Dilemmas of development aid

Like other areas of public policy, development aid has had its recurrent fads. The pendulum has swung from socialist-style big-push schemes to pro-market reforms and their latest iteration, results-based aid. This micro-oriented approach has come under attack for neglecting the wider “macro” environment of states and institutions.

Meeting of the High Level Forum on Trade Effectiveness in Busan, South Korea
“Mutual accountability” and “harmonization” were the watchwords in 2011, when aid and development officials from 160 countries deliberated in Busan, South Korea. © dpa

In a nutshell

  • Studies show no clear link between aid and growth, unless institutions are strong
  • Bottom-up, market-based, “accountable” projects were in vogue in the 2000s
  • Lately institution-building and geopolitically-motivated assistance have been stressed

In a recent plea, several economists, including Nobel Prize winners Joseph Stiglitz, James Heckman and Angus Deaton, called for a change in the current thinking about foreign aid and its allocation to poor countries. They criticized official development assistance (or ODA, as opposed to emergency humanitarian aid) for its recent tendency to focus almost exclusively on effectiveness and micro-projects that deliver a measurable (but still micro) impact in the short term.

Accountability certainly matters, but according to this critique, the main issue is that the international aid system is broken. To fix it, strategies should focus on “macro” policies and institutional reforms. These include “social protection” measures, including funding for universal education and healthcare; curbing protectionist subsidies in rich countries and land grabs in poor countries; discouraging tax avoidance by big corporations in the developing south; and establishing stricter regulations on labor markets.

While some of these criticisms and policy proposals sound sensible, others might prove overrated on closer inspection. Still, there is no question that the authors are right in insisting that some of the problem lies in the developed north, where misguided policies (such as farm subsidies) need to be changed.

There is also little doubt about the importance of “macro” or institutional reforms in the poor countries. It is widely accepted that the institutional framework is a crucial determinant of growth and development trajectories. But are these economies and societies so easily changed by redirecting development aid from micro to macro projects? Large-scale development strategies have been tried in the past, most often with little success.

Aid debates

Like any other area of public policy, development aid has had its recurring fads. The pendulum has swung from “big push” strategies to structural adjustment programs, from socialist-style development schemes to supposedly pro-market reforms, and from agriculture-first to industry-led approaches. In recent decades, the dominant philosophies have been project-based financing and NGO support (in the 1990s), general budget support (in the 2000s) and results-based aid (in the 2010s).

Many studies show that aid does not affect economic growth, except when local institutions are of good quality.

Some economists insist that aid has made a positive contribution to reducing poverty. Others doubt that it has been effective in spurring economic development or deny the benefits of aid altogether. Many comparative studies based on cross-country regressions show that, on average, aid does not affect economic growth, except when local institutions are of fairly good quality. From this, proponents of “selective conditionality” conclude that development aid should not be directed to fragile political environments. Since these are usually to be found in the poorest countries, this raises the question of whether the neediest are least deserving of aid.

Even today’s econometric techniques have not helped resolve this dispute, perhaps because it is difficult to obtain reliable data. But the very fact that specialists have been debating the outcome of development aid strategies for several decades is probably a sign that their real-world benefits are not self-evident. Given the complexity of the problems involved, this is hardly surprising, and suggests that there are no quick or simple fixes to the “broken aid system.”

Is effectiveness effective?

After years of politically-motivated spending, especially during the Cold War, it seemed logical to make aid agencies and recipient governments accountable for the taxpayer money they spent.

The High Level Fora on Aid Effectiveness organized by the Organisation for Economic Co-operation and Development (OECD) in Rome (2003), Paris (2005), Accra (2008) and Busan (2011) had some influence on the way aid was delivered over this period. The Fora stressed the need for recipient governments to “own” their development strategies and for donors to be “aligned” and “harmonized” with each other and aid recipients, resulting in “mutual accountability” with measurable results. Despite these admonitions, it seems that most of the target indicators were not met.

The real way aid gets delivered is through bargaining between donor agencies and recipient governments.

