Is aid a waste of time and money?
In his comment on my post about Ethiopian famine relief in the 1980s, Patrick acknowledged that different countries within Africa needed different solutions to their problems and that short-term emergency famine relief aid ought not to be condemned for failing to have long-term development benefits. He went on to note some specific criticisms of development aid that seemed to him to be more serious. I reproduce them here with my own comments, and also comments by Owen Barder, who is on temporary unpaid leave from a senior job in the UK Department for International Development and is currently working in California for the Center for Global Development – and thus a great deal more up-to-date on aid matters than me (my last active involvement in aid matters ended in 1991).
[P:] Aid being siphoned off by corrupt governments & officials thus aiding those that may be ‘part of the problem’.
[BB:] When I was involved in aid matters, more than a decade ago, a high proportion of our emergency and development aid was in effect given in kind, the money being spent directly on the goods and services used in specific aid projects. This leaves relatively little scope for money to be siphoned off to line the pockets of local politicians or officials, especially as most projects of this kind would be monitored and supervised by British aid officials on the spot. However we were also giving money as such to some countries, e.g. in balance of payments support. In those cases we would generally agree a programme of imports needed for development and needing to be financed by foreign currency, ensuring so far as possible that these were additional to the country’s regular imports and development purchases. We would transfer the funds only on production of the relevant invoices and we would collect and scrutinise the receipts. But since money is fungible, it was never possible to be 100 per cent sure that some part of the funds released by our own foreign currency grants could not be drained off in local corruption. Insistence on real additionality helped to keep this to a minimum.
[OB:] A large and increasing amount of aid is nowadays given as budget support, either through the Finance Ministry or direct to Government Departments (eg Health etc). However, this aid is accompanied by what is known as a "fiduciary risk assessment" which is intended to provide some reassurance that the aid will be used for the purposes for which it was intended. See http://tinyurl.com/b2u45 for details. This has the merit that it forces donors to look carefully at the arrangements for accounting for public funds, and ensuring there are proper systems for audit and accountability; no longer can donors ignore the possibility that public officials may be siphoning off public funds, as their own funds are mixed in the same system. (In the old days, if donors paid for schools or roads, this released expenditure pressures which could allow corrupt officials to siphon off other revenues – eg domestic taxes, telecoms revenues etc.)
Donors are pretty careful to ensure aid is not siphoned off. There was a lot more of that sort of thing during the cold war, when the main purpose of aid was to support particular governments, rather than reduce poverty.
[P:] Distortion of the local economy.
[BLB:] My impression is that the bulk of western aid nowadays is designed to strengthen, not distort, the local economy — although emergency food aid almost unavoidably does have some distorting effect, and of course US (and EU) dumping dressed up as aid inevitably distorts. In the case of the food aid given by the whole international community to relieve the Ethiopian famine in the 1980s, there was no serious distortion of the local economy, because local food had virtually disappeared from the markets in the famine areas after three successive years of major drought, affecting (most unusually) virtually the whole of the country. A good deal of the food aid given by western and other countries for famine relief was distributed as payment for labour in food-for-work programmes, in which Ethiopians were employed on irrigation and other water projects, re-forestation, etc., and received part of their payment in relief food aid, thus using the imported donated food as a means of stimulating a revival of local farming in the medium term. This could be regarded as a kind of beneficial distortion.
[OB:] Dumping food aid definitely distorts the local economy and should only be used in extreme circumstances. Large aid inflows can also lead to an appreciation of the exchange rate (eg Uganda) which can lead to a shift in the terms of trade against the domestic export sector. But the benefits unambiguously outweigh the costs (see paper at http://tinyurl.com/9nakm for an explanation of why).
[P:] Tied aid being used by donor governments to further foreign-policy objectives & support various industries.
[BB:] During my time serving in developing countries, I and some others repeatedly urged our political bosses to reduce and eventually terminate the reprehensible practice of ‘tying’ our aid to the purchase of goods and services from the donor country, and to encourage other donor countries to do the same thing. There was (perhaps naturally) some opposition to this from the Department of Trade and Industry which argued that we should untie our aid only if other donors were also untying their aid: otherwise British taxpayers’ money would inevitably tend to be spent on imports from other countries which continued to tie their aid, and our suppliers and exporters would be unfairly disadvantaged. There was some progress in untying UK aid in my day, but not much.
[OB:] All UK aid is now untied; and it is now illegal for the UK aid budget to be used for any purpose other than the reduction of poverty (International Development Act of 2002). All industrialised countries have committed to untying aid; most of the others have not done it as completely as the UK.
[P:] Are these criticisms valid, & if so are there any solutions to them? I would be extremely interested to read your opinions.
[OB:] My collection of evidence that aid works (so far) is here: http://tinyurl.com/d5ouc.
[BB:] No system is completely fool-proof, and the ingenuity employed in trying to divert money and resources into private pockets is phenomenal: if that energy and imagination were to be applied to making the country concerned more prosperous, aid would be virtually unnecessary! But times have changed since donors used simply to hand over the cheque and keep their fingers crossed about the way the money was spent — as I hope the foregoing comments help to demonstrate.