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The Effectiveness of Foreign Aid

Discussants: Steven Radelet, Senior Adviser, U.S. Department of State, and William Easterly
Updated: December 1, 2006


In recent years, the dialogue over foreign aid has moved beyond the hallways of institutions like the World Bank and the International Monetary Fund square into popular culture and the marketplace. For example, the Bono-spurred (RED) campaign turns consumption of iPods and cell phones into charity and organizations like the Gates Foundation and have put a new spin on private-sector philanthropy. But government-funded aid agencies—USAID, the Millennium Challenge Corporation, the World Bank, and the Global HIV/AIDS initiative—continue to disburse the largest share of aid from the United States. All these entities operate under the assumption that their money will make a positive difference. Aid experts disagree on their impact.

Steven Radelet, senior fellow at the Center for Global Development and former deputy assistant secretary of the U.S. treasury for Africa, the Middle East, and Asia, debates the effectiveness of foreign aid with William Easterly, professor of economics at New York University, author of The White Man’s Burden, and former research economist at the World Bank.

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William EasterlyMost recent

December 1, 2006

William Easterly

It is great that Steve reminded us the world is a complex place. The people who really need to hear his message of complexity are the aid planners who think they can transform the complex societies they don’t understand from the outside through an injection of money into the complex politics they don’t understand. Someone who thinks outside aid can permanently raise a country’s entire growth rate, against all evidence, clearly does not get complexity. Someone who recommends that hundreds of aid officials, administrators, and foreign experts devise hundreds of integrated and coordinated programs (roads, immunization, teachers, wells, raising GDP [gross domestic product] growth, grain mills, “PRSPs” [Poverty Reduction Strategy Papers], clinics, microfinance, oral rehydration therapy, “development strategies,” Millennium Development Goals) clearly does not get complexity. Such a bureaucratic approach has never ended poverty and never will.

How do rich societies solve these problems? Well-developed free markets and democracy, with property rights and individual freedoms, simplify the task for each actor. The firm supplies a specialized product, say grain mills (you can get a small hand-powered one online), to its consumers, and gets held accountable if grain mill consumers are unhappy—they stop buying the product, they return them to the store, the firm is threatened with its extinction if it doesn’t get its act together. The elected politician supplies roads, or teachers, or water supply to the voters, each done through a separate bureaucracy specializing in that task with nary a PRSP in sight, and if the voters are unhappy they vote the bums out of office. The bums try to prevent this debacle by making sure the specialized bureaucracies keep the voters happy with roads, water, and teachers (ever been to a PTA meeting when something has gone wrong in the school?). In short, rich societies work (not perfectly, but well enough to be rich) because of the decentralized way that complex problems are simplified— everyone has a specialized role and incentives and accountability to play that role reasonably well.

What a contrast with the world of foreign aid! Each foreign aid bureaucracy is responsible for everything, all the aid bureaucracies together are collectively responsible for all this “everything,”and in this bureaucratic maze with no exits, nobody is individually responsible for anything. All an aid critic asks is that there be REAL accountability, not the meaningless kind that the eternally clueless aid agencies talk about when they collectively set big Goals with no consequences when the Goals are not met. All one can ask is that somebody in the aid system takes individual responsibility for seeing that oral rehydration salts reach dying babies, that twelve-cent doses of medicine reach dying malaria victims, that wells get drilled and maintained to give clean water so babies don’t get sick in the first place. With individual accountability, Searchers in foreign aid will find a way to make these things work.

How can we think that aid accomplishing such modest tasks will bring an end to poverty? We can’t. Although aid performing these tasks well would do much good for the poor, it is a fallacy to think that overall poverty can be ended by a comprehensive package of “things,” like malaria medicines and clean water. The complex poverty of low-income societies will slowly give way to prosperity the same way it happened in rich countries, through the gradual homegrown rise of political and economic freedom. This is NOT an easy quick fix—“democracy” and “free markets” evolve from below with a lot of supporting social norms and institutions, they cannot be imposed from the top by the IMF [International Monetary Fund], World Bank, or U.S. Army. But there is good news—such evolution of freedom from below, and the concomitant decline of poverty, is already happening in many places. And until the benefits of freedom arrive for the poorest people in the world, let the aid agencies be held accountable for seeing that the $100 billion in annual foreign aid does finally reach the poor.