One could argue that the obsession with one criterion of effectiveness undermined effectiveness in the broader sense. It is also possible that pursuing effectiveness as a goal was quixotic from the start, given local competencies and aid practices on the ground.

Poorly educated local officials are not suited to filling out hundreds of pages of evaluation forms. The real way aid gets delivered is through bargaining between donor agencies and recipient governments – in other words, through compromise. This does not sit well with strict notions of efficiency. But compromise is what the “aid relation” between donor and recipient is all about, in a context of uncertain credibility on both sides.

Knowledge problems

There are even deeper “knowledge” issues. A decade ago in his book, The White Man’s Burden (2007), former World Bank economist William Easterly insisted that one crucial issue for development planners using aid is the age-old knowledge problem, which is also faced by central planners in socialist economies. How can aid planners – along with recipient governments – really know local needs and priorities? How can the genuinely needy know where to ask for help? How can various projects from different agencies or charities be effectively coordinated? What yardstick(s) should be used to evaluate whether projects are doing good, and who should be held responsible for the successes and failures? How to make sure aid is reaching the truly needy?

These are tough questions. Given this knowledge problem, Professor Easterly favored “searchers” over “planners,” preferring humble entrepreneurs who bring solutions to small problems over large-scale “social engineers.” Not surprisingly, the New York University economist’s emphasis in 2007 was on economic freedom – a bottom-up approach to development – rather than “big aid.” More recently, he has warned about how the purely technical, top-down approach to development aid leads to a “tyranny of experts” who turn a blind eye to the misdeeds of the dictators and rogue governments ruling the countries they are supposedly aiding. In the process, Dr. Easterly argues, these experts simply ignore the real foundation of development: winning rights for the poor to exercise their personal, political and economic freedoms.

German Development Minister Gerd Mueller visits a clothing factory in Ethiopia
April 4, 2017: German Economic Cooperation and Development Minister Gerd Mueller poses with garment workers in Addis Ababa, Ethiopia. Despite its altruistic image, development aid can generate perverse incentives for providers. © dpa

In this view, insisting on technical accountability for aid projects – with a narrow focus on objectives and measurement – completely misses the larger issue of government accountability. An example is the increased technical aid given to Ethiopia in the late 1990s and 2000s, under the rule of Prime Minister Meles Zenawi (1995-2012). At the time, Microsoft founder Bill Gates and former British Prime Minister Tony Blair praised the Ethiopian leader for reducing infant mortality – a clear objective with measurable outcomes. But while reducing infant mortality is certainly praiseworthy, they overlooked that Zenawi’s government was also starving its own people for political ends.

The aid business

Accountability has not exactly been a hallmark of the “aid industry” and its clients. Back in 1989, Graham Hancock, a former aid worker, was angrily writing his Lords of Poverty, depicting his former professional milieu as being very far from its altruistic image. Aid can indeed generate perverse incentives for its providers. Until recently, the various aid bureaucracies, lacking performance indicators and independent feedback mechanisms, had not been held accountable for the outcomes of their actions paid for by taxpayer money.

Aid organizations have habitually applied classic bureaucratic logic: making sure to spend their entire budgets even if the funds are wasted, for fear that donors might cut future contributions otherwise. Empire building is also the norm, as organizations try to maximize their budgets by showcasing high-visibility projects (such as water management in Africa), regardless of their real sustainability or usefulness. Projects often have open-ended, impossibly ambitious objectives, which support continual pleas for more resources. This is a self-legitimizing exercise only reinforced by the genuine, enduring misery of the world’s poor.

Even when aid workers behave on altruistic grounds, their agencies probably do not. The same goes for donor and recipient governments.

Such institutional incentives do not normally foster accountability or effectiveness. Even when aid workers behave on altruistic grounds, their agencies probably do not. The same goes for donor and recipient governments.

