Sunday, July 17, 2005

African aid: Weak incentives of good intentions.

An earnest call for aid to Africa occurred in the 1960s with the conviction that lack of savings in third world countries hampered these economies from making the investments needed to take the first step in the ladder to sustainable growth.

More than four decades later the question is, ‘has aid helped?’ According to the CATO institute Africa has received 450 billion dollars worth of aid from 1960 to 2000 and yet the average GDP per capita of the continent has declined at a rate of 5.9 percent per year. They put this statistic into perspective by comparing the progress made in South East Asia for a fraction of that aid. The report of recommendations presented to the Secretary General by Jeffrey Sachs and the UN Millennium Project also brings attention to this disparity in performance between the emerging economies in Asia and the ones in Africa.

Even though it is unanimously accepted that corruption and the disruption of free markets and trade are the chief causes for the lack of progress in eliminating poverty, there is debate over whether corruption can be reduced by asking for good governance conditions in return for aid.

Empirical research done by the World Bank on 10 countries that receive aid suggests that there is little correlation with the amount of funding and constructive policy change needed for economic prosperity. Some of the 10 countries made very good policy changes, some made negligible reforms while others made no changes or went from bad to worse. The disparity in results suggests that aid has no average impact on policy reforms.

The World Bank study shows that although aid has greatest effect in reducing poverty in countries where there is good governance, donors continue the ill-advised practice of providing greater sums of aid to governments that repeatedly fail to reform while reducing aid to governments who implement good policies.

In a Washington Post article World Bank economist William Easterly comments that broad ranging reforms, what he calls ‘utopian social engineering’, like the ones proposed by the Jeffrey Sachs and the Millennium Project are far too complex to control and implement effectively and costs are great when they fail. Instead, he argues for an alternative ‘piecemeal approach’:
The piecemeal reform approach (which his book opposes) would humbly acknowledge that nobody can fully grasp the complexity of the political, social, technological, ecological and economic systems that underlie poverty…Large-scale crash programs, especially by outsiders, often produce unintended consequences. The simple dreams at the top run afoul of insufficient knowledge of the complex realities at the bottom…Nor can you hold any specific agency accountable for their success or failure. Piecemeal reform, by contrast, motivates specific actors to take small steps, one at a time, then tests whether that small step made poor people better off, holds accountable the agency that implemented the small step, and considers the next small step.
But according to the Millennium Project report, the reason for past failures is the lack of commitment to big broad ranging plans with broad goals. They imply that the goals of piecemeal approaches have not been sustainable due of the interdependency of various problems. Funding money into specific issues is not enough, as related issues around it have not been solved. The effect is that eventually the good work done on a particular project will be diluted. It also criticises the short-term perspective adopted by piecemeal advocates, saying that the unstable and so far unsatisfactory influx of funds cannot lead to sustained development, i.e. even if the goals were broad enough, commitment to it was lacking.

They also comment on the lack of systematic frameworks for looking at countries and political systems on an individual basis, the result being a generic and inaccurate approach to African poverty. Each country has it’s own unique social, economic, geographical and political problems. For example some countries seem to enjoy fairly competent governments while most others are corrupt to the core. These differences are not being adequately factored in aid provision strategies.

In The Cartel of Good Intentions, William Easterly makes a comprehensive criticism of aid agencies, including the new Millennium Development Goals, which he sees as a re-branding of the same old mistakes. His main thrust is that top-down broad approaches have the usual problems of an inflated bureaucracy not driven by market motivations. Beginning by covering the myriad of administrative processes and informational requirements involved in getting funds to cover a simple task of fixing a road he illustrates the problem of taking on too many tasks in a centralised manner:
Within the World Bank, the transport economist must try to convince the desk economist that a Road Maintenance Loan that would repair this particular pothole merits higher priority than some other project, like say an Education Reform Loan pushed by the education economists…
Easterly tries to explain why it is that aid bureaucracies are finding it hard to change their persistent and ineffective practices. The problem comes from a conflict in incentives. “It is very hard for aid bureaucracies to get constructive feedback from past mistakes because admission of past failure is a threat to getting new aid resources to dispense in the future.” The problem with not learning from past mistakes is that those mistakes are more likely to be repeated.

This is also why we don’t see much work being done in projects that are hard to ‘show off’ to donors, like stocking and maintaining already built facilities. These endeavours have low observability and it looks like not much is being done:
Aid reports for many decades have bewailed the tendency of donors to finance new capital investment projects (easily observable at a point in time) and the neglect of operating supplies and maintenance after the project is completed. Donors consistently refuse to finance maintenance, with the idea that this is responsibility of recipient governments.
There are estimations that suggest that the benefit of spending on books is much higher than actually building new physical facilities, but donors still prefer to fund the later because it looks like they are doing a lot more.

The main source of this bureaucratic dysfunction is that these agencies do not have enough market feedback. They are monopolies and as such they have the same problems that afflict normal monopolies, i.e. they have less of an incentive to provide the quantity of services for relatively low price as a competitive firm.

The article continues on to discuss how the current set-up of the aid system also gets the stick end having multiple agents and multiple principles. It becomes very difficult to pinpoint the actual problem and which party is responsible. There is also a weakening of incentives when multiple principles are being served. There is also a tendency to collude, as agencies are terrified of being outcasts bringing about an increasing likelihood of being blamed for future failures by the rest of the cartel.

‘Something has to change’ is what I get from all this. If this crippling ineffectiveness of aid continues, donors will eventually get fed up with the wastage and funds will dry out. Then it will be too late for any reforms.

The real tragedy of all this is that just in the time that I spent today reading the various papers and writing up this review and just generally wasting away my Sunday, another 10 000 people have died due to starvation.


Callie said...

Hi there,

Thanks for what you said on Subvic's blog. That was nice to hear/read.

Take care,

Callie White

Anonymous said...

I didnt find thing that i need... :-(