Sunday, September 9, 2012

The mis-directed debate on Aid

Whether external aid is effective or not is arguably one of the most controversial topics of debate. Critics point to the several examples of corrupt and under-developed aid recipient countries, especially in Africa, and argue that aid programs have been ineffective. Some go further and argue that aid has positively damaged governance systems in these countries by, among other things, increasing rent-seeking opportunities and thereby increasing corruption and promoting governance failures.

I am inclined to believe that the critics of aid miss the point on the following counts

1. Failures in aid utilization are no different from the inefficiencies (and wastage and corruption) that characterize the regular public programs in these countries. An appropriate comparison would be the relative performances (in terms of achievement of outcomes) of similar programs in a sector in different parts of a country (after controlling for the regional differences) run with aid and domestic finances. My feeling is that the externally funded program, despite all its failures, would have been more effective than the domestic program.

There cannot be any absolute touchstone for measuring the effectiveness of aid utilization. Its effectiveness has to be seen in light of the general governance standards of the recipient country.

2. It may not be appropriate to paint all aid with the same brush. There exist wide variations across countries and programs/sectors. A more helpful and serious criticism would be to identify areas or regions/countries where aid may not be having the desired effect and similarly where they are successful. In countries like India, which have received huge amounts of aid, there is little to show that aid money has been less efficiently spent than the domestic government funds nor has it failed to achieve substantial (albeit less than would have been originally hoped) gains. 

3. Considering that aid is an external cashflow aimed at supplementing the local government finances, it is no different from any other sudden one-time domestically generated cashflow. Extending the logic that aid corrupts polities, one could as well argue that these countries should be denied access to any lumpy finances. The same logic underlies the "resource curse" faced by countries with huge natural resource reserves. Again extending the logic, we would have to argue that since the resource stocks are harmful to that country (by corrupting its polity), it should be deprived off those resources.

Apart from these there are several other more commonly argued responses in support of aid. If we are to make an meaningful dent in addressing the issue of effective aid utilization, it may be more appropriate to focus on identifying areas and sub-sectors where the marginal returns from such funds can be very high. Most of the aid falls into a general routine pattern across the world, flowing into health, education, and livelihood creation. Such programs, however well-crafted, are likely to get subverted as it winds its way through the domestic bureaucratic systems.

In conclusion, I am inclined to believe that the rightful indignation at the perceived shortcomings of aid programs is rooted in its obvious failure to achieve the desired objectives. But the moot point is whether the objectives were themselves too unrealistic, given the governance standards in the recipient countries. 

1 comment:

KP said...

Dear Gulzar,

The west has used aid as a foreign policy carrot to rulers / elected representatives in Africa. This extractive relationship has many shades, mostly negative but some genuinely interested in improving the African continent.

However, almost always the larger theme has been an extractive relationship and a corrupting influence - not constrained by any of the transparencty requirement that would affect the elected western governments in their own backyard.

Whether it is the francophone influence ( ex - Gabon / uranium)/ British or American influence in extractive industries - the theme is almost always the same.

Whats new ? It is China with an attitude that means business. Not for them a colonial legacy / or a condescending relationship that flows from the west's assumption of superiority.

My guess is that most of the earlier inefficiencies can be explained - and the money trail will go back to the west - i.e. money siphoned may have never ever reached intended recipients.

What has changed ? China knocking the credibility of a "benign supportive west with all the blather of democracy and choice" - using it to impose its cultural views / expanding its markets. China simply got down to the business of providing what it negotiated - and driving a hard bargain in return.

Heres a blog post from HBR that gets it right

How China's Approach Beats the West's in Africa by Stephan Richter

The author gets a lot right "In the past, a toxic combination of corruption, murky ties between ex-colonizing countries (and their business elites) and the new rulers, and overly complex planning structures derailed project after project. Given the ability to deliver projects on time and on budget, the Chinese offer Africa's governments and people a clean-cut deal: If you work with us, we will build it — period. No ifs, ands, or buts."

But then again the author comes up with lines that stretch credibility - "The formula the West applied to post-independence, post-1960 Africa was one that focused on democracy-building over market-building." really ???

In market terms China has started delivering real value and called the West's bluff - now atleast we can see some real efforts to get infrastructure off the ground in Africa.

China may be the best thing that happened to African governments - between all patronizing and getting nothing off the ground (all bandied billions disappearing in thin air) - it is now all business (with all its downsides too) - but at least there is some real progress on the ground, particularly in infrastructure.

regards, KP.