The State of Aid

Up until till recently, I had always assumed that aid, in any form, was a positive thing. Why would giving things to those less fortunate than us ( by us, I mean, the U.S. or other first world countries), be anything but positive? Below are my thoughts.

Disclaimer: Foreign aid is a topic wrought with complexities that demand a deeper understanding of all sides.  Obviously, I won’t be able to cover everything in a single blog post. There are dissertations written regarding foreign aid spanning years. I would just like to scratch a little deeper than the surface to put my thoughts together regarding the matter in a coherent manner.

I am a firm believer in the global economy, and in global economic integration. I believe that globalization is not only inevitable, but necessary. By nature, the capitalist system fosters” winners” and “losers”.  My focus in this, is primarily upon Jeffrey Sachs, Esther Duflo, Abhijit Banerjee and William Easterly. Each has their own story and perspective to tell regarding foreign aid.

Foreign aid has had a mixed record of success and failure. The determinants of growth and the failures of foreign aid are variable and are dependent upon each individual situation. Scholars such as Jeffrey Sachs, Esther Duflo, Abhijit Banerjee and William Easterly have speculated upon the benefits and costs of aid. Each has come to different conclusions as to why certain forms of aid are more effective than others. I would argue that foreign aid is often unsuccessful because it is too direct in its focus, rarely addressing the problems with the basic structures that support and build communities in impoverished countries, while instead often being too focused on tangible goods.

To understand why foreign aid is such a divisive topic, one must first understand the various forms that aid takes and why it is given. Aid can be welfare, grants or subsidized loans. Additionally aid includes mechanisms to promote economic development, such as trade subsidies and technical assistance and developmental loans . States give loans in order to spur development in specific industries, in order to create trading partners. Foreign aid can also be a strategy to enhance the business interests of the aid-givers domestic companies by allowing them to enter a market with reduced or no barriers. Foreign aid is also used as a tool to wield political influence in strategic locations as well as in the international arena. It can also be used as an incentive to pursue democratic policies and security through stability. This implies foreign aid is not necessarily simply a tool for development, but a carrot to induce policies that aid giving states find beneficial to their interests in the target countries and regions. However, even aids with no political strings attached may not have the intended effects on its target.

Jeffrey Sachs argues that foreign aid has been ineffective due to the inherent disadvantages at the geographical locations of certain impoverished nations between the Tropic of Cancer and the Tropic of Capricorn (Sachs, 72). Sachs argues that extending aid to such regions requires a unique approach. Sachs’ approach involves assessing the specific needs of each country or region and giving aid based upon that. For example, Sachs argues that malaria can be managed by the usage of bed nets as well as medicines and pesticides (Sachs, 61). He believes that health reform is necessary in order to break the cycle of poverty and to do so, the limiting factors must be eliminated. Limiting factors such as malaria can be treated and prevented relatively easily, thereby breaking the cycle. I argue that Sachs makes a fair point in giving importance to issues such as the lack of health care and technology. However, removing the limiting factors cannot be given priority over the establishment of trustworthy institutions to implement social services. The scope and reach of a strong social service system would accomplish much more than simply distributing drugs. Distributing drugs would be part of such a systems mandate, but improving health outcomes is much more complicated than just dispensing drugs.

Banerjee and Duflo present claims by critics that argue that free aid so completely distorts incentives that people are not willing to make even the most nominal investments in things such as malaria nets (Banerjee and Duflo, 49-50). They provide a case where this has been examined in Kenya. A nongovernmental organization called TAMTAM (Together Against Malaria) was distributing free mosquito blocking nets out of clinics (Banerjee and Duflo,49-50). Another nongovernmental organization in the area called PSI was dispensing subsidized nets in the same clinics as TAMTAM. The case examined the sale of PSI nets in various clinics at very price points. While the demand for nets was sensitive to the price, demand increased greatly as the price dropped towards zero (Banerjee and Duflo, 49-50). However, this is all moot as a fifteen percent increase in income resulting from the usage of said bed nets, enough to raise people out of the poverty trap, still did not incentivize the purchase of bed nets. It seems that there was no correlation made between the positive health outcomes from the usage of the bed nets and increased income, shown in an only five percent increase in usage of bed nets in the next generation (Banerjee and Duflo,49-50).

