The Aid Debate is Growing Up

Last week was “aid week” on Oxfam’s From Poverty to Power blog and one thing is clear: the aid debate has grown up. No longer are we arguing over the efficacy of distributing insecticide mosquito nets for free (thanks J-PAL), we are now actually moving somewhere productive and confronting real issues.

Nicola Mclvor lists some of the issues at stake at last week’s first High Level Meeting of the Global Partnership for Effective Development Cooperation. Some issues include:

–       The voice of the vulnerable to drive their own development

–       What is the role of the private sector?

–       What will our post-2015 goals be?

Duncan Green, author of “From Poverty to Power” (the book) and editor of From Poverty to Power (the blog) recently articulated his qualms with Angus Deaton’s attack on aid found in his own recent book “The Great Escape”.

Green summarized Deaton’s opinion on aid in Deaton’s own words:

‘Economic development cannot take place without some sort of contract between those who govern and those who are governed…. It is the need to raise taxes, and the difficulty of doing so without the participation of those who are taxed, that places constraints on the government and to some extent protects the interests of taxpayers…. One of the strongest arguments against large aid flows is that they undermine these constraints, removing the need to raise money with consent.’

In other words, bunging aid money to governments means they no longer have to listen to their citizens and opens the door to all kinds of bad practices.

Green correctly points out why we’ve had so much trouble coming to answers about aid effectiveness.

The aid discussion follows the classic pattern of…

1) A blizzard of cross country regressions reaching contradictory findings, eg one IMF study finds ‘aid improves revenue performance significantly’, while another asserts with equal certainty ‘tax revenue declines by 9 cents for each grant dollar.’

2) Baffled researchers then revert to ‘priors’ and political theory, to argue that aid does indeed undermine institutions. Eg see this 2006 CGD paper.

Green goes on to point out that while Deaton’s theory of aid undermining political connectivity within recipient countries is on the right track, Deaton’s claim that we need to take a hatchet to aid budgets goes a bit too far. Today aid donors and recipients are making commitments to ‘country ownership’ and ‘inclusive development partnerships’. So while aid has seriously undermined political process in the past there are evermore-serious efforts in place to ensure these errors do not happen again.

Angus Deaton was given the chance to respond to Green’s allegations. Deaton summarizes his opinion in three points:

Here is my take-away: (a) controlling for the factors that usually appear in growth regressions, aid as a share of recipient GDP is negatively correlated with growth, (b) similarly controlled, the change in growth is positively related with the previous period’s change in the aid to GDP ratio, where periods are several years long, and (c) the share of aid in GDP is larger for small recipients than large recipients, but the latter grow more rapidly than the former.

So why does aid often fail in aggregate? Deaton says, “Money and know-how are not the issues; power is the problem, and politics the solution.”

With a government in control, it is impossible to reach those who are powerless without paying the powerful, and paying the President and the government will make them less interested in listening to their people. Instead of having to raise money through taxation and deliver services in return, they can instead use their people to extract money from donors. They can enrich themselves by keeping their population poor; such aid is an instrument of inequality. Some governments may be more benevolent, but large, prolonged amounts of aid ultimately corrupt benevolent rulers, or cause them to be replaced by exploitative rulers.

Deaton ends by recalling the argument of Amartya Sen who made the claim that “the components of freedom are also instrumental in producing it: we make trade-offs between different freedoms at our practical and ethical peril.”

As it happens there was an incredible debate of sorts (somehow they both won) at the Center for Global Development a couple weeks ago between Professor Bill Easterly and Owen Barder. They weren’t intending to talk about aid, instead opting to debate the role of rights in development and the responsibilities (if any) of development “experts”, so naturally they talked about aid.

The debate is quite good. The thoughts and observations of BOTH Bill Easterly and Owen Barder deserve to be considered and scrutinized. A few highlights:

–       Owen Barder, an admittedly non-religious man, ends his opening statement with a call for the need of humility within the work of development experts and used the words (prayer) of Reinhold Niebuhr as a useful posture:

God, give us grace to accept with serenity
the things that cannot be changed,
Courage to change the things
which should be changed,
and the Wisdom to distinguish
the one from the other.

–       Gary Haugen’s (President of IJM) newest book, “The Locust Effect: Why Ending Poverty Requires the End of Violence” (which I reviewed several months ago) getting some play in the development mainstream.

Just as Sherlock Holmes is able to learn something from asking, “Why didn’t the dog bark?”, it seems we can learn something by asking, “What typical aid debate contributor is absent from this whole discussion?”