Department of Economics

Faculty of Economic and Management Sciences

Economic and Development Problems in South Africa and Africa

Understanding Foreign Aid

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TODAY: Understand the “Aid debate”

1. What are the main arguments for and against traditional forms of aid?

2. What is the way forward i.t.o. aid?• Incorporate objections and propose a

thoughtful solution

Aims for today

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Aid – The good, the bad, and the ugly

• THE GOOD• Poverty Trap• Big Push• Firemen logic

• THE BAD• Planners vs Searchers

(Easterly)• Feedback &

accountability• Volatility & Voluntarism• Lack of coordination • Policy conditionality • A cartel of good

intentions (Easterly)

• AND THE UGLY• Political, commercial and

strategic interests of donors

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Aid – The ‘good’...

• Sachs • ‘Poverty trap’ • Firemen logic• Big push• Conclusion?

• BIG SOLUTIONHealth – Education - Infrastructure

Poverty

Living hand-to-mouth

No savingNo investment

No infrastructure. Capital,

tech

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• Initially = gap funding view of aid• Developing countries are poor because they

have too little money• Consequently cannot buy sufficient capital,

infrastructure and expertise• Associated with big push view of development• If developed countries can transfer sufficient

goods/money, this should solve poverty and fuel growth in developing countries

• SuccessesA. ARV’s (40 000 1mil in 5 yrs)B. Smallpox eradication C. Measles (100 000 40 000)D. River-blindness

Aid – The ‘good’...(cont)

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But…what does history say?

Easterly -

• $2.3 trillion over last 50 years

• What do we have to show for it?

• {Duflo counterfactual}

‘Post-hoc ergo propter hoc’

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Aid – The bad...

• “Two years after the breakup of the Soviet Union, British economist Paul Seabright was talking with a senior Russian official who was visiting the UK to learn about the free market. “Please understand that we are keen to move towards a market system,” the official said, “But we need to understand the fundamental details of how such a system works. Tell me, for example: who is in charge of the supply of bread to the population of London?” The familiar but still astonishing answer to this question is that in a market economy, everyone is in charge. ”

• What does the bread supply in London have to do with aid?!

• Planners vs Searchers (Easterly)• ‘Utopian social engineering’ vs ‘piecemeal

democratic reform’ (Popper)

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Aid – The bad...

• “Two years after the breakup of the Soviet Union, British economist Paul Seabright was talking with a senior Russian official who was visiting the UK to learn about the free market. “Please understand that we are keen to move towards a market system,” the official said, “But we need to understand the fundamental details of how such a system works. Tell me, for example: who is in charge of the supply of bread to the population of London?” The familiar but still astonishing answer to this question is that in a market economy, everyone is in charge. ”

• What does the bread supply in London have to do with aid?!

• Planners vs Searchers (Easterly)• ‘Utopian social engineering’ vs ‘piecemeal

democratic reform’ (Popper)

Conclusion? SMALL SOLUTIONS

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Asking the right question?

1. If we want to end poverty in our lifetime, what does this require of aid? ?

(Sachs)

________________________________

2. What can aid do for poor people? ?

(Easterly)

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Aid – The bad...(cont)

• Political and governance dimensions of aid relationship • ‘Ownership’ an article of faith• Governance = ‘activities, institutions, and processes involved in

effectively managing and running a countries affairs in all it’s different spheres, economic, political and administrative, including the relationships between the state and the wider society” (Ridell, 372)

• Trilemma:1. Aid needs institutions to work, 2. The poor need aid, 3. Poor countries usually have bad institutions

• Feedback & Accountability - Who is responsible if the aid does not accomplish what it was meant to? (warm glow & Inter-temporal accountability?)

• Most often, countries with greatest need for development aid have the least capacity/ability/commitment to put the aid to good use (Riddell) – lack institutions• Resource rich but policy poor?

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Aid – The bad...(cont)

Bureaucracy

• “It is a paradox of foreign aid that it demands the most from bureaucracy under the conditions in which bureaucracy functions worst”

• Crowding out?