The aid would be better spent in improving the low adoption rate of mosquito nets over successive generations. The mosquito nets, while a cheap and easy form of aid meant to break the poverty trap, is misdirected and economically wasteful because its outcomes are so dismal.  Foreign aid would be better directed at creating and supporting institutions that would use mosquito nets as part of a comprehensive plan to educate the impoverished on the importance of improving and investing in health. Though the proper economic incentives are in place in this case, the lack of personal initiative in the face of such incentives implies the need for stronger institutions and social services that would move past simply distributing items and instead working to compel communities to adopt measures that will in the long run reduce poverty.

Mosquito nets are but one example where the foreign aid is misdirected on distributing goods rather than improving institutions that can build important social services. The narrative of Nick Wadhams in Nairobi gives an example of distorted economic incentives. Foreign aid can be well intentioned and seemingly innocuous, as was Jason Sadler’s idea of donating extra shirts from his company to Africa (Wadhams,1).What he failed to realize is that the shirt market in Africa was doing reasonably well independently of foreign aid. If Sadler had indeed sent his shirts, the market would have been overcome with shirts, and people would no longer find the need to buy them, thereby destroying the local industry. Distorted economic interests can happen by flooding the market with free goods and can bankrupt those who sell them which can lead to collapse of entire industries that were sustaining the economy, meager or otherwise.  The role of domestic investment and the incentives that drove it were destroyed just as the local shirt market was destroyed. William Easterly makes the case against foreign aid given in a form such as Sadler’s because it obviates the incentives that drive domestic investments and allows the governments of these countries to accede responsibility for their citizens to foreigners (Wadhams, 1). Again, foreign aid distributed as goods is not as effective as concentrating on building the institutions that would support domestic economies. Aid focused on creating a stronger bank and lending system could drive entrepreneurs to start businesses to drive economic growth. Aid in this case would not come just as money, but in the form of experienced professionals and advisors to help a country put the long term structures in place that make investing capital worth it for domestic investors. This would potentially enable sustainable economic growth of domestic industries, thereby ensuring that the country or region was on the path to self-reliance and eventually not require international loans.

Aid would be better served in creating institutions that could drive domestic investment and good governance, such as tying to improvements in governments as defined by an international body. Easterly argues that in the past, aid has been used to prop up dictatorships such as Paul Biya’s regime in Cameroon. He has received significant amounts of loans from the International Monetary Fund in order to promote growth, but has no results to show for it. Cold War strategic loaning practices have not ended with the Cold War and continue to support dictators across the globe (Easterly,3). The Biya example is an illustration of the poor usage of foreign aid funds, which have resulted in the continued victimization of the citizens of impoverished nations, such as Cameroon. Labeled as foreign aid, IMF funds are directed as loyalty payments to dictators that have expressed their interest in democratization (Easterly, 8). This itself a reason as to why aid has not had the positive effects in places such as Africa. Aid has been given to dictators, without strings attached to promote good governance, but as payments for public statements espousing imaginary beliefs in democratic values (Easterly, 7). This is the ultimate example of the failure of foreign aid. Aid is overly concerned with addressing the concerns of the people directly, which in the case of Biya is assuming that a corrupt government will take the time to distribute and utilize aid effectively when instead everyone knows the money was never meant to be utilized in that manner. Foreign aid should not be focused on the people directly, but that the results of foreign aid should in the end be beneficial to the impoverished.

The above examples exemplify the issues that are at the heart of the concerns regarding foreign aid. Foreign aid is misdirected and overly focused on the repetitive giving of goods rather than building and supporting institutions.  If foreign aid is meant to be successful, there must be institutions in place that can implement and provide numerical feed back as to the effects of the loans. It should be focused upon the betterment and empowerment of a civilian population, to create sustainable economic growth.

To be continued!

 

Works Cited

Banerjee, A., and E. Duflo. Poor economics, a radical rethinking of the way to fight global poverty. Public Affairs, 2012. Print.

Sachs, Jeffrey D. “Can Extreme Poverty Be Eliminated.” Scientific American Sep. 2005: 56-65. Print.

Sachs, Jeffrey D. “The Geography of Poverty and Wealth.” Scientific American. Mar. 2001: 70-75. Print

The New York Review of Books. “Foreign Aid For Scoundrels.” The New York Review of Books. Web. 4 Sep. 2012. <http://nybooks.com/articles/archives&gt;

TIME. “Bad Charity? (All I Got Was This Lousy T-Shirt!)” TIME. Web. 4 Sep. 2012. <http://www.time.com/time/printout/0,8816,1987628,00.html&gt;