Steven RadeletNovember 30, 2006

Steven Radelet

Bill deserves credit for tirelessly pointing out the weaknesses with aid, and for proposing some innovative solutions. And there is something appealing about the simple clarity with which he sees the issues. Aid is a failure. Aid programs equal the Big Push. Seekers win; planners lose. PRSPs [Poverty Reduction Strategy Papers] are central planning.

But unfortunately the real world won’t cooperate with simple absolutes. We need to condemn where aid has failed, but we also need to build on rather than just dismiss where it has succeeded, and where new initiatives show promise. Take the countries that have introduced PRSPs, which Bill maligns as failures of planning. Forty countries have adopted PRSPs since they first appeared in 2000. But far from failure, the average post-PRSP growth rate for those countries through 2004 was 5.9 percent per year, and for nineteen African countries with PRSPs it was 5.7 percent. Those countries received average aid flows of 12 percent of GDP [gross domestic product] per year. Now, I am not claiming that PRSPs are fabulous (some are pretty weak) or that the PRSP documents themselves are the cause of this growth. But I am worried about back-handed dismissals: Those forty countries are doing something right with their development strategies, and I can’t imagine how their progress and the supporting aid programs can be just written off as total failures.

Popular economics discussions are prone to simple absolutisms that don’t hold up in the real world, such as “free markets are good,” and “government intervention is bad.” But as with the age-old debate about the proper role of markets and states, simple absolutes on either extreme like “aid is a failure” or “aid is the miracle answer” don’t help policymakers in the real world get very far. Bill suggests I am engaging in diplomatic compromise and finding middle ground to keep everyone happy, but recognizing the reality of the complex world has nothing to do with diplomatic compromise, any more than recognizing that markets often work, but not always. We need to step away from the simple absolutes on both ends of the aid debate, and instead work hard to better understand where aid works and where it doesn’t. This is the essential starting point for figuring out how to make it work even better.

Bill correctly argues that we should not hide aid failures behind establishment clichés, and I couldn’t agree more. But we must also embrace and learn from the successes, whether it was Indonesia’s government-planned school expansion program (PDF), Muhammad Yunus’s bottom-up microfinance program, Egypt’s well-planned oral rehydration program, or Mozambique’s amazing fifteen-year record of nearly 8 percent growth, all supported by aid programs.

We need to allocate more aid to countries that are implementing sensible development strategies, like many of those forty countries with PRSPs. We should get more of it to local communities to decide how best to use it so they can hire or fire a teacher, sink a well, buy a grain mill, or build a clinic. We can support well-developed—dare I say it—plans and strategies to build rural road networks to connect the poor to markets (which have high rates of returns), or to scale-up nation-wide immunization programs, which have saved millions of lives. Whatever the activity, donors and recipients need to establish clear goals, announce them publicly, and be held accountable through independent evaluation. Let’s stay away from the simple absolutes on either end of the debate. Instead let’s learn from the failures and build on the successes, and not be afraid to recognize either.

William EasterlyNovember 29, 2006

William Easterly

Steve continues to offer the statesmanlike middle ground of the development establishment. The same carefully hedged statements are offered by the top-down planners who have given us the Millennium Development Goals campaign, the centerpiece of the modern aid effort, which Steve diplomatically refrains from commenting upon. Alas, if only the right buzzwords alleviated poverty, poverty would have ended long ago.

I ask instead, when are aid advocates going to get angry that the bulk of foreign aid fails to reach the poor? Steve clings to the traditional case for aid working, now adding the much-cited Green Revolution to the list of the same few successes that have been repeated over and over again by the defenders of the aid establishment.

As for Big Pushes, the aid flows were certainly large to many of their recipients. The quarter of countries with the highest aid got on average 16 percent of their Gross National Income for the past forty-two years, year in and year out. Their average growth rate of income per head over that period: 0.4 percent per year. Similar numbers apply to Africa as a whole. Systematic testing would not just count the alleged “success stories” of aid, but also the larger number that got the same amount of aid as the “success stories” and failed: Guinea-Bissau, Somalia, The Gambia, Mali, Rwanda, Nicaragua, Burundi, Guyana, Zambia, the Central African Republic, Senegal, Suriname, Chad, Niger, Togo, Haiti, and so on. Further testing shows that these outcomes were not an artifact of selection bias or reverse causality. (If you’ll forgive an anecodotal aside, I get a steady stream of emails from knowledgeable people in aid- recipient countries like Haiti and numerous African countries complaining that they see little evidence of the aid flows being directed their way.) At the most intuitive level, the Big Push certainly failed to meet the grandiose expectation that it would lead to development.

