Away From the Handouts

According to a new report from the OECD, total economic development aid to poor countries fell by 3 percent last year to $134 billion — the first drop in regular program assistance (as opposed to debt forgiveness) since 1997. OECD Secretary-General Angel Gurría acknowledged that the decline was linked to hard times, especially in Europe, where Greece, Spain and Belgium all slashed aid by double digits as part of their austerity budgets. But Gurría still managed some handwringing, arguing that "the crisis should not be used as an excuse to reduce development cooperation contributions." Should you be wringing your hands, too?

Two decades ago, only Grinches would have seen the question as even worth asking. Most people of goodwill thought that aid for everything from building public infrastructure to containing dread tropical diseases was a worthy activity. The UN’s Millennium Development Goals, proclaimed with much fanfare in 2000, represent the high water mark for this sort of thinking.

Today, thanks in no small part to William Easterly, a former World Bank researcher who now teaches economics at New York University, skepticism about the efficacy of development aid is thoroughly mainstream. And the debate has taken on new urgency in light of the reality that the United States, the European Union, and Japan all face chronic structural budget deficits that will make development aid (as opposed to military and geostrategic aid) a political luxury. Indeed, it’s hard to imagine the scenario in which the U.S. contribution — some $30 billion aid in 2011 — won’t fall sharply in coming years.

So, what do Easterly and Co. have to say for themselves? While I can’t do justice to their arguments in a few paragraphs, the attack on foreign aid comes from three directions. The first (and hardest to dispute), is that the economic return on the trillions (actually, close to $5 trillion) in official development aid delivered since independence movements swept away Europe’s colonies has mostly been wasted. Indeed, the return on many aid projects may have been negative, cementing autocrats’ power and feeding cultures of corruption while encouraging crony capitalists to suck the life from small entrepreneurs and would-be innovators.

Second, there seems to be a negative correlation between success in economic development and the amount of development aid received. Compare the record of China, which got relatively little aid over the decades, with that of Egypt or Zimbabwe or the kleptocracies of West Africa, which got a lot. For that matter, compare China’s remarkable growth with India’s, which was the darling of the aid community for decades, but merely limped along until the market reforms of the 1990s.

This critique is surely on target, but not quite as potent as it seems on its face because an awful lot of development aid really has been disguised strategic aid. The United States has effectively paid Egypt to keep the peace with Israel — and thus arguably got its money’s worth, even if most of the money went to the care and feeding of Egypt’s elite. Likewise, it’s next to impossible to defend the effectiveness of development aid in Iraq or Afghanistan (or for that matter, Vietnam or Nicaragua, back when they seemed to matter to Washington). But if development was a goal in these cases, it was an afterthought. And, to be fair, strategic aid did stimulate growth in some cases. Assistance to South Korea and Taiwan, which was entirely a byproduct of the Cold War, probably did generate substantial returns in terms of development.

Which brings us to the third leg of the indictment: The methods and motives of the donors. Easterly argues that development aid bounces from fad to fad and back, creating a cycle of optimism followed by disappointment — and a return to earlier nostrums. The wheel keeps spinning in spite of failure, he concludes, because "the cartel of good intentions allows rich country politicians to feel that they are doing all in their power to help the world’s poor, supports rich nations’ foreign policy goals, preserves a panoply of large national and international institutions, and provides resources to poor country politicians with which to buy political support."

Easterly, and many other economists, counsel tough love and deregulation as the alternative. Their prescribed dress for success is of the one-size-fits-most variety. Stabilize prices and keep budget deficits in check. Create an institutional framework (rule of law, private property, access to capital on competitive terms) that allows markets to work efficiently. Open the economy to foreign competition. Invite foreigners to invest — especially the ones who bring technology and management skills.

If all that seems familiar (so familiar that you skimmed the paragraph), give Easterly a good chunk of the credit for creating a new consensus about the fundamentals of development strategy. Easterly mostly has it right, but oversteps in dismissing all development aid.

I don’t mean the old-fashioned version that feeds the beasts of top-down governance and crony capitalism, not to mention commercial lobbies back in the donor countries. But rather a leaner, meaner version that improves the prospects for private initiative or tackles problems that can’t be solved without collective action. A few examples: roads that give farmers all-weather access to market towns, purchase guarantees for drugs targeted at AIDS and tropical diseases that are designed to stimulate R&D, technical aid and working capital to create self-sustaining crop insurance systems.

The catch is that somebody has to decide which projects to fund: If the aforementioned "cartel of good intentions" is still in charge, what’s to prevent it from reverting to type? This suggests that a very important part of monitoring development aid is monitoring the characteristics of the donor bureaucracies. And here, Easterly is again out front.

Working with Claudia Williamson, a colleague at NYU, Easterly offers tangible criteria for judging aid agencies ranging from transparency to degree of specialization to the efficiency of delivery methods, and ranks them accordingly. Among national donor agencies, the UK Department for International Development stands out; the United States is far down the list. Greece brings up the rear. Among multilaterals, the Global Fund (disease-fighting) and the Nordic Development Fund (climate change) are leaders. The IMF, World Bank and a passel of UN agencies are in the adequate-to-wretched class.

There’s no going back to the era in which mandarins from the donor agencies huddled with the dictator’s flunkies to decide which railroad to a hopelessly inefficient factory complex in the bush would be built, and which crony capitalists get a piece of the action. But it would be a shame to dump development aid altogether, just when some agencies are getting smart about how to make it work and specialists are getting smart about making sure they do.