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

Angus Deaton’s new book The Great Escape  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.  I’m not all of the way through it but have found it fascinating so far, including his argument that aid doesn’t work (mostly). Add to the anti-aid pile another must-read by Bill Easterly, The Tyranny of Experts, which will come out in March 2014 and appears to involve a tripling down on his own argument that aid has failed.

When two people as luminary as Easterly and Deaton agree on something and you don’t, that’s a reason to check you aren’t the one in the dark — or at the least not wearing rose-tinted Ray-Bans. But I do think the evidence shows that aid can and has worked, even if much of it hasn’t. Indeed, it may even be that most aid doesn’t work, or at least is far from as efficacious as it might be.  But that’s a reason to focus on quality, not a reason to give up.

Much of the last 50 years of development economics has focused not only on ‘how much’ but, critically, on ‘how well.’  So, for example, you can have very high investment rates and absolutely dismal economic growth if most of that investment goes to white elephants — or hardly functioning steel plants in the case of Nigeria.  And the economic returns to sticking kids in school can be dire if none of those kids learn anything, 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.  It would be surprising if the same general lesson didn’t apply to aid.

And we know the quality issue is a big one for the aid sector.  Just on the donor side, there’s ‘aid’ that’s debt relief on loans that aren’t being repaid, ‘aid’ that’s spent hiring third-rate consultants at home to provide unwanted advice to countries they’ve never previously visited, ‘aid’ that pays for domestic agricultural produce and shipping that sums to multiples of the cost of that produce in recipient markets, ‘aid’ that pays for overstuffed bureaucracies mandating safeguards and processes that tie up recipient governments and slows down delivery.  Then there’s ‘aid’ delivered to prop up friendly kleptocrats or buy seats on the Security Council or guarantee arms sales.  And, of course, recipients use the outputs of aid projects no more — and probably less — effectively than they do investments generated by local funding.

These quality concerns matter ever more to aid impact because in terms of pure volume of resources aid is becoming ever less important.  Government spending in developing countries now equals $5.9 trillion a year.  That compares to DAC ODA of $0.15 trillion.  Add in the issue of fungibility, and that means much aid effectively finances a small percentage of marginal investment projects on a government’s wish list.  You’d hardly expect that to have a huge impact.

So how do you increase ‘quality’ — by which I mean delivering aid that might make a meaningful impact?  The results of the academic aid effectiveness literature to date have been only so much use.   They suggest, 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.  In other words, aid works best where it is least needed.   

On the donor side, there is little hard evidence to confirm that the Paris agenda  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.  Examination of World Bank project performance, confirming the importance of ‘good countries’ to project outcomes as measured by the Bank’s IEG, also suggests that big, complex projects run by inexperienced task managers fail more frequently.  But all of these factors together explain only 12 percent (approximately) of the variation in project outcomes.

So perhaps it is better to take a step back and ask, ‘how do we make aid do more than finance a small percentage of marginal investment projects on the government wish list?’   I think the answer involves safety, leverage, and learning:

• As the number of low-income countries with extremely limited domestic revenues falls, the plausible role for aid as the ‘safety net provider of last resort’ in countries left behind actually grows.  It’s a role that aid already plays with vaccines, which helps explain why GAVI-eligible low-income countries have higher vaccination rates than do lower-middle-income countries.  And it is a role that in the future might extend to $1.25/day poverty.
• Outside those situations, aid will only have an impact if it leverages other spending, either in developing countries or at the global level.  In developing countries, this likely involves leveraging private financing through guarantees and partial investments — as long as those investments wouldn’t happen anyway — or leveraging more public investment through cash-on-delivery programs.  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.  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.
• Finally, aid might have a role in promoting learning.  If we’ve found one thing from 60 years of ODA, it is that there is no one-size-fits-all solution to development at the macro or micro level.  Knowledge is itself a global public good, and there’s clearly a need for an immense amount more of it.  Aid that tries new approaches, and properly evaluates them, is hugely valuable.

The traditional investment project–driven model of aid looks increasingly irrelevant. Frankly, the evidence suggests it has never worked particularly well.  That’s why Bill Easterly and Angus Deaton can conclude aid is a waste of resources.  But I’d take away a different lesson.  Aid can work, sometimes spectacularly.  And if we refocused aid, we’d see even more impact.  So when it comes to evaluating aid, I think the key question is ‘does it focus on safety, leverage, and learning?’ If not, it is likely grist for Deaton and Easterly’s mill.