Thoughts on Foreign Aid

Matt Collin, a research fellow over at CGD – Europe, has a nice quick and dirty video on the issues and reality of foreign aid.

He brings up a good point that is often hastily brushed over in the aid vs. trade debate. (Which apparently is still a thing, because my post on ‘The Great Aid Debate’ is still constantly one of my most viewed blog posts.)

It seems to me (at least in the public realm) we’ve lost track of the long-run vs. short-run dynamic.

In the long-run economics 101 tells us that markets are efficient, profits converge on zero, price equals marginal cost, etc. etc. In the long-run aid is, ideally, not a thing we want to be dealing with. Here’s where it gets tricky.

J.M. Keyens (yes, the Keynes v Hayek guy) has this quote that is often said in jest: “In the long-run… we’re all dead.”

The sad reality is for too many people around the world this is not a joke. And THAT’S why we need to ditch this meaningless aid vs. trade debate and focus on three things:

  1. Advocating our national governments to budget for more foreign aid.
  2. Invest in organizations and agencies who are committed to using aid most effectively. (i.e. elevating the most poverty per dollar spent.)
  3. Learn how aid can be used in ways were it doesn’t harm long-run development, but also doesn’t forget about those who are currently trapped in grinding poverty.

Why We Do Rigorous Evaluation

Over the past week there has been an interesting debate between activists and academics in the comments section of this article, entitled 10 Reasons Fair Trade Coffee Doesn’t Work by Bruce Wydick.

As the title of the piece hints, Bruce isn’t the biggest fan of Fair Trade coffee. As you can probably imagine, this opinion is not generally accepted. One commenter, Dean’s Beans Organic Coffee Company, (perhaps sarcastically), invites Bruce (who is releasing a book on the global coffee industry) to “see what real fair trade looks like”. Wydick responds,

Thanks for your reply, and it is a great illustration of why we need to do serious academic research and not rely on observations and anecdotes. The differences you observe may partly be caused by membership in a fair trade cooperative. More likely they are due to a selection bias where villages and groups of people who are well-organized and forward thinking do things like join fair trade coops. In other words, many of the differences we observe in communities are due to causal factors other than the program. The reason we do serious research rather than rely on anecdotes and stories is to separate what appears to be true from what is true, on average. There are a number of ways to statistically separate and identify causal effects that researchers to find out what true impacts are. (If you want to explore these, I would suggest with Poor Economics, by Esther Duflo and Abhijit Banerjee as a start.) What is true, on average, and corroborated by paper after paper is that fair trade coffee has minuscule impacts compared to other worthy types of development programs, and it is sad because many people as yourself are unaware of how poorly fair trade coffee performs as an approach to free people from poverty.

This was responded to with misunderstanding and naiveté. Wydick goes on to clarify,

Appreciate the comments people have posted on the article, and I want to respond to a few more of them.

Several people have downplayed the results of “academic studies” in favor of hearing individual voices of producers and others involved with fair trade. When evaluating the merits of a program or an issue, individual voices are important, but not as conclusive as rigorous research that seeks to find the “average” of what the voices (and data) are saying. For example, if any of us had a child who was suffering from a rare form of cancer, we would make our treatment choice based on the evidence the best academic research gives in an evaluation of each type of treatment. And we clearly wouldn’t base such a critical decision on how a certain individual felt who had had the treatment, or, especially, the opinions of those in the pharmaceutical companies who sell the drug, who of course have a conflict of interest in how the treatment is perceived by the public. Development interventions are just as serious as cancer treatments because we are dealing with the lives and livelihoods of people often living very close to subsistence, where bad interventions can prove very costly. They have to be rigorously evaluated to see if their claims hold up.

Academics are kind of in this referee role in a number of areas, and many people do not like their findings. They may conflict with strongly held prior beliefs, identities, and institutions in which they have a personal investment. The case of global warming is another example where academics clearly show a consensus about its existence and causes. Yet there are many who feel comfortable countering the evidence presented in a high-quality study in the journal Science with “how darn cold it was in Chicago last week.” Others will deny global warming because they don’t want to change their habits, and so denying that it exists justifies inaction.

In the case of fair trade coffee, the central purpose of the system is to increase the income of impoverished coffee growers. This is an effort entered into with the best of motives. But research overwhelmingly shows it does not do this well, if at all. Since this is the case, rather than take a defensive posture toward the findings of academic studies, it would be refreshing to see the fair trade coffee industry begin to act more constructively and begin to correct the flaws in the system.

Obviously, I side with Wydick in this debate. I encourage you, however, to read the original article and the ongoing debate in the comments section and decide for yourself.

The Aid Debate is Growing Up

Last week was “aid week” on Oxfam’s From Poverty to Power blog and one thing is clear: the aid debate has grown up. No longer are we arguing over the efficacy of distributing insecticide mosquito nets for free (thanks J-PAL), we are now actually moving somewhere productive and confronting real issues.

