cannot create effective incentives through aid
It sounds straightforward to say that if a donor offers a lot of money for a developing country to change a policy or achieve a particular outcome, this should, at the margin, have some effect on incentives within the developing country and so increase the likelihood that this policy change will occur or the outcome be achieved. People respond to incentives, right?
Yet there is a mountain of empirical evidence that aid conditionality does not work. (Check the references at the bottom of this post for details.) There are two good reasons why donors cannot create effective incentives for developing countries.
First, donors do not make credible threats. Most donors have an organizational imperative to get the money out of the door. Aid agency staff want to sustain their bureaucratic status by managing large budgets. They do not, in practice, withdraw aid when developing countries do not comply with conditions. Officials in the governments of developing countries know that donors rarely stop aid – indeed, it is much more likely that aid will not be disbursed because of donor maladministration. The Government of Kenya was able to include the same promise to reform agricultural policy in five successive World Bank loan agreements over fifteen years: the condition was never met, and the aid was always disbursed. If the threat is not credible, it creates no incentive. Svensson (2000) set out the argument and the evidence in detail.
Second, the incentive created by aid is not strong enough to influence decisions of government officials. Aid is used to deliver services within the developing country, and that has only a very indirect impact on the interests of a minister or senior official. After all, most aid does not end up in the minister’s personal bank account. Of course, other things being equal, most ministers and officials want to see their fellow citizens better off. They might also calculate that more aid which improves service delivery will make them more popular and so more likely to hold on to office. But these benefits are often much less direct and immediate than the political costs to them of reform. A politician is not going to take on vested interests and risk being ousted from office just to increase the number of wells being dug in a rural area. In other words, people do respond to incentives, but aid is not as big an incentive as you might think.
Consider the choices made by ministers in industrialized countries. They too want to improve the economy, increase spending and improve public services for their citizens, for the same reasons as politicians in developing countries. But they are constrained from implementing sensible economic reforms, or raising more money in taxes, by powerful vested interests. Responding rationally to the incentives they face, they choose carefully which vested interests they are willing to confront at any given time; and that means compromising on the services they can deliver and the amount of economic growth they can bring about. The prospect of faster growth and better services does not lead them to make suicide runs at reforming agricultural subsidies, removing trade tariffs or increased taxes on the super-rich. Developing country ministers are no different. Rational ministers will not risk being ejected from office just to bring more aid to the country.
This is why conditionality based on cutting aid does not work, and it is why it is a great mistake for development agencies to allow their success to be measured in terms of the amount of policy reform they have brought about. Aid works because it pays for essential services, not because it brings about policy change.
I am not sure that industrialised countries could not create meaningful incentives for politicians in developing countries: but I believe it would be much more effective to impose travel restrictions and visa bans, to uninvite Ministers from key conferences, or to sequestrate money accumulated in Swiss bank accounts, than to cut off aid. These approaches would have the added advantage that they wouldn’t leave the poor to starve.
Incentives and Cash on Delivery
If I don’t believe that developing countries will respond very much, if at all, to aid-based incentives, why do I support Cash on Delivery aid?
Some have argued that this is a show stopping argument against Cash on Delivery. Tom Harrison says that “the biggest issue with ‘cash on delivery’ is that it assumes that where governments do not provide key public services it is because they lack the incentive to do so rather than because they lack the capacity to do so”. I agree with him that it would be a mistake to think that we can create incentives for developing countries to deliver key services; but I disagree that this is the assumption on which Cash on Delivery is based. And in a well-argued paper, Ngaire Woods and Paolo de Renzio criticize the idea of Cash on Delivery Aid, partly on the basis that “external actors may have limited leverage on domestic political realities and accountability”. I entirely agree with them about this.
I don’t believe that most developing countries need incentives to deliver better education for their children, better health care or access to safe water. I think in many cases that what they need is money. The problem is that donors won’t give that money without a whole rash of conditions, milestones, benchmarks, policy dialogues, missions, evaluations and reports. Donors are forced to impose all that paraphernalia because they need to demonstrate to their taxpayers that the money has achieved something. It makes aid costly for developing countries, and highly unpredictable. I believe that Cash on Delivery can cut through all that: by providing money on the basis of results, donors can put more money into countries that are willing and able to deliver more and better services, without imposing hassle on either donor or recipient.