• Writing aid-proposals or completing donor-applications is a professional skill which immediately precludes thousands of smaller recipients from consideration.

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World Bank Organization Chart

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Perverse incentives of aid1. Foster dependency 2. Food aid crowding out farming3. Aid can protect (prop-up) bad

governments from the consequences of their own incompetence or imprudent policies

4. Donor dependence1. NGO’s become more bureaucratic and are accountable to

donors not recipients 2. Due to small tax base and large share of funds from donors,

government may become accountable and responsive to donors not voters

3. Who is the client?! (Principal – Agent problem)

Aid – The bad...(cont)

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Aid – The bad...(cont)

Lack of coordination among aid agencies• 35 000 separate official aid transactions each

involving approx 25 donors• Competition? Replication? • Inefficiency? Parallel systems (Cannibalism?)• Undermines and reduces potential impact of aid

Policy conditionality• Do no harm?• Washington Consensus or Washington Confusion

‘Stabilize, Privatise, Liberalize’

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Aid – The bad...(cont)

A cartel of good intentions (Easterly)1. Define their output as money dispersed rather than

services delivered 2. Produce many low-return observable outputs like

glossy reports and ‘frameworks” and few high-return less observable activities like ex-post evaluation. (only 5% of WB loans were evaluated ex-post, very few controlled experiments. Only evaluation = self-evaluation unobjective)

3. Engage in obfuscation, spin control, and amnesia (“new and improved”) so that there is little learning from the past

4. Put enormous demands on scarce administrative skills in poor countries

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Aid – The bad...(cont)

A cartel of good intentions (Easterly)1. Define their output as money dispersed rather than

services delivered 2. Produce many low-return observable outputs like

glossy reports and ‘frameworks” and few high-return less observable activities like ex-post evaluation. (only 5% of WB loans were evaluated ex-post, very few controlled experiments. Only evaluation = self-evaluation unobjective)

3. Engage in obfuscation, spin control, and amnesia (“new and improved”) so that there is little learning from the past

4. Put enormous demands on scarce administrative skills in poor countries

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Aid – The bad...(cont)

Is there anything new under the sun?

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Aid – The bad...(cont)

‘do everything’ / Big Plan

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Aid – The bad...(cont)

Volatility and Voluntarism in aid-giving• Due to voluntary nature of aid volatile• Volatility unpredictability Difficult to plan well• Multilateral vs Bilateral aid• Governments usually more stable than private

donors, but...“In short, the current methods of allocating aid for both emergency and development purposes, in aggregate or to particular countries, are not based on any system which effectively matches needs with the aid funds provided, or which even tries to do so”

(Ridell, 2007: 360) D&S

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• Summarize economist article in 25 words and 60 words

•NOT ALL INFORMATION IS OF EQUAL VALUE

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Aid – The bad...(cont)

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Aid – and the ugly...

Political, commercial and strategic interests of donors• < 50% of all aid goes to the poorest 65 countries (2005

stats)• Strings attached

• 60% of ODA is ‘tied’ or partially tied i.e. The aid must be used solely/partially ‘for the purchase of goods and services, including technical assistance and consultancy services, originating in the donor country’ (Ridell, 2007: 358) [U.S-Iraq?!] [China-Africa! Chinese labourers]

• Increases costs by 20% and often means accepting resources which aren’t high on the priority list

• Decreases potential development impact of aid by 1/3• Opening potential markets, buying allegiance,

covert support?• And the plot thickens...

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Aid – and the ugly...

Foreign aid – aiding our interests one nation at a time

• 60% of ODA is ‘tied’ or partially tied i.e. The aid must be used solely/partially ‘for the purchase of goods and services, including technical assistance and consultancy services, originating in the donor country’ (Ridell, 2007: 358) [U.S-Iraq?!]

