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A Lot of Aid Doesn’t Work. That’s a Reason for Reform, Not Retrenchment

October 22, 2013

<p>Angus Deaton&rsquo;s new book <a href="http://www.amazon.com/The-Great-Escape-Origins-Inequality/dp/069115354X"><em>The Great Escape</em></a>&nbsp; is a must-read for those interested in development simply because it is written by Professor Deaton, a world-leading expert in trends in global quality of life.&nbsp; I&rsquo;m not all of the way through it but have found it fascinating so far, including his argument that aid doesn&rsquo;t work (mostly). Add to the anti-aid pile another must-read by Bill Easterly, <a href="http://www.amazon.com/Tyranny-Experts-Economists-Dictators-Forgotten/dp/0465031250/ref=sr_1_1?s=books&amp;ie=UTF8&amp;qid=1381893437&amp;sr=1-1&amp;keywords=The+Tyranny+of+Experts"><em>The Tyranny of Experts</em></a>, which will come out in March 2014 and appears to involve a tripling down on his own argument that aid has failed.</p><p>When two people as luminary as Easterly and Deaton agree on something and you don&rsquo;t, that&rsquo;s a reason to check you aren&rsquo;t the one in the dark &mdash; or at the least not wearing rose-tinted Ray-Bans. But I do think the evidence shows that <a href="http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-4005">aid can and has worked</a>, even if much of it hasn&rsquo;t. Indeed, it may even be that <em>most</em> aid doesn&rsquo;t work, or at least is far from as efficacious as it might be.&nbsp; But that&rsquo;s a reason to focus on quality, not a reason to give up.</p><p>Much of the last 50 years of development economics has focused not only on &lsquo;how much&rsquo; but, critically, on &lsquo;how well.&rsquo;&nbsp; So, for example, you can have very high investment rates and <a href="http://www.sciencedirect.com/science/article/pii/S0304387899000474">absolutely dismal economic growth</a> if most of that investment goes to white elephants &mdash; or <a href="http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-2341">hardly functioning steel plants</a> in the case of Nigeria.&nbsp; And the economic returns to sticking kids in school can be dire if <a href="/publication/schooling-not-education-using-assessment-change-politics-non-learning">none of those kids learn anything</a>, not least because the educational returns to hiring more teachers or buying more books will make no difference if the teachers are unable or unwilling to teach.&nbsp; It would be surprising if the same general lesson didn&rsquo;t apply to aid.</p><p>And we know the quality issue is a big one for the aid sector.&nbsp; Just on the donor side, there&rsquo;s &lsquo;aid&rsquo; that&rsquo;s debt relief on loans that aren&rsquo;t being repaid, &lsquo;aid&rsquo; that&rsquo;s spent hiring third-rate consultants at home to provide unwanted advice to countries they&rsquo;ve never previously visited, &lsquo;aid&rsquo; that pays for domestic agricultural produce and shipping that sums to multiples of the cost of that produce in recipient markets, &lsquo;aid&rsquo; that pays for overstuffed bureaucracies mandating safeguards and processes that tie up recipient governments and slows down delivery.&nbsp; Then there&rsquo;s &lsquo;aid&rsquo; delivered to prop up friendly kleptocrats or buy seats on the Security Council or guarantee arms sales.&nbsp; And, of course, recipients use the outputs of aid projects no more &mdash; and probably less &mdash; effectively than they do investments generated by local funding.</p><p>These quality concerns matter ever more to aid impact because in terms of pure volume of resources aid is becoming ever less important.&nbsp; Government spending in developing countries now equals $5.9 trillion a year.&nbsp; That compares to DAC ODA of $0.15 trillion.&nbsp; Add in the issue of <a href="http://wber.oxfordjournals.org/content/12/1/29.abstract">fungibility</a>, and that means much aid effectively finances a small percentage of marginal investment projects on a government&rsquo;s wish list.&nbsp; You&rsquo;d hardly expect that to have a huge impact.</p><p>So how do you increase &lsquo;quality&rsquo; &mdash; by which I mean delivering aid that might make a meaningful impact?&nbsp; The results of the academic aid effectiveness literature to date have been only so much use. &nbsp;&nbsp;They <a href="http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-4005">suggest</a>, for example, that aid appears to more effective in promoting economic growth when given to richer countries currently receiving little aid, with stronger institutions and a healthy macroeconomic position.