The promise of Cash on Delivery might – just might – nuance the political incentives in developing countries a little. If the media, parliamentarians and civil society know that cash is available for any country that delivers better outcomes, that may help them to put pressure on their government to do a better job. The government will not be able to hide behind the old excuses of lack of money or the pernicious impact of donor conditions and foreign interference. They will have to explain to their own citizens why they have not been able to do more.
Furthermore, it is possible that I’m wrong, and that in some cases Cash on Delivery aid will provide a modest incentive for some countries. Some of my friends think it might help, and I’ve never heard anyone make a convincing case that it would do any harm.
Conclusion
I think a reasonable position to take is:
- Donors cannot, in practice, create incentives for developing countries through the promise of aid. That is why aid conditionality does not work.
- It is absurd to measure the success of aid by the policy change it brings about. We should measure aid’s success by the services which are provided.
- Cash on Delivery does not depend on the assumption that developing countries need incentives to provide key services. There are good reasons for testing the idea even if you do not believe that incentives are needed or would work.
References:
Killick, T., (1998), Aid and the Political Economy of Policy Change, Routledge, London and New York.
Collier, Paul. (1997). “The Failure of Conditionality.” In Catherine Gwin and Joan Nelson, eds., Perspectives on Aid and Development. Policy Essay 22. Washington, D.C.: Overseas Development Council.
Devarajan, Shantayanan, David Dollar, and Torgny Holmgren. (2001). Aid and Reform in Africa. Washington, D.C.: World Bank.
Nelson, J.M., (1996), “Promoting Policy Reforms: The Twilight of Conditionality?”, World Development, Volume 25 Number 9, September.
Svensson, Jakob, (2000). “When is foreign aid policy credible? Aid dependence and conditionality,” Journal of Development Economics
The Wall Street Journal reports that Bill Gates may now see that we need to invest in health systems, not simply fight individual diseases:
That question goes to the heart of one of the most controversial debates in global health: Is humanity better served by waging wars on individual diseases, like polio? Or is it better to pursue a broader set of health goals simultaneously—improving hygiene, expanding immunizations, providing clean drinking water—that don’t eliminate any one disease, but might improve the overall health of people in developing countries?
The new plan integrates both approaches. It’s an acknowledgment, bred by last summer’s outbreak, that disease-specific wars can succeed only if they also strengthen the overall health system in poor countries.
We already knew that, right? The big philanthropic foundations pride themselves on trying new approaches, and not being constrained by conventional thinking. Great. But it is a pity when they have to reinvent the wheel themselves.
The development policy debate focuses too much on aid. Aid policies may help to improve the living conditions of people in developing countries, but it is development policies that will result in lasting transformation. If we are serious about promoting long-term change, we should talk less about aid, and more about the other rich-world policies and behaviours that affect developing countries.
Rich countries have many reasons for wanting to help poor countries. The main three British political parties speak in their manifestos of Britain’s obligations to the developing world (Lib Dems); moral duty, common interest and poverty emergency (Lab); and enlightened self interest and commitment (Cons). The combination of motives – moral concern for others and self-interest – is a strength of the development cause, not a handicap.
These motives translate into two broad classes of objectives for development policy:
- One view is that development assistance should help to accelerate economic and institutional change in developing countries. The idea is that temporary support from outside can be a catalyst for permanent changes in developing countries. As economic growth takes off, developing countries will no longer need our help. This view is attractive both to donors, who do not want to go on giving aid for ever, and for recipient countries who do not want to continue to be aid dependent. For shorthand we will call this the transformation objective of development assistance.
- Another view is that development assistance can improve people’s lives today. This is most obvious in the case of humanitarian relief, for which the objective is to provide food and shelter; but more generally a lot of aid is used to send children to school or provide basic health care. On this view, the development process is long and hard, and one role for outsiders is to enable people to live better lives while this process is happening in their country. Let’s call this the solidarity objective of development assistance.
It is entirely reasonable for countries, organizations and individuals to care deeply about both the transformation and the solidarity objective, and they can coherently pursue both objectives at the same time.
From time to time, people try to make connections between these objectives, positive and negative.
The claim of a positive connection is the idea that spending money on health and education is an investment in the human capital of a country, and that this will, in time, lead to faster economic growth. Some point to significant investments in education in fast-growing Asian economies as evidence that education spending will promote growth. Others say that improving health will lead to a demographic transition, in which falling infant mortality leads to smaller family sizes and greater investment in each child. Both of these stories are appealing, though unfortunately neither is very well supported by the evidence.
