No free lunches in development

In a recent interview to the NYT, lamenting at the rich countries reluctance to help developing countries during the recent pandemic, Nobel laureate economist Esther Duflo said,

Rich countries could have agreed on a financial package for the poor nations, so they could help their citizens. But it didn’t happen, so the rich nations spent about 24 percent of their GDP in fiscal stimulus measures but the poor nations only had 2 percent to spend. It would have been a drop in the bucket for the rich countries to help the poor nations spend the same proportion of GDP because their GDPs are much smaller.

This argument is commonplace in several contexts, especially in the context of aid and international development and in public finance allocations. Since the cost of financing some important expenditure is only a small share of the total expenditure being borne by the entire government, it's easy to meet the requirement. 

This comparison is as strikingly appealing as it's profoundly misleading. It's pure rhetoric. 

All public finance, especially given the times of severely strained national government fiscal balances, is about allocation of acutely scarce resources among several equally important (in the eyes of different stakeholders) competing needs. Some demands will be met, and many not. So there is a serious  and fiercely competed opportunity cost to the allocation for any expenditure item, howsoever small. This rationing of allocation squeezes out certain equally important expenditure needs, which deprive beneficiary stakeholders and hurts the respective implementing bureaucracies. It's therefore natural that those losing out in the rationing process push back very strongly. 

In case of aid, in times of burgeoning domestic needs and constrained budgets, it's only natural that the public question the idea of supporting poverty eradication efforts in some distant developing country. Even within the government, the Transport or Education Departments, which have received far less than they demanded, would naturally quibble at their allocations being pruned down to meet the aid requirements. There are no free lunches!

I'm not saying anything against the merits of giving aid. All I want to say that such arguments are pure rhetoric. They serve only to make political points without in any way addressing the problems being highlighted. Fundamentally, governments have no discretionary slack available in their revenues, and all expenditures (howsoever small and whether efficacious or not) have some or other strong interest groups behind them who'll strongly oppose any displacement from their budgets.