• Increases costs by 20% and often means accepting resources which aren’t high on the priority list

• Decreases potential development impact of aid by 1/3

‘Yet the Americans wield influence over a regime (Egypt) that depends on them for $1.5 billion a year of aid and almost all its modern weaponry….Mr Mubarak’s immediate value to the superpower is summarised conveniently in a 2009 State Department cable disclosed by WikiLeaks. It says that America’s strong military relationship with Egypt has supported peace between Egypt and Israel and ensured critical access to the Suez Canal and Egyptian airspace for American military operations. Mr Mubarak and Egypt’s military leaders, the cable says, see America’s aid to Egypt as “untouchable compensation” for making and maintaining peace with Israel” (Economist, Feb 5th 2011)

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Aid – and the ugly...

Foreign aid – aiding our interests one nation at a time

Political, commercial and strategic interests of donors• < 50% of all aid goes to poorest 65 countries (2005

stats)• Strings attached

• 60% of ODA is ‘tied’ or partially tied i.e. The aid must be used solely/partially ‘for the purchase of goods and services, including technical assistance and consultancy services, originating in the donor country’ (Ridell, 2007: 358) [U.S-Iraq?!]

‘Yet the Americans wield influence over a regime (Egypt) that depends on them for $1.5 billion a year of aid and almost all its modern weaponry….Mr Mubarak’s immediate value to the superpower is summarised conveniently in a 2009 State Department cable disclosed by WikiLeaks. It says that America’s strong military relationship with Egypt has supported peace between Egypt and Israel and ensured critical access to the Suez Canal and Egyptian airspace for American military operations. Mr Mubarak and Egypt’s military leaders, the cable says, see America’s aid to Egypt as “untouchable compensation” for making and maintaining peace with Israel” (Economist, Feb 5th 2011)

Aid

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Looking at the bigger picture• Other Government policies not supportive of aid

policies?• Poaching nurses and doctors? SA? DFID and UK

Health Dep• Trade?? – Arms and agriculture? (next slide)

Bigger picture?

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Trade• “Developed countries tariffs remain high on

goods that are strategically important to developing economies, such as textiles and farm products” ??

Promising more aid is easier than dismantling politically sensitive agricultural subsidies that favour Western farmers at the expense of African ones.....

• Developed countries are quick to condemn trade in ‘blood diamonds’ which prolong and promote war, but little has been done to limit the sale of arms to many aid-recipient countries?? (Holistic strategy?) (French in Rwanda! During Genocide)

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Getting the egos out the way...“The aid sceptics—some of them veterans of the industry, their palms calloused from many previous bouts of hand-wringing over Africa—have all the best lines in the debate. Everything has been seen before, they say, nothing has worked. But what do they mean precisely? Do they mean that the World Health Organisation should abandon its efforts to put 3m HIV-carriers on anti-retroviral therapies? Perhaps those already on the drugs should hand them back, lest they succumb to “dependency”. Should Merck stop donating its drug, ivermectin, to potential victims of riverblindness? Let Togo reinvent the drug itself! Perhaps, in the name of self-reliance, Tanzania's government should stop giving pregnant women vouchers to buy mosquito nets. Get sewing, ladies!No one should be naive about aid. It cannot make poverty history, and it can do harm. But to say that nothing works is wrong. Cynicism is only the most common form of naivety. “

Esther Duflo: Social experiments to fight poverty

“Intelligence squared Aid to Africa debate”

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1. Missing money (Sachs) vs. missing institutions (Easterly)?

2. Can one have a ‘big plan’ w.r.t. aid?3. Is a ‘big plan’ necessary to mobilise the

obese?4. Thematic vs. Mechanical outlook on

aid?5. To what extent is aid political? Does it

matter?6. Is aid really the key issue to tackle?

Trade?7. Can aid create good

policies/institutions? How?8. Aid 2.0 ???

Points to think about…

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Readings…

• -  Birdsall, N. 2008. Seven Deadly Sins: Reflections on Donor Failings  In Easterly, W. (ed.)Reinventing Foreign Aid. Cambridge, Mass: The MIT Press.

• -  Easterly, W. 2007. Planners vs Searchers. In The White Man’s Burden. Oxford: Oxford University Press.

• -  Riddell, R. 2007. Why aid isn't working. In Does Foreign Aid Really Work? Oxford: Oxford University Press

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