The possibility of a negative connection is that the things that donors do to support people in developing countries as a matter of solidarity may actually slow down the political, social, institutional and economic changes that the country needs for transformation. It may sustain unaccountable governments in power; undermine the social contract between citizen and state; hollow out fragile government institutions; cause appreciation of the real exchange rate and so choke off exports; or create a culture of dependency that dims demand for social change. Again, the empirical evidence for these (quite plausible) ideas is pretty thin (pace the claims of Dambisa Moyo).
Are we using the right tools to pursue our two types of objective: tying to catalyze transformation, and at the same time to help people live better lives? I think we are focusing too much on aid and not enough on development policies.
It is quite straightforward to see that aid can help meet solidarity objectives. It is used to provide clean water and food, and to finance public services such as health and education. There is quite good evidence that it is effective, though there is much more to learn about how to do it better.
It is much less clear that aid achieves our transformation objectives. The statistical evidence linking aid to economic growth is, at best, uncertain (see The Anarchy of Numbers by David Roodman). This does not mean that there is no relationship – it is much harder to demonstrate a statistical connection when there are few countries to observe, and so many factors as well as aid that are likely to affect whether a country achieves economic lift-off. We can think of aid being to growth what venture capital is to start-ups: many investments will fail, but the huge benefits from the few that succeed may make the losses worthwhile.
I personally have my doubts that aid makes much difference to the prospects for economic and social transformation. Countries change from within, through long, slow, organic processes, and it is hard to see how money and advice from outside can make much of a difference to that. Consider our own history, and the decades and centuries that it has taken us so far to construct our social and political institutions.
If we are serious about promoting transformation, we need to look beyond aid to how we can change the environment in which developing countries are struggling to change their economic, social and political institutions. Transformation is much likely to take root if we create conditions in which it is likely to succeed.
What are the development policies that might contribute to this?
- Trade policy – As well as duty-free, quote-free access for all developing countries to our markets, we have to dismantle the complex rules – such as rules of origin and phyto-sanitary standards – which make exports complicated.
- Agriculture policy – We have to stop dumping subsidized agricultural over production abroad, especially as our aid conditions prevent developing countries from competing with us. We also have to stop using food aid as a welfare system for European and American farmers.
- Climate change – If anthropogenic global warming is a reality, as is the consensus among scientists, then the harm we are doing to developing countries through climate change will become one of the most important obstacles to development. Probably the most important thing we can do to accelerate development is to stop our own carbon emissions.
- Conflict – We make and sell the guns that are used in conflicts in developing countries. We buy the oil and minerals over which groups are fighting. We sustain the unaccountable leaders in pursuit of our geo-strategic interests. If we were serious about development, we would by now have stopped the Lord’s Resistance Army in Uganda – it would be a simple matter for a well-resourced army.
- Immigration – In the 18th Century, a third of Europeans moved to America, to the benefit of both continents. In the 20th and 21st century we have introduced historically unprecedented restrictions on the movement of people – notwithstanding our rhetoric about globalization. These restrictions may be the single most important factor which explains why poor countries have not been able to converge on rich countries.
- Intellectual property – Another constraint on the ability of developing countries to close the gap is that there are historically unprecedented constraints on their ability to appropriate technologies. For centuries, new agricultural techniques such as crop rotation spread through word of mouth. During the industrial revolution, America and Europe were able to use technologies from Britain. When Henry Ford invented the assembly line, the idea was rapidly adopted everywhere. But today’s technologies – from business software to pharmaceuticals and biotechnology – are protected by patents that make it impossible for other countries to adopt.
- Corruption – We often think of corruption as a problem of developing countries, but this ignores the fact that the money for corruption comes from, and often returns to, industrialised countries. Rich western companies pay bribes, in return for access to contracts or minerals. To his eternal credit, President Jimmy Carter introduced the Foreign Corrupt Practises Act, which made it harder for American companies to pay bribes abroad. But there is much more we could do, if we were prepared to take on the vested interests of our own multinational companies, to reduce corruption in developing countries.
- International governance – In our own nations, we have long ago dropped the property qualification for representation; but internationally we do not think that it is strange that representation in our main institutions is based on wealth and power. This matters because again and again, the interests of developing nations are ignored, or treated only as a footnote. From banking secrecy to internet peering arrangement, the rules of the game are set by the wealthy in their own interests. Changes to these practices which would be irrelevant to most of us, but could make a huge difference to the prospects for development, are resisted by powerful vested interests from industrialized countries.
