Arnold Kling  

The Foreign Aid Debate

Good for Whom?... Best Line I've Read in a While...

Cato Unbound looks at foreign aid. First, William Easterly writes,

The two key elements necessary to make aid work, and the absence of which has been fatal to aid’s effectiveness in the past, are FEEDBACK and ACCOUNTABILITY. The needs of the rich get met through feedback and accountability. Consumers tell the firm “this product is worth the price” by buying the product, or decide the product is worthless and return it to the store. Voters tell their elected representatives that “these public services are bad” and the politician tries to fix the problem.

...If a bureaucracy shares responsibilities with other agencies to achieve many different general goals that depend on many other things, then it is not accountable to its intended beneficiaries—the poor. No one aid agent is individually responsible for successfully achieving any one task in the current aid system. Without accountability, then the incentive for finding out what works is weak.

Deepak Lal thinks that Easterly is, if anything, too optimistic.

unlike private charity, foreign aid essentially transfers money from rich country governments to poor country governments. How can these donor governments ensure that the recipient governments use these resources for the purposes they were intended? As the history of foreign aid's failures, particularly in Africa show, despite their promises there is little that the donor governments have been willing or able to do if the recipient governments do not fulfill them. Nor is channeling these flows through international or domestic NGO's likely to overcome this problem, for these so-called "agents of civil society" too can be coerced or co-opted by predatory governments. That is why in a recent book I had argued that short of direct or indirect imperialism there seems to be little hope of overcoming the domestic political obstacles to the efficient utilization of foreign aid, particularly in Africa

Finally, a modest dissent from Steve Radelet.

First, the rich countries have given very modest amounts of aid. Second, aid has achieved very modest results in many places, strong results in a few, and failure in others. Third, aid is no panacea – trade policies, institutions, decent governance and the rule of law, private entrepreneurship, and investments in health and education are the mainstays for growth. But aid can help and has helped on the margin in very poor countries, at least in some circumstances.

It seems to me that one of Radelet's point is that a lot of "aid" is really something else. Often, that something else is favoritism for corporations based in the donor countries. The effectiveness of aid is reduced by corruption in the donors as well as by corruption in the recipients.

Maybe we should handle foreign aid the way Tyler Cowen thinks that we handle subsidies for the arts. That is, by using tax preferences and matching grants, we could subsidize "patrons of the poor." Individual donors might fight corruption at both ends of the foreign aid chain.

Comments and Sharing

COMMENTS (7 to date)
aaron writes:

Imperialism is a quick and dirty way to instill the instituations and the "mainstays" which Radelete writes about. I doubt, however, that it is very cost effective (or effective in general). I think society is too complex today to effectively plan and manage dependent societies.

Possible exceptions might be places where the patron nation is there by invitation. I think this can be done by having a vote to defer total government control to the patron nation followed by periodic (probably annual) referendoms.

spencer writes:

Roughly one-third of US aid is to Israel.

It seems to have worked very well and has been run by government bureaucracy on both sides.

I wonder why CATO ignores this success story.

Roger M writes:

Our foreign aid isn’t designed to actually help the poor, but to appease the Left. The most effective aid, and largest in dollar terms, comes from foreigners working in the US. I can’t remember the specific figures, but Mexican workers in the US transfer about $9 billion to Mexico every year. African workers send home tens of billions of dollars each year. Those people are doing the real work of helping the poor.

We have given Israel $3 billion and Egypt $1.8 billion in military aid every year since 1978 as a bribe for them to play nicely together. That’s a big chunk of our foreign aid and it’s wasted. Israel doesn’t need it and Egypt is the most anti-American country in the Middle East. They won’t even use the army we paid for to help us in Iraq

Roger M writes:

Doesn't seem to be much interest in the foreign aid debate, but for the 2 or 3 of us who are, here is an interesting story on private foreign aid amounts vs government aid:

DD writes:

While I agree that a lot of aid is given for an ulterior motive, I believe that Easterly is referring specifically to the aid that is given for altruistic reasons, i.e. the UN's Millenium Development goals. Arguably, that altruism can always be stuck to something non-altruistic and deemed false, but for the most part if the aim is to save lives and reduce poverty and that just so happens to develop a healthy economy and another market to hock our goods in, then no one is going to complain.

DD writes:


I think you're right on with the comment of aid going back home from immigrants being the most effective. That is effectively what Easterly is arguing for, getting the money to those that need it and if you fail to do that you should be punished for it (more or less like ebay's reputation scheme). Therefore, the most efficient aid organizations stay in the "market" and the least are held accountable and get the boot. He also argues for home grown, or bottom up solutions (i.e. those from the community that know what needs to be done), rather than top down solutions. His argument is, more-or-less, to get the funds to those members of the community that know what to do with them.

I think the biggest point Easterly is trying to get accross is simply that there is an information black hole that prevents the system from working anywhere near as well as it could. There is poor feedback to donors from aid agencies, and no legitimate (meaning it has to be taken seriously) feedback from supposed "aid targets" to the aid agencies or, especially, the donors. The feedback loop between target and donors is the biggest problem that needs to be overcome. Basically Easterly is saying, if we can somehow bridge that information gap we can introduce true accountability and get better results. In fact, if it is done correctly there could even be an increase in aid due strictly to some newly demonstrated effectiveness.

Roger M writes:

I think you're right, and USAID has moved that direction to some degree with its emphasis on microlending.

Another problem that foreign aid has to address is the effect on local markets. When we dump tons of wheat and other food on a country, it destroys the local and regional ag markets by depressing prices. We should purchase as much from local and regional markets as possible before dumping free food in a country.

Of course, then there are the arguments by Peter Bauer that aid can actually hinder development. All of these arguments points out how complex the situation is and how careful we need to be in providing aid.

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