Quite often, development aid is used as a geopolitical tool to promote a nation’s strategic and economic interests. Effectiveness is an afterthought at best. Aid is a means of exchange that can be bartered for such things as support at the UN, access to natural resources, purchases from the donor country (through so-called tied aid and expensive “technical assistance”), arms deals, or partnership in “the war on terror.” More broadly, aid helps leading powers widen their spheres of interest, as a quick glance at the biggest donors (the United States, China, France, Germany, Russia and the United Kingdom) shows. France’s dodgy relations with its former African colonies (especially during the Cold War) come to mind, as does the U.S.’s constant flirting with a select group of autocracies.

Poor parodies

Western donors have shown sympathy for the world’s worst dictators. In such cases, as Zambian economist Dambisa Moyo describes in her study Dead Aid, development aid not only creates dependency but enables corrupt governments to stay in power against the will of their people. It even encourages them to maintain misery as a way of justifying the aid flow. These governments have little incentive to reform and open their economies to general prosperity. When a government relies on foreign aid, instead of tax revenue, for a large chunk of its budget, it becomes harder for citizens to hold their government accountable, removing an essential foundation for the rule of law.

Since the fall of the Berlin Wall, the West has tried to impose a quid pro quo of democratic elections in exchange for aid. Unfortunately, this well-intended policy has had unintended consequences. As the Oxford economist Paul Collier recently noted, the need for political order is especially strong in fragile environments. Yet elections produce winners and losers, not power-sharing structures. This breeds conflict and corruption, which undermine the rule of law. The West’s old reflex of prescribing a “copy-paste” of its own institutions in an alien context can end up being counterproductive.

Western donors are often dissatisfied with the results of democratic elections (think of Tunisia or Egypt after the Arab Spring) or prefer to support long-time strongmen such as Egypt’s Hosni Mubarak (1981-2011), Cameroon’s Paul Biya (1982-present), Republic of Congo’s Denis Sassou Nguesso (1979-1992 and 1997-present) and Chad’s Idriss Deby (1990-present) for the sake of political stability – even if it contradicts their pleas for democracy. In the same vein, donors often insist on reforms as a condition for aid, even when it is obvious that recipient governments and bureaucracies are incapable of implementing them. The process becomes a parody on both sides.

Two trends

Given these drawbacks, future approaches to “development cooperation” will probably depart from the traditional aid model. Some trends are already visible and will probably gain prominence.

Over the past decade, traditional donors have had to adjust themselves to competition from rising powers, especially China. For example, the Busan Forum in 2011 was forced to de-emphasize some aid “targets” to get these players on board with the 2005 Paris Declaration on Aid Effectiveness. While the advent of new donors may not always favor accountability and transparency, it does help build more infrastructure in poor countries, which helps their economies grow and trade.

The private sector is the surest vector of development, but mixing public and private money often breeds cronyism.

Given China’s geopolitical ambitions, this trend will likely continue. It certainly gives new leverage to strongmen in poor countries, since they can “shop around” and play donors against each other, threatening to switch to another sphere of influence as in the good old days of the Cold War. It is not yet clear just how disruptive this “South-South” nexus will be to the geopolitics of the traditional global powers, or whether it will produce a peaceful system of “multipolar” development cooperation in the long run.

A parallel trend, seemingly inspired by the first, is for Western donors (especially the U.S. and the UK) to place less emphasis on effectiveness and more on “aid for trade.” The objective is to develop poor countries’ trading capacity so they can benefit from global markets. This strategy focuses on improving conditions for the private sector, especially in energy and transport infrastructure, along with providing enhanced “development finance.”

While this sounds like a very good idea for boosting long-term growth, some issues remain. One is that the strategy reduces the “ownership” of recipient governments and might spur their resistance, which would destroy effectiveness. For example, the World Bank’s new strategy of “de-risking” fragile countries to lure private investors has already been criticized as a form of “neo-paternalism” by critics on the left.

Some, like economist Paul Collier, insist that aid money should be used to get pioneering firms to go and create new markets in fragile states. While there is no doubt that the private sector is the surest vector of development, mixing public and private money often multiplies the risk of cronyism and “socialization” of losses – not the best recipe for accountability.

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