What’s sad is that the Big Push has been discredited in the academic literature for decades now, yet somehow it has made a reappearance in aid policy in the twenty-first century. Likewise, central planning lite seems to be back in vogue for the poor countries, seventeen years after the collapse of centrally-planned economies in Eastern Europe. The Poverty Reduction Strategy Papers (PRSPs in aid jargon) are foisted on the poor countries, including the long-suffering Liberians, who surely have better things to do than placate the aid donors with a PRSP. In what other fields would old failed ideas reappear as the basis for policy? Alas, the poor get the worst of everything, including the worst economics.

Should we aid commentators in the rich countries hide these failures behind a judicious screen of establishment clichés? Or should we say "Enough is enough," and hold aid agencies accountable for failed approaches? Should we demand that aid money be taken away from the old failed “planners” and be used to scale up the effective things that “searchers” have found, like the Progresa program in Mexico—cash transfers to families conditional on children’s school attendance and health checkups? It’s easy to reach a diplomatic consensus that leaves all the aid donors satisfied, but I would prefer to see the real customers satisfied—the poor.

Steven RadeletNovember 28, 2006

Steven Radelet

I agree with Bill on some of his proposals for strengthening aid. But characterizing past aid efforts as “failed Big Pushes” isn’t accurate, for two reasons. First, aid amounts have not been that big. Bill cites $2.3 trillion over fifty years, which sounds huge, but it translates to $46 billion a year, a modest amount for any global capital flow. Only about $26 billion per year went to low-income countries (as opposed to middle-income ones). This works out to be fourteen dollars per person per year in low-income countries—not exactly winning the lottery.

Second, as I wrote earlier, while the record on aid is not a huge success, it is not a complete failure, either. Millions of people were lifted out of poverty in large aid recipients such as [South] Korea, Taiwan, Botswana, Indonesia, and more recently, Mozambique and Tanzania, and (since Bill goes back fifty years) through aid investments in the “Green Revolution” that massively increased agricultural productivity. Bill rightly laments that millions still die from disease, but the fact is that millions now live because of routine child immunizations, the spread of oral rehydration therapy, and other interventions documented in the book Millions Saved. A fair grading would probably give aid a B- or so—clearly not an A+, but not an F either. The real record is that modest amounts of aid have brought about modest improvements on average, with some important successes alongside some sad failures.

Going forward, we must, as Bill argues, get more money directly to the people that need it most, and give more local control to development funding. Local communities should be able to hire and fire teachers, decide how to allocate their budgets between books and benches, and hold teachers and school administrators responsible.

But broader planning and strategies have their role as well. Indeed some of aid’s biggest successes were the result of large-scale, top-down planning and execution, including the Green Revolution, the eradication of small pox and near eradication of polio, and nation-wide immunization programs. I spend a lot of time working with the new government of Liberia—seven trips in the last year—and its reconstruction after years of destruction and civil war would not be possible without nationwide strategies on where to build roads, how to reconnect power grids, and how to get seeds and fertilizers to returning refugees. More local control is sorely needed, but it needs to be complemented with sound development strategies and the appropriate level of larger scale investments in public goods, as experience in more successful countries has shown.

Aid agencies need to better allocate funds to countries that are seriously committed to development. They need to move away from one-size-fits-all approaches, and work differently across countries. Finally, I could not agree more with establishing an independent evaluation mechanism, something the Center for Global Development has advocated for some time. Aid agencies need to set clear goals for their projects and programs, announce these publicly, and be evaluated independently on their progress. Only then will we create the right incentives for success, and learn better what works, what doesn’t work, and why.

