Why foreign aid has failed to end poverty in Africa

By Emmanuel Mungwarakarama
Tuesday, 24 October 2006
What are the two tragedies of the world’s poor? One of them is, according to Jeffrey Sachs in his book The End of Poverty, 30,000 children die every day from the diseases and malnutrition that go along with extreme poverty. For example, there are nearly 2 million annual child deaths from diarrhea, which could be easily prevented with 10-cent doses of oral rehydration therapy. It is really a tragedy that people are so poor that they cannot afford 10-cent doses of oral rehydration therapy.But there is a second tragedy, which Jeff does not spend any time in his book talking about, and the second tragedy is that the West has already spent $2.3 trillion on foreign aid over five decades, and babies with diarrhea are still not getting the 10-cent doses of oral rehydration therapy. There are still 2 million deaths, and even in what the World Bank calls an aid success story like Ghana, 50 percent of babies with diarrhea never receive oral rehydration care.This is really the scandal of our generation, that all this money has been spent on foreign aid and yet, in any meaningful sense, this money never reached the desperate poor. What is the response to this failure? It is to ask for more aid money, which has been the same answer as in the previous five decades of foreign aid, which does nothing whatsoever to address the second tragedy: that money is spent and yet does not reach the poor.A Grandiose Global PlanSo, the U.N., the World Bank, and the International Monetary Fund have come up with a big plan to solve all the problems of the poor by the year 2015. How exactly would this plan be implemented? Jeff says in his book that the U.N. Secretary General should personally run the plan. He would not have to do much: He would just have to coordinate the actions of thousands of officials in six U.N. agencies, the U.N. country teams, the World Bank, the International Monetary Fund, all consistent with the World Bank and IMF Poverty Reduction Strategy Papers.Just think about the incentives that are created by this grandiose global plan. You have all the aid donors and recipients collectively responsible. They all share responsibility for implementing all of these actions, for meeting 54 different goals, which also depend on lots of other things besides what the donors and recipient governments do. If anything goes wrong, you can blame the other aid donors, you can blame the other factors that affected whether the goals were achieved or not, or you could even just say, “The reason I didn’t achieve that goal was that I was working on this other goal.”That is what happens when you have multiple goals, collective responsibility, and goals depending on things besides what the aid agents themselves do. This is the worst possible incentive system of all time. When you really read the fine print of the very long documents that set out the goals, you reach this conclusion: In this great, grandiose campaign to end world poverty and achieve the Millennium Development Goals, nobody is individually responsible for any one result.Of course, you could set all this in reverse if you did have true accountability and incentives. Then aid agents would want to get customer feedback and try to figure out what works, and then you could get some specific good outcomes from some aid efforts.Just think about the U.N. Millennium Development Goals. How, possibly, could you get customer feedback on which of the 449 interventions are working? Where are the incentives for those implementing the 449 interventions? Who can be held accountable if some of the 449 interventions do not work? And why doesn’t somebody just get held accountable for getting 10-cent medicine to babies?The planners’ favorite answer is to double foreign aid. An interesting iron law of aid advocacy is that whenever anyone starts campaigning for more foreign aid, they always ask for an exact doubling of foreign aid. It is never an 83 percent increase or 117 percent; when in doubt, double foreign aid. Not long ago we had the G-8 summit, in July 2005, where they agreed to double aid to Africa. They have also agreed to double foreign aid as a whole by the year 2010, and the aid campaigners will then ask for doubling aid again after 2010.Unfortunately, the obsession with the amount spent substitutes for customer feedback, incentives, and accountability. It substitutes for focus on whether the money actually reaches the poor, so the second tragedy continues unabated. And it also creates the perverse incentives in aid agencies just to spend money, because if money is the indicator of success, then all the incentives are just to spend aid money and not to try to have the money get results.The World Bank and IMF have their own plans, which they call the Poverty Reduction Strategy Papers. This planning approach is really just a misguided way to approach the problems of world poverty.F. A. Hayek said that “the success of action in society depends on more particular facts than anyone can possibly know.” How can you possibly know enough to implement a big plan? Economics is all about teaching people how little we really know, how little economists really know, about what they imagine they can design. Karl Popper has this great quote, which is really applicable in a lot of circumstances, that any sort of comprehensive plan to remake society in a way that eliminates poverty is just completely unworkable because “it’s not reasonable to assume that a complete reconstruction of our social system would lead at once to a workable system.”Searchers vs. PlannersThe alternative to planners is “searchers.” There are private entrepreneurs who get customer feedback to meet essential needs. They have incentives to get them to you, so there were 9 million copies of the Harry Potter book distributed on the first day of its publication because everyone along the supply chain had the right incentive to get 9 million copies out there. The publisher