Nicola Mclvor lists some of the issues at stake at last week’s first High Level Meeting of the Global Partnership for Effective Development Cooperation. Some issues include:

–       The voice of the vulnerable to drive their own development

–       What is the role of the private sector?

–       What will our post-2015 goals be?

Duncan Green, author of “From Poverty to Power” (the book) and editor of From Poverty to Power (the blog) recently articulated his qualms with Angus Deaton’s attack on aid found in his own recent book “The Great Escape”.

Green summarized Deaton’s opinion on aid in Deaton’s own words:

‘Economic development cannot take place without some sort of contract between those who govern and those who are governed…. It is the need to raise taxes, and the difficulty of doing so without the participation of those who are taxed, that places constraints on the government and to some extent protects the interests of taxpayers…. One of the strongest arguments against large aid flows is that they undermine these constraints, removing the need to raise money with consent.’

In other words, bunging aid money to governments means they no longer have to listen to their citizens and opens the door to all kinds of bad practices.

Green correctly points out why we’ve had so much trouble coming to answers about aid effectiveness.

The aid discussion follows the classic pattern of…

1) A blizzard of cross country regressions reaching contradictory findings, eg one IMF study finds ‘aid improves revenue performance significantly’, while another asserts with equal certainty ‘tax revenue declines by 9 cents for each grant dollar.’

2) Baffled researchers then revert to ‘priors’ and political theory, to argue that aid does indeed undermine institutions. Eg see this 2006 CGD paper.

Green goes on to point out that while Deaton’s theory of aid undermining political connectivity within recipient countries is on the right track, Deaton’s claim that we need to take a hatchet to aid budgets goes a bit too far. Today aid donors and recipients are making commitments to ‘country ownership’ and ‘inclusive development partnerships’. So while aid has seriously undermined political process in the past there are evermore-serious efforts in place to ensure these errors do not happen again.

Angus Deaton was given the chance to respond to Green’s allegations. Deaton summarizes his opinion in three points:

Here is my take-away: (a) controlling for the factors that usually appear in growth regressions, aid as a share of recipient GDP is negatively correlated with growth, (b) similarly controlled, the change in growth is positively related with the previous period’s change in the aid to GDP ratio, where periods are several years long, and (c) the share of aid in GDP is larger for small recipients than large recipients, but the latter grow more rapidly than the former.

So why does aid often fail in aggregate? Deaton says, “Money and know-how are not the issues; power is the problem, and politics the solution.”

With a government in control, it is impossible to reach those who are powerless without paying the powerful, and paying the President and the government will make them less interested in listening to their people. Instead of having to raise money through taxation and deliver services in return, they can instead use their people to extract money from donors. They can enrich themselves by keeping their population poor; such aid is an instrument of inequality. Some governments may be more benevolent, but large, prolonged amounts of aid ultimately corrupt benevolent rulers, or cause them to be replaced by exploitative rulers.

Deaton ends by recalling the argument of Amartya Sen who made the claim that “the components of freedom are also instrumental in producing it: we make trade-offs between different freedoms at our practical and ethical peril.”

As it happens there was an incredible debate of sorts (somehow they both won) at the Center for Global Development a couple weeks ago between Professor Bill Easterly and Owen Barder. They weren’t intending to talk about aid, instead opting to debate the role of rights in development and the responsibilities (if any) of development “experts”, so naturally they talked about aid.

The debate is quite good. The thoughts and observations of BOTH Bill Easterly and Owen Barder deserve to be considered and scrutinized. A few highlights:

–       Owen Barder, an admittedly non-religious man, ends his opening statement with a call for the need of humility within the work of development experts and used the words (prayer) of Reinhold Niebuhr as a useful posture:

God, give us grace to accept with serenity
the things that cannot be changed,
Courage to change the things
which should be changed,
and the Wisdom to distinguish
the one from the other.

–       Gary Haugen’s (President of IJM) newest book, “The Locust Effect: Why Ending Poverty Requires the End of Violence” (which I reviewed several months ago) getting some play in the development mainstream.

Just as Sherlock Holmes is able to learn something from asking, “Why didn’t the dog bark?”, it seems we can learn something by asking, “What typical aid debate contributor is absent from this whole discussion?”

A Week in Rewind: ‘The Great Aid Debate’

This week has been kind of a blur for development economics. The publishing of the annual letter on aid and development by the Gates Foundation sparked the dry kindling that is “the great aid debate” (or perhaps better known as Jeff Sachs vs. EVERYBODY else).

If you happened to miss all of this (a.k.a. if you don’t have a Twitter account) or if your head is spinning and you don’t know what to think; allow me to (try to) make some sense of the letter, articles, blog posts, and tweets that have been published and republished this week.

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