William EasterlyNovember 27, 2006

William Easterly

Steve’s intentions to find a reasonable middle ground in foreign aid are laudable. Unfortunately, the foreign aid system itself won’t play along and be reasonable. The system keeps going back to the same failed ideas that prevent most aid money from actually reaching the world’s poor. The “Big Push” of large aid increases to launch countries out of poverty remains a popular idea in important UN aid efforts and the Blair Commission for Africa, despite fifty years and $2.3 trillion worth of failed Big Pushes. Top-down planning by experts remains a favorite approach, as embodied in the World Bank/International Monetary Fund Poverty Reduction Strategy Papers (PRSPs)—explained in the 1,260 page PRSP Sourcebook—despite years of experience that shows planners at the top don’t have enough feedback from the poor, incentives for implementation, or accountability for results to make the plans work.

The final reductio ad absurdum is the Millennium Development Goals (MDGs) campaign, currently occupying center stage in foreign aid, which features collective responsibility of all actors for fifty-four different targets to be reached in every country by the year 2015. The United Nations and the World Bank have already admitted the MDGs exercise will fail in Africa, the most aid-intensive region; previous UN-sponsored International Goals also failed with nobody held accountable. The MDGs lead to such outlandish efforts as the UN Millennium Project’s 449-step comprehensive strategy to reach the MDGs and the World Bank’s elaborate costing exercise as to how much more aid is needed to reach the MDGs. All such exercises are seemingly oblivious to the much documented weak link between spending and results, such as the 30 percent to 70 percent of government-provided medicines that disappeared before reaching patients in surveys of low-income aid recipients. 

In the bureaucratic hall of mirrors that is foreign aid, nobody is individually responsible for any one result. So despite $100 billion in foreign aid in 2005, one million children died from diarrhea due to lack of ten-cent oral rehydration salts and more than one million died from malaria due to lack of medicine that costs twelve cents a dose—and nobody is held accountable for these failures. In the aid world we actually have, genial complacency is not the right response.

The right response is to demand accountability from aid agencies for whether aid money actually reaches the poor. The right response is to demand independent evaluation of aid agencies. The right response is to shift the paradigm and the money away from top-down plans by “experts” to bottom-up searchers—like Nobel Peace Prize winner and microcredit pioneer Mohammad Yunus—who keep experimenting until they find something that works for the poor on the ground. The right response is to get tough on foreign aid, not to eliminate it, but to see that more of the next $2.3 trillion does reach the poor.

Steven RadeletNovember 27, 2006

Steven Radelet

Bono, Angelina, Brad, and Oprah have made aid and development cool stuff in recent years. Despite some glitz, overall this is a good thing—lots more Americans are now more aware of global poverty. But unfortunately the debate has been polarized by two extreme views, neither of which is fully accurate. Some claim that aid rarely does any good, with ineffective bureaucracies giving aid to consultants and corrupt dictators rather than to those that could use it well. Others claim that aid does a world of good, and that just rapidly scaling up aid would make all the difference in denting world poverty.

Most development practitioners and researchers don’t fully buy either argument. While there is some truth in each, the accumulated evidence suggests a much more nuanced picture in which overall aid has done a fair amount of good in many countries despite its failures in others, and that increased aid can do more if we improve how we give it.

There is no question that too much aid has gone to plundering dictators like Jean-Bédel Bokassa [Central Africa Republic], Ferdinand Marcos, and Baby Doc Duvalier [Haiti], or otherwise wasted on bad ideas badly implemented. And average income in Africa is about the same as it was two generations ago. But that is just one part of the story.

Millions of lives have been saved through large-scale health interventions, many of them supported by aid programs. Routine immunizations save three million lives every year, small pox was eradicated, polio has been nearly eradicated, and there has been enormous progress in fighting river blindness, guinea worm, diarrheal diseases, and others. Life expectancy has gone up around the world.

On economic growth, despite popular misconceptions, the vast bulk of research over the last decade has found that while aid is not the most important ingredient in stimulating growth, overall it has had a modest positive impact. Sure, lots of countries have done poorly. But several large aid recipients have done well, including Korea, Botswana, Taiwan, and more recently Mozambique, Ghana, and Tanzania. Egypt and Pakistan have tripled their incomes. The few studies that find no relationship between aid and growth are fragile, and rely on special and unrealistic assumptions, such as that each dollar of aid has the same impact with no diminishing returns, and that all aid is the same whether it is used to build roads or buy food for refugees.

Going forward we need to move beyond the bashing and the rah-rah and honestly learn from both aid’s successes and its failures. The real challenges are to find hardheaded solutions to make aid more effective, and to get more of it to those that can use it well.

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