Aid as policy


“”The Empire is evil”? Don’t you realise what a silly statement that is? The Empire is actually a complex system of carefully targeted programmes and government departments. You should be asking specific questions like: “Is the Empire’s Death Star project effective at curbing population growth?””

Lee Crawfurd over at The Roving Bandit recently wrote a compelling post about why the question “Does aid work?” is fundamentally flawed.

The question “does policy work” is¬†jarring, because we immediately realise that it makes little sense. Governments have about 20-30 different Ministries, which immediately implies at least 20-30 different areas of policy. Does which one work? We have health and education policy, infrastructure policy (roads, water, energy), trade policy, monetary policy, public financial management, employment policy, disaster response, financial sector policy, climate and environment policy, to name just a few. It makes very little sense to ask if they all collectively “work” or are “effective”. Foreign aid is similar. Aid supports all of these different areas of policy. My colleagues and I at¬†OPM¬†work on aid-financed projects that support most of these different policy areas in different developing countries.

Lee, as he admits himself, is taking his cue from the combined work of Esther Duflo, Abhijeet Banerjee and Dean Karlan. Some policy questions are becoming more and more answerable: does X work in a given context is something that can be tested and applied. Lee is asserting that since aid is just used to fund policies, thus the question of whether aid works just boils down to the complex task of determining whether or not individual policies work.

Yet, when you examine this assertion a little further, it starts to fall apart. Let’s imagine we lived in a world where we, development economists from aid-giving countries, figured out all the good government policies. We knew exactly which actions developing country governments needed to take to save children’s lives, promote income and job creation, reduce hunger and conflict and so on. In the world which Lee has presented to us, policy works, because we knew what all the best policies were. Would aid work?

It certainly wouldn’t be guaranteed to. Aid isn’t just policy – it’s the transfer of financial resources and technical expertise from one country or entity to another. That transfer is inherently non-trivial: it can create huge differences in power, has the potential to distort the¬†recipient’s¬†decision-making, creates opportunities for rent-seeking and often is used for completely political purposes. We cannot, for instance, only judge a US-funded conditional cash-transfer programme in Afghanistan solely on its microeconomic impact – it has to be viewed within the context of the US’s ongoing military intervention in that country, and its likelihood of long-term success. The recent scrap between Rwanda and its donors over the security situation across the border in the DRC again shows that aid is vastly more complicated than simply choosing effective programmes.

Lee acknowledges some of these differences and potential problems, but then dismisses them as things which are hard to gather robust evidence on. This preference to stick to what we know is somewhat admirable and tempting, but ultimately dangerous: it is incredibly difficult to gather widespread, robust evidence on the effects of aid on the macroeconomy or on local political economy. This should make us more, rather than less, wary of possible deleterious effects.

I’m as equally horrified as Lee by the recent attention that right-wing attacks on aid have been getting in the UK, and I completely agree with him that aid cannot always be ¬†judged as a whole. The question, “does aid work?” doesn’t get us very far in life, especially since we have little concept as to what metric we should be using. That said, we have to tread carefully around the argument that small, neat questions are sufficient for success.¬†I agree that aid should be considered more carefully as a bundle of heterogeneous flows and relationships, but I also believe that “aid” is unique in several key ways, and it is only healthy if we continuously question whether the the things that make aid unique also undermine its effectiveness.

Ideology and results-based aid

Jonathan Glennie considers the merits and limitations of results-based aid.

There was a time when countries were being forced to adopt fees for basic health services, a practice now discredited by the overwhelming evidence. Today, by proposing to hand decision-making over fully to the recipient country, COD aid demonstrates a post-ideological humility regarding how to achieve development. The fact that China has become a mighty power has only added to the sense that there is more than one way to fry and egg.

Yet the question of which eggs we should be frying still lingers. It will still be easy to disagree whether the targets set in any results-based agreement will have any meaningful impact on development. Recipient governments might have an explicit say on what their priorities are, but donors can continue to cherry pick the outcomes they want to start, say, a COD contract for.

So there is still room for ideology and disagreement here.

Perverse incentives in fundraising

On Wednesday, Kim Kardashian is going to die a little. So is her sister, Khloé, not to mention Lady Gaga, David LaChapelle, Justin Timberlake, Usher, Serena Williams and Elijah Wood.

That day is World AIDS Day, and each of these people (as well as a host of others ‚ÄĒ the list keeps growing) will sacrifice his or her own digital life. By which these celebrities mean they will stop communicating via Twitter and Facebook. They will not be resuscitated, they say, until their fans donate $1 million.

More here. I can think of a few more tweeters that I think should join in. And isn’t $1,000,000 a little low? How about $500,000,000?