It is entirely reasonable that industrialized countries want both to promote transformation in developing countries, and to help people there to live better lives while that process is taking place. Aid has been proven to be an effective instrument for meeting our solidarity objective, but it is far less clear that it is a significant driver of transformative change. Our political rhetoric focuses on the idea that development policies should promote transformation. Yet it seems unlikely that aid is the most useful tool we have for achieving this. If we are serious about transformation we should invest more time and effort in creating the global environment in which economic and social change are more likely to succeed, by changing our policies and behaviours on issues like trade, agricultural policies and immigration.
Many people who work in development are directly or indirectly dependent on aid. Government development agencies gain their bureaucratic position from the size of their budget. International NGOs get a lot of their money from aid budgets or from private charitable giving. Partly as a result, the debate about development too often shifts to aid: whether it works, how much is given and by what means. These are important questions, but primarily for the important goal of helping people in developing countries to live better lives while they are waiting for, and helping to build, a more prosperous and fair society. If we are serious about accelerating the transformation, it is our development policies, not aid policy, that we should be discussing.
The term fungibility has been misunderstood and misused in development circles, so creating confusion that leads to inappropriate policy conclusions. This post goes back to basics and tries to bring a little rigour and clarity to the question of fungibility of foreign assistance. As we will see, the technical concept of fungibility is irrelevant to the questions of whether aid is used as intended and whether it is effective. Nontheless donors do need to consider whether and how to take account of the possible reallocation of other resources that may occur when they give aid, and whether this has implications for whether and how they give aid.
Here is the summary version – the long version is below.
- To say that an asset is fungible means technically that one unit is directly convertible into another unit of the same asset. But in development, people have come to use the term in a different, technically incorrect, sense. They use it to mean that the recipient may respond to aid by changing the way they use their own resources, with the risk that aid “frees up” resources to be used in unpredictable ways. (The tangential connection to the proper idea of fungibility is that aid may partly substitute for the other resources available to the recipient community.)
- Donors have two responsibilities which relate to this. First, they should ensure that the aid they give is used for the purposes for which it was given. Second, they should ensure that their aid is good value for money, which requires them to take account not only of the direct effects of aid, but also the indirect effects. These indirect effects include the overall impact on resource use in the recipient community. Resource reallocation is just one of the indirect effects, and it unlikely to be the most important.
- These two concerns are a close analogy to the general obligations in public financial management to ensure that public money is both properly spent and good value for money. These are distinct concerns which are better not confused. Aid can arrive safely and be used for the purposes intended even if the recipient community has made offsetting changes in its own resource use. Being used for the purposes intended is a separate question from whether aid is achieving its broader goals and achieving good value for money: it is this latter question which may be affected by how it impacts resource use in the recipient community.
- Properly defined, neither fungibility nor liquidity of the aid affects the extent to which recipients can make offsetting changes in resource use. The extent of offsetting changes is determined by whether recipients are willing and able to make choices about how to use their non-aid resources. The characteristics of the aid and how it is delivered make little difference to this.
- By mislabeling the question of broader resource use as an issue “aid fungibility” we create the misleading impression that the way we give aid is an important determinant of the extent and nature of the possible impact on overall resource use. We create the impression that by choosing the right aid instrument, we can limit or prevent these effects. In fact, aid could be entirely non-fungible and illiquid and still have big, unpredictable effects on resource allocation.
- There is a lazy assumption that these issues are more of a concern for aid given as budget support to governments. Aid given in kind and aid given through NGOs is subject to the same issue of impact on overall resource use as aid given in the form of budget support.
- If donors are concerned about the indirect effects of aid on the allocation of government resources, then they should be looking for ways to strengthen the resource allocation process and to exercise more influence over the recipient’s budget allocations. Giving their aid through NGOs is likely to have the opposite effect, since donors thereby exclude themselves from the dialogue about resource allocation. Rather than try to bypass these issues, donors should increase their engagement in improving public financial management, supporting transparency and accountability to parliament, and providing aid through government budgets so that they have a locus to influence the recipient country’s use of resources.
A more detailed explanation follows.
