Apply the Rigor of Investing to Foreign Aid

There's a reason Americans are confused about the value of overseas development assistance. And there's also a fix -- if the State Department gets serious about the next QDDR.

John Moore/Getty Images
John Moore/Getty Images

With the midterm elections barely over in the United States, attention has inevitably shifted to the 2016 presidential contest. Hillary Clinton, the bookies’ favorite, is already taking shots from competing candidates in both major parties. As a former secretary of state, she will undoubtedly face questions on foreign aid, which continues to be a punching bag for Republicans. The answers she provided in her old job could use some improvement.

One of pundits’ favorite chestnuts about foreign aid — or overseas development assistance (ODA), if you prefer — is that Americans think the government spends much more on foreign aid than it does in reality. Indeed, a recent Pew Research Center quiz suggested that one-third of Americans believe Washington spends more on foreign aid than on Social Security, transportation, or interest on the debt. (In reality, foreign aid comprises about 1 percent of the budget.) Perhaps as a result of this misconception, foreign aid was the area most targeted for cuts in another Pew poll last year.

But just because the government spends a relatively paltry amount on foreign aid doesn’t mean the money can be spent carelessly. Indeed, this notion was part of the motivation for the Quadrennial Diplomacy and Development Review (QDDR), which Clinton launched at the State Department in 2010. The QDDR, which borrows its name from the Quadrennial Defense Review at the Pentagon, was nominally an effort to bring the civilian arms of foreign policy in line with the military. But importantly, it was also supposed to make foreign aid more coherent across the many branches of government that deliver it. That was a sensible goal, but the review was hamstrung by infighting and cover-your-assism.

What the review did right was to refer to spending on foreign aid as investments and to declare the importance of measuring results, with an eye to improving accountability. Unfortunately, it fell far short of other exercises, like Britain’s Multilateral Aid Review. Unlike with that review, no major programs or grants were eliminated or put on probation as part of the QDDR; rather, the QDDR was mainly a think piece outlining strategy for the future.

Since the QDDR, accounting for the results of foreign aid has focused on outputs — how many people or organizations have received services and other aid — rather than outcomes such as increases in income, well-being, and life expectancy. A few new initiatives have come into the mix, such as the Global Development Lab, but they might just as well have arisen without the review. The vast majority of funding is going to the same sorts of programs as it did before the QDDR.

That could change in the second QDDR, which Secretary of State John Kerry launched in April. In fact, by being clearer about the goals of foreign aid and evaluating its results, the QDDR might even be able to solve Americans’ perception problem.

At the most basic level, the United States spends money on foreign aid for two reasons: to help people out of charity and to get something tangible in return. Most aid programs strive to do a bit of both — and both goals can also be measured. In particular, the economic benefits that derive from aid programs can be estimated and projected.

In my 2010 book, Power in Numbers, written with Philippe Douste-Blazy, I offered an example of how this might work: The cost of saving a child in Guatemala from a deadly case of malaria might be about $16, but that child might buy close to $100 a year in American goods and services over the course of his or her working life. By paying for malaria treatments in Guatemala, the U.S. government would become a machine for transforming $16 worth of American output today into $100 a year of American output 15 or 20 years down the road. At a discount rate of, say, 5 percent a year, the total return would be roughly 6,000 percent.

That’s a stunning and measurable payoff, assuming the government can decide on how to discount future economic growth (not to worry — Washington has been doing it for decades). And the same kind of evaluation can be used for more altruistic ends: Just ask GiveWell or the Gates Foundation. They’re experts at estimating things like the cost per life saved of different interventions, which is the first step toward getting the most bang for your charitable buck. Such an evaluation might also generate public debate on how American aid should balance altruism and investments that generate concrete returns.

If Americans had access to a public database of foreign aid programs that included these measures of costs and rates of return, they might find that the numbers compared favorably to most other government programs (in terms of economic growth) and their own favorite charities (in terms of cost per life saved). After all, what’s the return on $3 billion Zumwalt-class destroyer? Comparisons with the size of spending in other areas would help dispel the myth of a bloated foreign aid budget too.

That’s not to say all foreign aid programs would measure up. In one notorious case, $111,000 went to pottery classes in Morocco that only a handful of people attended, and most of them couldn’t even understand the instructor. The inspector general at the U.S. Agency for International Development (USAID) spotted that one, but a systematic approach would do more for efficiency than relying on a watchdog. Moreover, it’s not as though the program had numerical targets for altruism and payback to the American economy when it began.

The irony here is that the State Department spends millions of dollars on programs to promote transparency and accountability abroad (here’s an aptly named example). Instituting these principles inside the U.S. government, however, is made somewhat difficult by the culture of the American aid community. Too often, it stresses passion, empathy, and goodness rather than results.

Rajiv Shah, USAID’s director since 2010, epitomized this problem in his annual letter in 2013. He began with an anecdote about an aid program he’d worked on after college, when he met an Indian girl who was "barefoot, dressed in muddied rags." "I believed I knew the face of poverty until I saw that little girl," he wrote. His goal may have been to move his readers and attract support for his agency, yet by relying on these familiar tropes — and the call to action that inevitably followed them — he essentially invalidated the view of foreign aid as an investment. These tropes are a crutch — a justification for aid that distracts from the discipline that taxpayers demand from all government spending.

In this year’s QDDR, planned for release in December, Kerry and his colleagues have a chance to set down guidelines for applying that discipline. They could put out another laundry list of worthy-sounding priorities, like Clinton did, or they could adopt the sort of rigor in investing and reporting that even a publicly traded company might envy. Will they consider which one might impress the American public more?

Disclosure: In 2012, while working as a director at Dalberg Global Development Advisors, a strategic consulting firm, Daniel Altman, the author of this article, was briefly involved in an assessment for the U.S. State Department of progress toward the QDDR Appendix 2 benchmarks. Altman now serves on Dalberg’s expert advisory board.

Daniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York University’s Stern School of Business. Twitter: @altmandaniel