An international charity calls for…. no more aid?

We don't need no stinkin' aid budget.

I stumbled upon this piece through Dambisa Moyo’s twitter feed, which seems to be entirely dedicated to linking to pieces which agree with her:

My proposal is simple, the Government should stop trying to manage international aid projects but should replace all its international aid with an additional GiftAid supplement for the UK’s International Aid charities. Then the giving public can decide the level and type of international aid, and both government and charities would save considerable administrative costs.

Yes, that’s Andrew Cates, CEO of the international charity SOS Children’s villages, actively calling for the elimination of the entire DFID budget to increase the tax incentives for people in the UK to give privately. It’s such a blatantly self-serving recommendation that I was forced to read it twice just to make sure I understood him correctly. His argument hinges on two assertions: that charities are more efficient than official donors (or recipient governments), and that

The public can choose charity projects which work.

Which, I’m afraid, should read: “the public will choose charity projects which are better at marketing.”

Check this space next week, where I will argue that the UK’s aid budget should replaced with scholarships for young development economists in the middle of their Phds.

Profiting off the poor

Writing on, Josh Berkman finds it unacceptable that ‘social entrepreneurs’ are making a profit off of an extremely poor consumer base:

In many cases, it’s fine to profit from good ideas that can help people, but I’d say there’s something wrong when your target consumer is living on less than two dollars a day and is spending well over half her income to feed her family. It’s not cool to set up shop in a slum or a village without running water in the homes and charge the very poorest residents for products and services they need. The driving ethos behind these so-called new do-gooders appears to be that nothing is free, even if your target consumer makes less in a year than what you paid for your laptop.

Berkman goes on to to suggest an alternative approach: helping local communities and businesses create beneficial projects which tackle the same problems. I disagree with Berkman’s assessment of social entrepreneurs, for several reasons:

The first is a reality check – while social entrepreneurs obviously have an altruistic objective, the sine qua non of their work is profit. However morally objectionable you might¬† find the idea of poor people purchasing goods and services, without the expected profit, many of those goods and services would no longer be available. Entrepreneurs aren’t sitting on huge piles of cash, just looking for ways to spend it: they have investors who will only commit when they smell a future return (even if they might accept a lower-than-average return for socially-beneficial enterprises). I’m friends with a social entrepreneur who runs a low-cost private school franchise in urban Kenya, where many extremely poor households send their children, glad to pay a low price to ensure a better education. Sans profit, his schools wouldn’t exist, and those families would have to make do with Kenya’s lacklustre public schools.

I sense that Berkman wishes that social entrepreneurship would look a little more like traditional aid and be driven solely by need and pure altruism. Unfortunately, most of aid never reaches those lofty expectations, and even if it did, the above argument still stands: this chunk of money follows profits, not need.

The neccessary synthesis is that profit and need are not mutually exclusive and may be more closely aligned than aid and need. The aid-giver’s dilemma is huge: identifying and meeting true need through a haze of mixed signals, political problems and changing priorities, then attempting to identify the impact of that aid by leaping back over the same hurdles.

The entrepreneur’s problem is much simpler: design and offer a product. If it is valuable to the poor then there will be demand and hopefully profits will ensue. If not, the product fails. Either way, all the risk (and the cash!) is borne by the entrepreneur, which creates enormous incentives to get things right.

One of the most persistent and important criticisms of the aid industry is that the beneficiaries are voiceless – there is no way for the poor to vote on moving money from one project (or donor!) to another. Donors and charities are often ignorant of this, because no one really complains about getting free stuff, whether or not it is the most appropriate assistance. In contrast, the poor vote for goods and services every day with cash from their meager budgets. This is an extremely strong case of revealed preferences: we don’t need to ponder whether or not wildly successful ventures like mobile phones or M-PESA are useful to the poor – their enthusiastic uptake says it all.

Some of Berkman’s concerns are well-founded – the private system is not comprehensive – especially for those most concerned with social protection:

What good is nutritionally enhanced food if the people who need it most can’t afford it when global commodities prices spike or a bad weather year in a far away country creates perilously low crop yields?

But this is where government and/or aid should certainly play a role. It’s perfectly possible for one to complement the other, such as through subsidies , public-private partnerships, and regulation. Social enterprises are never going to be great at providing certain public goods or dealing with externalities, but in the absense of functioning public alternatives there isn’t much room for criticism.

Entrepreneurship is not the ultimate solution to all our woes, but it plays an intriguing and perhaps crucial role in the big picture. I find it much more disconcerting knowing there are people out there wasting millions of dollars of aid money on bad projects than knowing that a few people make an honest buck on products that the poor value.