A new article published in The Lancet by Chunling Lu with Chris Murray, Dean Jamison and others, has caused quite a stir in development circles. They use data on health aid and government spending on health to estimate that for every $1 given in health aid, the recipient government shifts between 43 cents and $1.14 of their own spending to other priorities. (If the aid goes to NGOs, by contrast, government health spending appears to increase.)
Even if the quantitative analysis is correct (which is by no means certain, given huge gaps in information), it is far from clear that this is a problem that needs to be solved. Furthermore, of the five recommendations in the paper, three are irresponsible sectoral special pleading which deserve to be rapidly dismissed.
This story has spilled over into the mainstream press (for example, in The New York Times) as a result of a sensationalist AP story headed “Health Aid Made Some Countries Cut Budgets“. The story breathlessly reveals:
After getting millions of dollars to fight AIDS, some African countries responded by slashing their health budgets, new research says. For years, the international community has forked over billions in health aid, believing the donations supplemented health budgets in poor countries. It now turns out development money prompted some governments to spend on entirely different things. … “When an aid official thinks he is helping a low-income African patient avoid charges at a health clinic, in reality, he is paying for a shopping trip to Paris for a government minister and his wife,” said Philip Stevens, of the London-based think tank International Policy Network.
The language used by the authors is less inflammatory, but the opening sentence makes it clear they think there is a problem:
Government spending on health from domestic sources is an important indicator of a government’s commitment to the health of its people, and is essential for the sustainability of health programmes.
As summarized in their press release, the authors make five recommendations to deal with this alleged problem:
- adoption of a clear set of reporting standards for government health spending as source and spending in other health-related sectors
- establishment of collaborative targets to maintain or increase the share of government expenditures going to health
- investment in developing countries’ capacity to effectively receive and spend health aid
- careful assessment of the risks and benefits of expanded health aid to non-governmental sectors
- study of the use of global price subsidies or product transfers as mechanisms for health aid
The first recommendation is fine: I’m all for the adoption of reporting standards for spending by donors and by governments, and for those standards to specify the source as well as the destination of all spending. (The authors may not be aware of the progress that is being made globally on this under the International Aid Transparency Initiative). It is also hard to be against investing in the capacity of developing countries to receive and spend health aid, though I wonder what this means in practice. The other three recommendations are irresponsible, for reasons we shall come to below.
Let’s start with the problem we are trying to solve. It is far from clear that the behaviour of developing countries described in the paper is anything we should be concerned about. Of course health advocates who earn their living from health spending in developing countries are up in arms at the news that their various wheezes to capture a big chunk of available development finance and redirect it to their cause may not have been a complete success. But those of us who take a more objective view of the relative priorities of different types of development spending can be more sanguine.
There are at least four reasons why the findings of the paper should not be a cause for concern.
First, it suggests that governments are reprioritising their spending in the light of the aid they are receiving. I think this is a good thing. Exercises to find out what poor people actually care about, such as Voices of the Poor, routinely find that the poor place put a lot of value on security (of person and property), but this does not usually excite people who work in development. Donors find it more attractive to finance health services than to pay for essential services such as a national statistical office or the efficient functioning of courts. If we are willing to pick up the bill for health care then it is not only reasonable but desirable that developing countries should use the fiscal space we have created to invest more in important national priorities that don’t happen to be of interest to their donors.
Second, increases in aid for health may well come at the expense of other forms of aid which developing countries are right to try to offset. (I say “may well” because of course we don’t know what would have happened to total aid if health aid had not increased so rapidly.) Donor fads come and go: this year it is agriculture. When developing countries see health aid rising, but the donors losing interest in infrastructure, the most sensible thing they can do is make an offsetting shift in their own budget allocations. When the donor pendulum swings back again, recipient countries will have to make the corresponding shift in the opposite direction.
Third, as eloquently pointed out by Sridhar and Woods in the Lancet, the desire to force changes in the spending priorities of recipient countries runs directly contrary to the evidence about what makes aid effective, and a series of international agreements, especially the Paris Declaration (2005) and Accra Agenda for Action (2008). In the face of evidence that aid is most effective when there is ownership by the recipient country, donors and multilateral agencies committed themselves to align their aid with the systems and priorities of recipient countries. It is not OK for health sector lobbyists to ignore this because they don’t like the priorities actually chosen by developing countries.
