The Foreign Aid Debate
Cato Unbound looks at foreign aid. First, William Easterly writes,
The two key elements necessary to make aid work, and the absence of which has been fatal to aid’s effectiveness in the past, are FEEDBACK and ACCOUNTABILITY. The needs of the rich get met through feedback and accountability. Consumers tell the firm “this product is worth the price” by buying the product, or decide the product is worthless and return it to the store. Voters tell their elected representatives that “these public services are bad” and the politician tries to fix the problem.
…If a bureaucracy shares responsibilities with other agencies to achieve many different general goals that depend on many other things, then it is not accountable to its intended beneficiaries—the poor. No one aid agent is individually responsible for successfully achieving any one task in the current aid system. Without accountability, then the incentive for finding out what works is weak.
Deepak Lal thinks that Easterly is, if anything, too optimistic.
unlike private charity, foreign aid essentially transfers money from rich country governments to poor country governments. How can these donor governments ensure that the recipient governments use these resources for the purposes they were intended? As the history of foreign aid’s failures, particularly in Africa show, despite their promises there is little that the donor governments have been willing or able to do if the recipient governments do not fulfill them. Nor is channeling these flows through international or domestic NGO’s likely to overcome this problem, for these so-called “agents of civil society” too can be coerced or co-opted by predatory governments. That is why in a recent book I had argued that short of direct or indirect imperialism there seems to be little hope of overcoming the domestic political obstacles to the efficient utilization of foreign aid, particularly in Africa
Finally, a modest dissent from Steve Radelet.
First, the rich countries have given very modest amounts of aid. Second, aid has achieved very modest results in many places, strong results in a few, and failure in others. Third, aid is no panacea – trade policies, institutions, decent governance and the rule of law, private entrepreneurship, and investments in health and education are the mainstays for growth. But aid can help and has helped on the margin in very poor countries, at least in some circumstances.
It seems to me that one of Radelet’s point is that a lot of “aid” is really something else. Often, that something else is favoritism for corporations based in the donor countries. The effectiveness of aid is reduced by corruption in the donors as well as by corruption in the recipients.
Maybe we should handle foreign aid the way Tyler Cowen thinks that we handle subsidies for the arts. That is, by using tax preferences and matching grants, we could subsidize “patrons of the poor.” Individual donors might fight corruption at both ends of the foreign aid chain.