Should Foreign Aid Be Abandoned or Adapted?

The problem with arguments against aid is not that they lack fiscal appeal or past evidence -- nobody wants to waste money abroad while the budget is being cut at home. The problem is that they belong to a world that doesn't exist anymore.
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In his latest book, Angus Deaton, an idol among development data junkies, makes two claims. First, advances in medicine have helped humans live longer and better lives. Over the centuries, greater awareness of germs, the discovery of vaccines, and the use of sanitation drastically brought child mortality down, initially among rich families in rich countries. Other people and other countries followed. More recently, progress was -- and is being -- made against the kind of chronic diseases that kill the old, like strokes and cancer. So, up until about 1800, you were really lucky if you lived past 40. Today, you are likely to clock 70 or more. We have managed to "escape" death -- or, rather, to postpone it. But not everyone has escaped. Huge differences exist and persist within and across countries -- by some estimates, poor American males die about five years earlier than their rich peers, but more than 20 years later than the poor in Nigeria. Where you are born, and how rich your family is, can easily add or subtract a decade from your life horizon. Millions still die of preventable or curable diseases. Not what one likes to hear, but the facts are impossible to disagree with.

It is the second claim in Professor Deaton's book that makes you scratch your head. He says that you cannot help those who have not yet "escaped" by giving money to their governments. To him, the "foreign aid" given by rich nations and multilateral banks to developing countries is almost useless, probably counter-productive, and should be abandoned -- all $120 billion a year of it. This is not an unusual claim. Many see government-to-government charity as a way to dominate former colonies, impose models and values, subsidize the donors' contractors and consultants, take care of security concerns, and prop dictators. To prove it, they only have to point to an inconvenient truth: After 50 years and more than $3 trillion in aid, poverty is still alive and well. Why keep giving? And money is fungible, anyway: When you donate to build a health clinic, you may make it easier for politicians to buy weapons -- now that they don't have to pay for the clinic.

More damaging, aid is said to break the fundamental contract on which every society rests: Citizens pay taxes and that gives them the right to demand services from their government -- like good schools, passable roads, and an honest police force. Why would a politician tax his voters and be pestered by their resulting scrutiny if a nice, rich country is willing to bank-roll him? In technical parlance, foreign aid weakens governance. Ergo: Scrap foreign aid. Or, at least, make sure that you spend it on things that benefit the poor in general, not in any one country -- like research on tropical diseases.

The problem with these arguments against aid is not that they lack fiscal appeal or past evidence -- nobody wants to waste money abroad while the budget is being cut at home. The problem is that they belong to a world that doesn't exist anymore. Start with governments in developing countries. They are no longer free to do anything they please, even if a donor tried to force them to. They are subject to tougher "accountability frameworks." Think of these as four "D's" -- democracy, decentralization, devices, and debt. Politics has over the past decade become much more contestable in most places. You are more likely than ever to be kicked out of power -- or face social unrest -- if you cannot deliver or if you are caught stealing. Not that incompetence and corruption do not happen. They do. But it is becoming more difficult to get away with it. This is not just about voting presidents in and out of office every four or five years, or the opposition having a voice in parliament. It is also about the local mayor or governor, not some far-away federal minister, taking responsibility for your children's schools or your city's hospital -- the "D" in decentralization. When public services are bad, you can embarrass those leaders into action in real time by texting, tweeting, or posting from your cellphone -- "D" for devices. And how about the big policies that can make the economy thrive or tank? Who else keeps an eye on that, apart from the International Monetary Fund? Markets do. Even poor African countries try to sell sovereign bonds -- "D" for debt -- to foreign and domestic investors. You can't do that if your economic policy is a mess and potential lenders don't trust that you will pay them back. None of this is water-proof, of course. But it makes the idea that foreign aid relaxes pressure on the governments who receive it sound a bit beyond the point -- these days, the pressure comes from elsewhere.

What about multilateral institutions like the World Bank? Doesn't their aid weaken governance because it replaces the need to tax? Well, for most developing countries, money from multilaterals is not much larger than a rounding error in the governments' financing plan. Many of these countries have gained access to finance on their own, and many get large revenues from the sale of oil, gas and minerals. Think of the governments of, say, Brazil, China, Colombia, India, Mexico, Nigeria, Russia, or South Africa. Their financial needs are giant compared with any foreign aid they might receive. In fact, they value aid as long as it helps them solve problems that they cannot solve by themselves -- in other words, they value aid if it carries knowledge, not just cash.

Finally, and beyond becoming more accountable and relatively smaller, there is another tectonic plate that has been shifting underneath foreign aid. We -- meaning, anyone with a stake in economic development -- are on our way to knowing all the poor by name, one by one, individually. This started 15 years ago in Mexico as a way of transferring cash to those in need. It soon became obvious that, to make the transfer, the Mexican government had to meet the person, identify her, collect her basic data, and establish a logistical mechanism to pass on the cash -- be it a kiosk, a debit card, or a cell phone. At last count, some 70 developing countries -- 35 of them in Africa -- have these kinds of transfer systems in place. At the same time, the cost and speed of biometric identification are collapsing -- to about $4 and five minutes per person, as India has shown. This technology opens a logical crack in the main argument against foreign aid. If it is true that giving aid to governments weakens their resolve to serve their people, don't stop aid; instead, give it directly to the people. You now have the tools to do it. But, is aid large enough to make a difference? Well, Nga Nguyen and this economist calculated how many African countries receive enough aid to lift all their citizens out of extreme poverty -- assuming aid was individually distributed. The answer is 25. Not a bad start.

PS: Professor Deaton publicly -- and brilliantly -- presented his book in Washington on December 2, 2013. I was the commentator to his presentation. This column is based on my remarks.

PS 2: You can learn more about this and other realities of the war on poverty in my new book: "Economic Development: What Everyone Needs to Know", just published by Oxford University Press.

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