Fourth and finally, we say that we want to see capable, accountable and responsive states in developing countries. Making, passing and executing budgets is the very heart of a capable and accountable state. That is why in the UK, as in many other western-style democracies, a government which cannot pass its budget (“carry supply”) is deemed to be unable to govern. If resource allocation priorities are determined elsewhere, then the government is one in name only. We cannot expect governments to be accountable to their citizens for decisions that they have not made. If we want accountable states rather than puppet client states, we should rejoice, not complain, when they demonstrate a willingness to make choices of their own.
Sectoral advocates may say that we should not accept the priorities determined by developing countries, especially in countries in which there are weaknesses in democratic accountability or technical ability to execute budgets. They might say that the government represents the interests of an elite, not the majority of the country’s poor. Of course that may be true in some countries: but there is no reason to think that donors’ priorities, also driven by vocal lobby groups and vested interests, reflect the real needs of a country or its poorest people. We should avoid getting into the situation in which well-heeled foreign academics and lobbyists from international NGOs with no accountability to people in developing countries are treated as a more representative voice of the poor than their own government.
What is most shocking about this paper is that it betrays a combination of ignorance of, or indifference to, decades of experience about what works in development. The three most egregiously inappropriate recommendations amount to setting input targets, bypassing government by using NGOs, and giving aid in kind rather than in cash. The paper’s authors should pause to reflect on the fact that progressive development thinking has fought a long, slow, painful campaign to shift away from exactly this kind of aid, and for very good reasons. Aid that leads to long-term, sustainable change must be based on real ownership of the developing country and help build rather than undermine or marginalise national institutions.
To be fair to the authors, the press release is quite measured, and it begins by highlighting the commitment to health by developing country governments. It also highlights the most important and sensible of their recommendations, the need for greater transparency. But the paper also irresponsibly creates the impression, amplified by the Associated Press, that health aid has somehow been wasted, and that donors should try to address this in ways that would be a couple of steps backwards on the long slow road to more effective aid.
This post is a longer, more detailed companion to my article published today at the Atlantic Community. You might want to read that first. Here I include a gratuitous but friendly swipe at a caricature of the views of Bill Easterly.
Almost every successful complex system became successful through a process of evolution.
Complex animals are the result of generations of evolution: of random mutation of genes (variation) and then survival of the fittest (selection). That is how complex animals, superbly adapted to their environment, come into existence. In market economies firms and products are launched (variation). If customers like their products, and if the firms are efficient, they will grow; if not the firm will fail (selection). That is why well-functioning markets tend to have efficient firms which make products that customers want. Political movements spring up (variation) and do well if they are popular with the electorate (selection).
At the end of The Selfish Gene, Richard Dawkins invented the notion of a meme, an idea which tends to reproduce itself in a community such as a fashion, culture, value, melody or belief. He describes how societies with successful memes (“Don’t marry your cousin”) tend to do better than societies with memes that do them harm (“Humans make a tasty dinner”).
The development system is a complex system, but it would be excessively kind to claim that it is a successful one. There are many initiatives to design a new “aid architecture” which are unlikely to succeed; and even if they did, do we really want to wait another half a century until we can agree the next new design? What we need instead is to instill into the development system mechanisms that force it to evolve as circumstances change.
In development, we have quite a lot of variation but not enough selection.
There are too many, rather than too few, organisations and projects in development. Here in Ethiopia, nine sectors have 20 donors or more (including health, governance, education, water, agriculture, infrastructure), and according to the DAC database there were 1 840 projects by aid donors in Ethiopia in 2007. Globally the UN has more agencies working in development than there are developing countries, and there are more than a hundred global funds working in the health sector alone.
It isn’t just DAC donors and multilaterals that are proliferating. In Ethiopia there are more than 3 500 NGOs, almost entirely funded from overseas. As with official aid agencies, some of these NGOs are outstanding. Some are well-meaning but ineffective. Some are charlatans and rent-seekers. Ethiopians are shrewd judges of which are which. But the ineffective agencies and NGOs and the charlatans, and some very duff projects, still get funded year after year.
I recently met a European bureaucrat sent to “build capacity” at the Africa Union, whose headquarters are here in Addis Ababa. As we ran together in the hills above Addis where Ethiopian athletes train, he told me frankly that his project was a complete waste of time. No surprise: we have known the shortcomings of the way donors give “technical assistance” for more than forty years. But there is nothing in the aid system that forces organisations to stop wasting money on projects that everybody knows will never work.
