What's the Future of Foreign Aid?

The real change in -- and the future of -- development assistance is not coming from its traditional donors but from its recipients.
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Rich countries have been giving money to poor ones for many decades and for many reasons -- from geopolitics to post-colonial guilt to altruism. Much of that money was meant for development, that is, to build the schools, hospitals and roads that, over time, would make the recipients less poor. This "Official Development Assistance" -- that's what it's technically called -- was sometimes sent directly, and sometimes through multilateral organizations like the World Bank. It came as grants and as soft-loans -- so soft that many were later forgiven -- and it was big: this economist's back-of-the-envelope calculation is that, over the past 50 years, net ODA has added up to about three and a half trillion dollars in 2011 prices. To give you an idea, that's about three times larger than the entire economy of sub-Saharan Africa. And the flow continues to this day, at about US$120 billion per year.

You'd think that's good. What can be wrong with international philanthropy? Well, foreign aid has been criticized from lots of angles. It is said that it has propped up dictators, who were happy to siphon the funds into their own accounts abroad. That it was self-serving, as only companies and consultants from the donor countries got contracts. That it ignored local priorities and preferences, and literally bulldozed its way into communities. That it imposed economic "models" that clashed with local realities. That it was volatile, jumping from one flavor-of-the-month issue to the next without sticking long enough to make a difference in any. That it overwhelmed already-weak civil services, who had to meet the peculiar administrative requirements of each donor. That it achieved very little, especially in lifting people out of poverty. That it created "aid dependency", because recipient countries did not bother to set up proper tax systems. The list goes on and on.

Much of that criticism is valid. But things have changed. Over the past decade, traditional donors have begun to demand political freedom or, at least, less political repression before they disburse. Since 2000, they have tried to track results, mostly through the so-called "Millennium Development Goals", a set of worthy commitments on extreme poverty, primary education, maternal health, and the like. Since 2005, they have made a genuine effort toward harmonizing their procedures and at aligning behind the strategies of the recipients -- rather than imposing policies from outside. They have financed fewer construction projects and more policy reforms. They even wrote off massive amounts of debt, in exchange for promises of more social expenditures and less corruption. By early 2013, 36 countries had received some $76 billion in debt relief. And one can only guess that rich countries will continue to look for maximum impact from each aid dollar -- after all, many of them face years of tough austerity at home.

However, the real change in -- and the future of -- development assistance is not coming from its traditional donors but from its recipients. First, some of the latter have developed enough to become donors themselves -- think of the role that China, Brazil and India now play in Africa. These new-comers have learned the lessons of the past, ditched the aid mentality, and see themselves more as partners than as donors. They are more interested in trading raw materials and investing in infrastructure than in exporting their own way of thinking.

Second, aid flows are being dwarfed by revenues from oil, gas and minerals. Many, if not most, developing countries have plenty of money of their own, as they are discovering and exploiting natural resources at an unprecedented pace, right when the prices of those resources are high and expected to stay that way. Very few governments still depend on donations to pay teacher salaries or build power plants. Those who don't are less inclined to accept conditions or, even less, instructions from foreigners.

Third, today's average developing country has access to private funding. Some of it comes from investment banks which, apart from demanding good economic management, ask few questions -- in larger countries, private loans dominate the public financing plans, while aid has become not much bigger than a rounding error. Some comes from mega-philanthropists and their foundations -- think of the progress the Bill and Melinda Gates Foundation has made in the fight against malaria. And some comes embedded in the work of dozens of NGOs and global funds that provide services for which, otherwise, the government would have to pay -- say, for HIV/AIDs treatments.

So, if its recipients have cash and options, will official aid end? Probably not. No sensible government snubs an offer of free or cheap money. And places where the state is fragile or conflict rages need all the help they can get. The real question, though, is whether aid will remain relevant, and if so how. The answer boils down to this: solutions. Governments in developing countries will seek assistance only when they have a problem that they cannot solve by themselves. They know how to build schools, hospitals or ports, and can pay for them. But they will look for other countries' experiences when reforming educational curricula, designing health insurance systems, or regulating private suppliers of infrastructure. They will want to avoid the mistakes of others, and learn from their successes. At times, they may ask for support in implementing particularly tricky projects, mostly as a way to keep graft, pollution or displacements at bay. In other words, what will make future aid relevant will be knowledge, not dollars. And the donors that will be sought after, rather than just accepted, will be those that can deliver ideas, experiences, expertise, lessons, evidence, and data. Development aid will be a more difficult business -- for you will need to operate at the technical cutting-edge -- but a more useful one.

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