Economic and Development Problems in South Africa and Africa
Understanding Foreign Aid
Department of Economics

Faculty of Economic and Management Sciences
Aims for today
• Admin www.nicspaull.com/teaching
 TODAY: Understand the “Aid debate”
2
1.
What were some of your “take-away” points from the Mwenda
lecture?
2.
What are the main arguments for and against traditional forms
of aid?
3.
What is the way forward i.t.o. aid?
• Incorporate objections and propose a thoughtful solution
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
•
3
Political, commercial and
strategic interests of donors
4
Aid – The ‘good’...
• Sachs
• ‘Poverty trap’ 
• Firemen logic
• Big push
• Conclusion?
• BIG SOLUTION
Health – Education - Infrastructure
5
Poverty
No
infrastructure.
Capital, tech
No investment
Living handto-mouth
No saving
Aid – The ‘good’...(cont)
• 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
• Successes
A.
B.
C.
D.
6
ARV’s (40 000  1mil in 5 yrs)
Smallpox eradication
Measles (100 000  40 000)
River-blindness
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’
7
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)
•
8
‘Utopian social engineering’ vs ‘piecemeal democratic reform’
(Popper)
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?
9
SMALL SOLUTIONS
Asking the right question?
1. If we want to end poverty in
our lifetime, what does this
require of aid? ?
(Sachs)
________________________________
1. What can aid do for poor
people? ?
(Easterly)
10
11
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
Who is responsible if the aid does
not accomplish what it was meant to? (warm glow & Inter-temporal
Feedback & Accountability 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
•
12
Resource rich but policy poor?
Dambiso Moyo – “The fundamental problem of an aid-based
economy” (@1min)
13
Aid – The bad...(cont)
Bureaucracy
14
•
“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.
World Bank Organization Chart
15
Aid – The bad...(cont)
Perverse incentives of aid
1. Foster dependency
2. Food aid crowding out farming
3. Aid can protect (prop-up) bad governments from the
consequences of their own incompetence or
imprudent policies
4. Donor dependence
1.
2.
3.
16
NGO’s become more bureaucratic and are accountable to donors not
recipients
Due to small tax base and large share of funds from donors, government
may become accountable and responsive to donors not voters
Who is the client?! (Principal – Agent problem)
17
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’
18
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
19
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
20
Aid – The bad...(cont)
Is there anything new under the sun?
21
Aid – The bad...(cont)
‘do everything’ / Big Plan
22
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
Speaking of “aid” is a misnomer
23
• Summarize economist article in 25 words
and 60 words
•NOT ALL
INFORMATION IS
OF EQUAL VALUE
24
Aid – The bad...(cont)
25
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...
26
Aid – and the ugly...
Foreign aid – aiding our interests one nation at a time
‘Yet the Americans wield influence over a regime (Egypt) that
depends
for $1.5
billion
a year
• on
60%them
of ODA
is ‘tied’
or partially
tied of
 aid
i.e. and
The almost
aid mustall
be its
used
modern weaponry….Mr
immediate
value
the superpower
is
solely/partially Mubarak’s
‘for the purchase
of goods
and to
services,
including technical
summarised
conveniently
in a 2009
Department
cable
disclosed
assistance
and consultancy
services,State
originating
in the donor
country’
(Ridell,
by WikiLeaks. It says that America’s strong military relationship
2007: 358) [U.S-Iraq?!]
with Egypt has supported peace between Egypt and Israel and
• Increases
by 20%
often
means
accepting
aren’t
ensured
criticalcosts
access
toand
the
Suez
Canal
and resources
Egyptian which
airspace
for American
Mr Mubarak and Egypt’s military
high onmilitary
the priorityoperations.
list
leaders,
the cable
see impact
America’s
• Decreases
potentialsays,
development
of aid by aid
1/3 to Egypt as
“untouchable compensation” for making and maintaining peace with
Israel” (Economist, Feb 5th 2011)
27
Aid – and the ugly...
Foreign aid – aiding our interests one nation at a time
‘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 interests
value to the
Political,
commercial
and strategic
of superpower
donors is
summarised conveniently in a 2009 State Department cable disclosed
< 50% of allIt
aidsays
goes that
to poorest
65 countries
stats)relationship
by• WikiLeaks.
America’s
strong (2005
military
with
Egyptattached
has supported peace between Egypt and Israel and
• Strings
ensured critical access to the Suez Canal and Egyptian airspace
• 60% ofmilitary
ODA is operations.
‘tied’ or partially
 i.e.
The
aid must
be used
for American
Mr tied
Mubarak
and
Egypt’s
military
the purchase
goods and services,
including
technical
leaders, solely/partially
the cable‘for says,
see ofAmerica’s
aid to
Egypt
as
“untouchable
compensation”
making
and maintaining
peace (Ridell,
with
assistance
and consultancyfor
services,
originating
in the donor country’
Israel” (Economist,
Feb 5th 2011)
2007: 358) [U.S-Iraq?!]
Aid
28
Bigger picture?
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)
29
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)
30
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. “
•
See
KIVA.org
OIKO.org
Esther Duflo:
Social experiments to fight poverty
“Intelligence
31
squared Aid to Africa debate”
Points to think about…
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?
32
8. Aid 2.0 ???
Readings…
33
•
- 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
34