A slight disagreement with Bill Easterly
This is where I partly disagree with my friend and fellow blogger, Bill Easterly (or to be more accurate, I disagree with the following caricature of his view). Bill argues in The White Man’s Burden that there are too many “planners” and not enough “searchers” in development. He is robustly critical of anyone with anything resembling a grand plan, and consistently sceptical of the aid industry’s habit of herding towards the next big thing (microfinance, agriculture, etc). He calls for more experimentation, and more small scale programmes grounded in local realities.
I’m all for lots of experimentation: an evolutionary process needs variation. But the evolutionary force missing in the aid system is not variation but selection. For the evolutionary process to work, there has to be some process by which more resources are channelled to effective aid, and resources are taken away from things that don’t work. If not a planner, then there has to be some sort of decision maker to make this happen. Bill seems to agree with this in principle - the AidWatchers prize for Best In Aid went to the “smart giving” movement which encourages private donors to give more money to effective organisations. But if ever someone suggests that a particular approach appears to be work and ought to be scaled up, Bill pops up and accuses them of being a planner, or of diverting scarce resources to their pet cause at the expense of the myriad of other grass roots programmes being promoted by searchers.
While I agree with Bill’s robust scepticism, and his demand for more rigorous evidence, I think he focuses too much on the need for more “searchers” and does not sufficiently focus on the need for stronger selective pressures. I agree that we don’t want a plan, but we do need some way of doing more of what works, and doing less of what does not, and that in turn requires some sort of institutions to channel aid to priorities. But Bill is apparently allergic to any sort of institution playing this role.
What would better selection look like?
There is a movement which advocates a suite of sensible measures, including:
- a stronger focus on results, and less focus on announcements of spending
- more rigorous and independent evaluation, using randomised controlled trials where possible
- a stronger link between funding and results (for example, Cash on Delivery aid, EU MDG Contracts and the selectivity of the Millennium Challenge Corporation)
- promoting better giving to charities by the public (through organizations like GiveWell, Philanthropedia and Great Nonprofits)
I’m in favour of all these things, and I would like to see more of them. But they are all essentially “top down” mechanisms for selection, in which the pressure comes from wise outsiders who decide what is working.
Other complex systems do not rely on top down intervention to force selection (unless perhaps you believe in theistic evolution, in which change occurs through the external intervention of a benign deity.) Tesco is not the largest supermarket in the UK because the government has conducted thorough monitoring and evaluation of its outputs and outcomes. We do not used randomised controlled trials to decide which coffee shops should stay open. Political parties win elections by getting votes, not because they have convinced a higher authority of the quality of their log-frames.
We should not exaggerate the market metaphor: development work is not exactly like a market, and anyway few markets operate well without some kind of central regulation. But it isn’t neoliberal faith in markets to say we should look for more bottom-up ways to enhance selective pressure in development, so that the decisions are not made by benign deities from outside (even ones who know who to do randomised trials) but by the people who are supposed to benefit from the aid.
In a recent TED talk David Cameron spoke of a post bureaucratic age in government, in which citizens are able to improve services through greater local accountability. More use of top down evaluation, with consultants flying in to conduct rigorous baseline surveys and measure results of treatment and control groups, however rigorous and independent, does not feel very ‘post bureaucratic’ to me.
There are increasingly many examples of bottom-up mechanisms towards better accountability in development, many of which are enabled by growing access to communications and technology. Ingredients of this revolution include:
- social accountability movements such as Twaweza (listen to Rakesh Rajani interviewed here)
- giving cash to people in developing countries, for example through cash transfer programmes
- giving people vouchers for services, and letting them choose where they get that service from
- Advance Market Commitments, which reward firms for producing goods and services of value
Oddly, many of these efforts to empower the poorest to direct resources themselves are opposed by some people working in development who regard themselves as progressive. It is hard to escape the feeling that this opposition may owe more to concern for their own job satisfaction than for the interests of the poor.
It is not a straight choice between top down and bottom up accountability: there are hybrid models. An important trend in development assistance over the last decade has been efforts to encourage greater accountability of developing country governments to their own citizens, so that aid given to governments is better used in the service of the poor. This is a big part of the thinking behind the combination of budget support and Poverty Reduction Strategies. Creative ideas are now emerging for strengthening the feedback loop from the intended beneficiaries of aid programmes to the overseas decision makers (such as ALINE and Guidestar), so combining top-down selection with bottom-up information about effectiveness. These long chain accountability mechanisms are important, but they seem to me to be a second-best to giving poor people themselves direct influence over how resources are used.