is held accountable if you are dissatisfied. If you get your Harry Potter book and the words are upside down, you can take it back and get a new one; and if the firm does not give you a new one, then the firm is eventually going to go out of business for mistreating the customers.The other great feedback system that we are all familiar with is democracy. Politicians are subject to voter feedback, so they have the incentives to meet your needs for public services, and they are accountable if they do too lousy a job on delivering public services.Now, we know none of these solutions works perfectly all the time, and they are certainly not an overnight panacea because, as Karl Popper has told us, there is no way that you could transform a whole society overnight from what it is now to a free-market democracy. It is just not within the realm of economists to be able to engineer that. But we know from overwhelming empirical evidence that markets and democracy are the ultimate home-grown source of prosperity. This is how you eliminate world poverty: through markets and democracy. This is what works.I think markets and democracy can be a great model. Since they are such a successful system, they can be a great model to try to make aid more like a successful system, to try to inspire aid efforts to do less planning and more searching, to try to get aid agents thinking in market-like terms, thinking in democracy-like terms; getting customer feedback, having incentives for aid agents to deliver the medicines to the babies, and having accountability if they do not.So we have to ask the question: Why is it that planners are so popular? Why are these big plans more popular than searchers in the whole foreign aid business? There is a fairly clear political economy explanation that the planners offer appealing dreams of ending poverty, which is really good for sound bites and media frenzies, without anyone in the rich countries actually being held responsible for doing anything very costly. All that has to be done is to spend a little more aid money, and then everyone is satisfied, and then you promise grandiose things like the end of poverty for which you will never be held accountable. Politically, it is great to be able to promise big things for which you will never be held accountable.Searchers do not offer big promises like the end of poverty, which aid cannot possibly achieve. Nothing outsiders do can possibly achieve the end of poverty; again, that has to be done by relying on home-grown markets and democracy. So aid right away has a huge rhetorical disadvantage: It is not offering the big promise, and the searchers are insisting on politically risky accountability. Everybody likes accountability for other people, but nobody likes being held accountable themselves, and rich country politicians certainly do not want to be held accountable for taking responsibility for whether their aid dollars accomplish something in helping poor people.The dream of planners is that foreign aid could finance economic growth, and the only reason to think that that can not happen is that it has never happened and every effort to make aid achieve economic growth has failed. The data show that there is a correlation between aid and growth, but, unfortunately, it is negative. Sophisticated econometric analysis finds no evidence that aid raises growth. What does raise growth is markets, so the citizens of India and China, by shifting to more market-oriented economic systems and creating new opportunities for millions of local entrepreneurs to get rich by their own efforts, increased their own incomes by $715 billion last year.This is the true source of long-run development, not foreign aid. The good news about this is that, once you acknowledge that growth is mostly home-grown and comes from home-grown markets and democracy, you could free up aid so that it could maybe accomplish some useful things for poor people to give them new opportunities. You could free aid to do some more specialized tasks that are not so grandiose as ending poverty or achieving economic growth. You could hold aid agencies accountable for achieving specialized tasks.Let me just give you one example of the wrong approach of planners. There is a Canadian/World Bank project in Lesotho that tried to promote farming in a mountainous region of Lesotho, which did not work because, according to the project managers, the local people were defeatists and did not think of themselves as farmers. That was really silly of the local people—except for the fact that they were not farmers; they were migrant workers in South African mines. The only result of the project was that they built a new road on which South African lorries brought grain into the region, which drove the few existing farmers out of business. This is the kind of mess-up on the ground that happens when you try to plan from the top down.Unaccountable planners also keep repeating or even intensifying the same failed approaches. The aid business has been stuck for a long time on trying to work with local governments, which usually means they wind up chasing unachievable goals of transforming poor country governments, which outside aid cannot possibly do. So you have the unaccountable chasing the unchangeable.In the 1960s and ’70s, there was project aid, which assumed that governments had good institutions and policies. And, of course, the aid did not work then because the governments did not have good institutions and policies.In the 1980s, there was some dawning realization that part of the problem was bad economic policies, so then there was the invention of structural adjustment by the World Bank and IMF, which made aid conditional on the bad governments adopting good policies. The only problem with structural adjustment phase one was that it did not work. Aid was not a strong enough incentive to change policies, and the aid donors were not sufficiently selective; they kept giving money to bad governments even when they did not reform.
To be continued