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April 06, 2006

Instead of Foreign Aid

A lead essay on Cato Unbound by William Easterly correctly diagnoses the tragic failure of foreign aid programs and then, in my view, prescribes exactly the wrong remedy: another bureaucracy.  However, looking at the economic success of India and China – together almost a third of the world’s population – suggests a much more effective way of helping the impoverished than foreign aid.

Easterly’s description of the tragedy:

“This is the tragedy in which the West already spent $2.3 trillion on foreign aid over the last 5 decades and still had not managed to get 12-cent medicines to children to prevent half of all malaria deaths. The West spent $2.3 trillion and still had not managed to get $4 bed nets to poor families. The West spent $2.3 trillion and still had not managed to get $3 to each new mother to prevent 5 million child deaths. …It’s a tragedy that so much well-meaning compassion did not bring these results for needy people.

“The West’s efforts to aid the Rest have been even less successful at goals such as promoting rapid economic growth, changes in government economic policy to facilitate markets, or promotion of honest and democratic government. The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country no richer today than 40 years ago….”

Easterly gives a nod to India and China’s success: “While the West was agonizing over a few tens of billion dollars in aid, the citizens of India and China raised their own incomes by $715 billion by their own efforts in free markets.”

But his proposed solution ignores that success.  His prescription is: “The solution is as obvious as it is unpopular—create a truly independent group of evaluators who have no conflict of interest with the World Bank or other multilateral development banks.”  Also hold aid agencies accountable.

Possibly ignorant of all the work that has been done to evaluate aid efforts (and all the money spent on THAT), Easterly presents for emulation a Mexican project which aided some villages and kept others as a control.  Not surprisingly, the aided villages did better.  The results were used to declare the intervention a success.

This kind of study ignores three crucial factors:

  1. The study is not a double blind (and can’t be).  The villages that were aided know that they’ve been aided.  It’s a well known phenomenon in both medical testing and industrial engineering that groups which believe they’re being helped actually do better.
  2. It may have been that the average village would have improved through the study period with or without aid.  But giving aid to half the villages may have assured that most of the improvement was concentrated in the aided villages at the expense of the villages which didn’t get aid.
  3. There was neither a comparison with other possible programs OR a cost/benefit analysis.

Also, the one study Easterly cites as an example for how foreign aid should be conducted going forward is a study of DOMESTIC aid.  It is a Mexican government study of a Mexican government program. Domestic aid is much more effective than foreign aid and that helps point to a way the West can help the Rest escape poverty.

More evaluation is just tinkering around the edges and ignoring the fact that foreign aid doesn’t work – BUT LOCAL ECONOMIC DEVELOPMENT DOES.  See India and China.

How are these nations which used to be the exemplars of teeming poverty lifting themselves from despair?  Obviously by selling stuff to the rest of the world.  Despite problems of corruption, poor infrastructure, and an initial lack of a trained workforce, flourishing private economies have developed.  Poverty, while reduced, is still rampant but demonstrably shrinking as DOMESTIC resources are brought to bear on the problem.

What these countries did for themselves was build educational systems and reduce crushing levels of bureaucracy and remove monopoly protection.  They decided to let some people become incredibly rich while an incredible number were still unspeakably poor – a politically tough decision.  Their diaspora communities, which had flourished in the West, began to send their well-earned money back to seed economic development.   Soon entrepreneurs were also going “home” to start new businesses. They didn’t need bureaucrats to measure the success of their efforts – the marketplace did that.  Since they were culturally connected and still had friends and family in the home country, many of them did succeed.  A virtuous circle of success funding future success began.

We in the West were and are the customers for much of this economic development.  We get good value for the money we spend even if we don’t count the “good” we are doing in the recipient countries.  The West was also the source of much of the seed capital since it was earned here by first, second, and third generation entrepreneurs and then invested back in the mother country.

So here’s a radical proposal:

1.      Scrap all foreign aid except emergency short-term relief for catastrophes (a form of world-wide mutual aid).

2.      Remove all remaining trade barriers to goods – especially goods with a high labor content - from the developing world (simpler just to remove them from everything).

3.      Allow INCREASED immigration, especially of students.

4.      Do nothing to discourage remittances home from immigrants and guest workers – these are extremely effective aid.

5.      Don’t get our knickers in a twist over (initially) low wages paid foreign workers.  They are usually much better than what was available to them before (or they wouldn’t take the jobs) and the wages go up (see Japan and now China).

6.      Take the money we were spending on foreign aid and redirect it to aid and retrain the workers here who are displaced by freer trade and freer immigration.  We will be able to monitor this domestic spending much better than if were spending the money abroad.

For example, the US sugar industry benefits from enormous protective tariffs. One domestic result is that ethanol production from sugar here is not economically viable even though it is in Brazil.  The foreign result of the tariffs has been that sugar workers in South America earn less than they would otherwise.  A recent hysterical broadcast piece on CNN said that the Chinese are capitalizing on this by buying South American sugar (how dare they!) and that the South Americans like this because it is raising their standard of living (duh).  Somehow having some of the dollars we spend at Wal-Mart on Chinese-made goods come back to this hemisphere is supposed to be a bad thing.  This is world trade (yes, globalization) at its best.

Even simpler if we just bought the sugar directly, of course.  But the rising tide of China is helping to lift other boats.

The traditional concept of foreign aid is a pompous, paternalistic failure (even though well-meant).  Another bureaucracy for “us” to measure “them” isn’t the answer.  We can help the poor of the world the most if we get out of the way of their helping themselves.  We can help the poor of the world best if we don’t “protect” ourselves from competition from them.  And we can spend the money we would have sent to Switzerland via various officials of aid-receiving governments on mitigating the effects of foreign competition where it’s felt most severely domestically – and making ourselves more competitive in the process.

(footnote:  Mary and I are involved in micro-credit efforts and believe that these can be effective.  However, these are NOT government to government programs and are usually administered by domestic profit-seeking entities albeit with some initial subsidy from abroad.)

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