Conclusion
Complex systems become and stay effective through a process of evolution: this requires variation and selection. The development system contains quite a bit of variation, but not enough selective pressure. Proposals for more effective top-down selective pressure should be supported, but the real prize is finding better ways to increase selective pressure from the people whom these programmes are intended to support.
Over at The Atlantic Community there is a discussion this week on how aid can be improved.
First up is Lawrence Haddad, with Six Ways to Improve Aid Effectiveness. In summary, his six are:
- fix the broken feedback loop.
- communicate the successes and risks of aid in a less ‘public relations’ way.
- publish results of donor efforts to meet their commitments
- limit the number of donor transactions that recipients are expected to engage with.
- focus more on influencing other parts of donor governments.
- plan for aid exits, even if they won’t happen for 10-15 years.
I largely agree with these. Within the aid system, I’d give top priority to fixing the broken feedback loop; and for development policy more broadly I’d focus on better influencing the other parts of donor governments.
The part about planning for aid exits is least convincing. On the contrary, I think aid suffers from the pretense that it is temporary, with everyone having to claim that aid projects will catalyse permanent change. Every programme has to be designed to look as if it will only require aid for a short time, after which it will be self financing. This makes donors too reluctant to invest in excellent programmes which are likely to need sustained funding over many years.
And I’d add predictability – surely one of the most important improvements in aid that donors could easily make. aid is made hugely less effective by lack of predictability. Homi Kharas has estimated that the cost of aid volatility is between 15 and 20 percent of the total value of aid, or about $16 billion a year. From the average recipient’s perspective, the deadweight loss is about 1.9 percent of GDP. Ironically, many of the drivers of lack of predictability (such as donor conditions) are intended to ensure that aid is effective, and have the unintended consequence of making it less so. This is the most requested improvement from developing countries, and it is something that donors could do relatively easily.
My own piece is up tomorrow. You won’t be surprised to learn that I think greater transparency is at the heart of improving the aid system, as a way of driving the other changes that Lawrence and others identify.
Ray Offenheiser, president of Oxfam America, writes on the Modernizing Foreign Assistance blog that US foreign assistance should be more transparent, more predictable, reduce reliance on US contractors and NGOs, use local NGOs, use country-based rather than Washington-based planning, and focus on outcomes rather than outputs.
This is very good stuff (and particularly commendable for the concise way it is written, without any of the usual development-speak). I am particularly pleased to see transparency and predictability as the first two items.
I would add three things.
First, “reduce reliance on US contractors” is an anaemic recommendation. The US should follow international best practice and untie all its aid. In particular, the way the US and EU dump their surplus food in developing countries, driving local farmers out of business, is a disgrace.
Second, a quick way to improve the effectiveness of scarce aid resources would be to spend more money in the poorest and most populous developing countries. Less than 40% of total aid is spent in less developed countries. Just shifting aid to the countries that need it the most would make a big difference to the impact of that aid.
Third, Congress needs to stop with the earmarking which is a huge driver of inefficiency in US foreign assistance. Perhaps it is implicit in the final recommendation (make plans in the country, not in Washington) but it needs to be explicit. The Bush administration did a pretty good job of preventing Congress from imposing earmarks on the MCC; this approach should be extended to the rest of US foreign assistance.
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:
- More AMCs for vaccines and green technology
- Protect some aid from security and political objectives
- Independent evaluation agency
- More representative G-20
- Visas for people from poor countries
- Duty free, quote free access to all markets
- Per capita distribution of net income from non-renewables
- Reform of selection of heads of international agencies
- World Bank to have a global public good window
- 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:
- Global standards for transparency and traceability of all aid to increase accountability and effectiveness
- Climate justice – every person in the world to have equal, tradeable, carbon emission rights, capped overall at the level scientists tell us is safe
- Global information sharing among tax authorities to prevent tax evasion
- Unbundling of aid funding from aid delivery, complete untying and global standardised output and outcome indicators to enable cost comparisons
- A global minimum income guarantee backed by cash payments to the world’s poorest people
- Product traceability from sweatshop to supermarket using barcodes
- A complete ban on exports of small arms
- A standing, professional UN peacekeeping force to be deployed by a reformed Security Council
- Reform of intellectual property to permit free access in the lowest value markets
- 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:
- Higher taxes on the wealthy, so reducing inequality
- A curb on speculation and financial market excesses
- 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.
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