&nbsp; In other words, aid works best where it is least needed. &nbsp;&nbsp;</p><p>On the donor side, there is little hard evidence to confirm that the <a href="http://www.oecd.org/dac/effectiveness/parisdeclarationandaccraagendaforaction.htm">Paris agenda</a> &nbsp;has been the key to highly effective aid, although surely giving aid only where it is wanted, working transparently and in partnership, and focusing on results are all good things.&nbsp; <a href="http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2011/05/02/000158349_20110502085201/Rendered/PDF/WPS5646.pdf">Examination</a> of World Bank project performance, confirming the importance of &lsquo;good countries&rsquo; to project outcomes as measured by the Bank&rsquo;s IEG, also suggests that big, complex projects run by inexperienced task managers fail more frequently.&nbsp; But all of these factors together explain only 12 percent (approximately) of the variation in project outcomes.</p><p>So perhaps it is better to take a step back and ask, &lsquo;how do we make aid do more than finance a small percentage of marginal investment projects on the government wish list?&rsquo; &nbsp;&nbsp;I think the answer involves safety, leverage, and learning:</p><ul> <li> As the number of low-income countries with extremely limited domestic revenues falls, the plausible role for aid as the &lsquo;safety net provider of last resort&rsquo; in countries left behind actually grows.&nbsp; It&rsquo;s a role that aid already plays with vaccines, which helps explain why GAVI-eligible low-income countries <a href="/blog/new-bottom-billion-and-vaccination-part-ii">have higher vaccination rates</a> than do lower-middle-income countries.&nbsp; And it is a role that in the future might extend to <a href="http://www.foreignpolicy.com/articles/2011/07/18/the_price_is_right">$1.25/day poverty</a>.</li> <li> Outside those situations, aid will only have an impact if it leverages other spending, either in developing countries or at the global level.&nbsp; In developing countries, this likely involves leveraging private financing through guarantees and partial investments &mdash; as long as those investments <a href="/publication/moving-beyond-mines-and-mobiles-how-can-ifc-add-value-fragile-states">wouldn&rsquo;t happen anyway</a> &mdash; or leveraging more public investment through cash-on-delivery programs.&nbsp; Cash on delivery could perhaps be particularly aimed at global public good provision like lower pollution, reduced deforestation and unsustainable fishing, or reduced communicable disease spread.&nbsp; Another way for aid to have an outsized global impact is in the form of investment in and testing of new technologies for development: vaccines for neglected tropical diseases, robust forms of off-grid energy, drought resistant crops, and so on.</li> <li> Finally, aid might have a role in promoting learning.&nbsp; If we&rsquo;ve found one thing from 60 years of ODA, it is that there is no one-size-fits-all solution to development at the <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=252797">macro</a> or <a href="/sites/default/files/context-matters-for-size_0.pdf">micro</a> level.&nbsp; Knowledge is itself a global public good, and there&rsquo;s clearly a need for an immense amount more of it.&nbsp; Aid that tries new approaches, and properly evaluates them, is hugely valuable.</li></ul><p>The traditional investment project&ndash;driven model of aid looks increasingly irrelevant. Frankly, the evidence suggests it has never worked particularly well.&nbsp; That&rsquo;s why Bill Easterly and Angus Deaton can conclude aid is a waste of resources.&nbsp; But I&rsquo;d take away a different lesson.&nbsp; Aid can work, <a href="http://www.theatlantic.com/international/archive/2013/10/heres-the-best-thing-the-us-has-done-in-afghanistan/280484/">sometimes</a> <a href="http://www.amazon.com/Case-Studies-Global-Health-Essential/dp/0763746207/ref=pd_sim_b_7">spectacularly</a>.&nbsp; And if we refocused aid, we&rsquo;d see even more impact.&nbsp; So when it comes to evaluating aid, I think the key question is &lsquo;does it focus on safety, leverage, and learning?&rsquo; If not, it is likely grist for Deaton and Easterly&rsquo;s mill.</p>

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