Avoiding the Cardinal Sins of Foreign Aid
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An Interview with Nancy Birdsall
YJIA: Foreign aid has become an increasingly hot topic, particularly among students and in academia. Aid arguments often fall into one of two camps: that the aid industry is inefficient and ineffective, and should therefore be drastically reformed and even reduced; or that aid can effectively fight poverty, especially if scaled-up. Do you think this dichotomous framework is useful? Do you favor a side?
NB: I don’t think it’s particularly useful. I think the ongoing battle between Bill Easterly and Jeff Sachs has not really done the development community that much good, frankly. I think that the industry is inefficient and ineffective and should be drastically reformed. At the same time, even with the difficulties, foreign aid, particularly aid focused on public health or education, has been shown to be increasingly effective. These are programs that have a specific input where we can measure actual improvements in people’s lives.
The debate is about aid that is supposed to transform society in some way, either by bringing about economic growth or by, say, improving governance – reducing corruption, introducing incentives for government to do property rights, rule of law, etc. It’s very difficult to show that that kind of aid has made a difference in countries that weren’t going to take the right steps anyway. That, to me, is a useful distinction, much more than whether aid works or doesn’t work, whether it should be scaled up or reformed.
YJIA: In what ways, if any, is the academic debate on aid reform relevant to the field? What evidence do you see that academic critique is affecting the way that aid organizations operate?
NB: I think the emphasis in the last decade on rigorous evaluation, including but not only randomized control trials, has infiltrated the business. I’m not sure that we see dramatic shifts in the way aid monies are spent yet, but there’s a lot of potential there. This work is most relevant to those kinds of programs I just invoked, where there is a focus on specific inputs that help people.
I think there hasn’t been nearly enough academic thinking in the last ten years about the political economy and how aid effects institutional changes, accountability, and relationships within countries – sort of what you might call the macro-trends that really matter the most.
We have a proposal at the Center for Global Development that I’ve been working on called ‘Cash on Delivery’ aid, which is meant to do just that. It’s meant to introduce incentives at a higher level for governments to push for certain development outcomes, and then conduct process evaluations, to see whether that the program is making a difference.
YJIA: Can mutual learning be better facilitated between aid, policy, and academic communities?
NB: Oh yes, definitely. I hope that that’s part of what we manage to do at the Center for Global Development.
Perhaps an additional and maybe even higher return investment would be to spend money on jump-starting truly independent think-tanks and policy research groups in developing countries. There is already some effort to do this, sponsored by the Hewlett and Gates Foundations. This is the sort of thing that I think should be much more emphasized because what’s missing in the low-income developing countries is independent thinking and healthy debate about aid. The research groups that do exist tend to be extremely dependent on outside money, or on government money or corporate money within their own countries. There’s nothing like Brookings or Carnegie or the Center for Global Development. If these groups were supported, they could then be interacting with academics and think tanks in the North, in Europe and the US and Australia, with the goal of making aid more effective.
YJIA: What are the essential questions those interested in aid reform should be asking? What is your research agenda for the next generation of development economists and policy makers?
NB: The most fundamental question is how do you do a transfer, essentially a financial transfer, from the outside into a country in a manner that actually strengthens the processes of self-discovery and institution building in the long run within that country.
This is exactly the same problem that students could study with respect to transfers from the federal government to the state, even within the United States. Think back to the fight over how much of the stimulus package went directly to the states in block grants. The concern was if the federal government just gave block grants to the state, then the state may not use it well, or they may not spend it fast enough. This is the same impatience and the same emphasis on inputs that we see on the part of the aid community. On reducing waste and corruption, on ensuring that environmental safeguards are on, on ensuring a fiduciary responsibility is upheld.
The big question is the cost of monitoring. The problem is how do you spend millions of dollars in poor countries which, by definition because they’re developing countries, are going to be in a state of institutionalism that is far weaker than a U.S. state. It’s about accountability relationships: how do you get a recipient government to be accountable to its own citizens.
Approaches at the micro-level are a contribution, but they are far from sufficient to understand what needs to change in the way aid is undertaken. It’s at the macro-level where we can actually figure out how to oversee transfers without undermining accountability to citizens and local institution building. And that’s true, by the way, whether it’s transfers from the government or other actors within a country. If it’s other actors within a country, you’re also failing to build a relationship between a state and its citizens. When aid is a substitute for tax revenue, it’s a problem. And it is a substitute for tax revenue.
My second essential question is about regional and global public goods. What’s the politics and what’s the mechanism for addressing problems like adaptation to climate change in developing countries? I think that’s hugely unexplored. Who should run those programs, how should they be governed? What should be the role of China and India and other major players?
It seems as though most students concerned with aid reform are ending up doing randomized control trials. That’s okay, but it shouldn’t be the only goal.
YJIA: If you were appointed head of USAID tomorrow, what would be your top five priorities for reform (assuming that eliminating USAID is not an option)?
NB: In the case of USAID, the reform has to come from the outside. It’s about changing what to do about the role of Congress. USAID has been hamstrung. It’s so burdened by earmarks and by implicit and explicit mandates that have accrued over more than twenty years from Congress, that it has no flexibility. It can’t work at the country level, it can’t have a country strategy, it can’t develop strategies around dealing with global public good problems, whether they’re more resources for agricultural R & D or clean energy. It’s completely locked down. People say that USAID has 200% of its budget earmarked.
The first step, in my view, is a sweeping reform that has to be sponsored at the highest levels, either at the State Department or Congress, to remove existing constraints. On the list for positive reforms, I would include more flexibility over time and across countries, building on the complex of the Millennium Challenge Corporation (MCC), which is based on creating incentives and on moving money to countries that Americans understand as having similar interests, values, good government and all that. There also needs to be a much bigger emphasis on transparency. MCC has shown that if you have a clean start and you are transparent about what you’re doing, then Congress will lay off a bit.
In the long run, it will be important to distinguish between transfers to developing countries that are primarily meant to enhance national security – all the work in Iraq and Afghanistan, the big money that goes to Israel and Egypt, and, in the last decade, Pakistan – and the resources for humanitarian and development programs which, of course, are also in the interest of the American people in terms of security in the long run. There has to be a person at the table that says you have to stick with and be patient about advancements that may build huge benefits but not in the short run. Not benefits in terms of international security and diplomatic relations, but in terms of a more prosperous and secure global system. So I would separate the budget somehow. Some people say, and I agree, that this would likely happen if there were more independence of USAID from the State Department. If USAID stays on paper in the State Department, I would like to see it returned to having the kind of budget autonomy that it had ten or fifteen years ago.
Finally, at some point, it would make sense to make development a cabinet level appointment. There are three legs of the foreign policy stool: defense, diplomacy, and development. At present, development’s leg is the shortest, so the stool isn’t very steady.
YJIA: Many claim that functioning institutions are key to effective aid. Can aid do anything to support the development of good institutions or must this be a strictly local process?
NB: It’s fundamentally a local process and it’s difficult to find a way for aid to enhance the local process. Policy-based programs, which constitute budget support, are probably better than lots of mini-projects in that they give the recipient government some flexibility. But even those programs involve endless discussions about policy arrangements and inputs. ‘Cash-on-Delivery’ aid is designed to avoid the dilemma of outsiders pretending to think they know the production functions for any outcome, whether it’s improving the education system or enhancing economic growth. So, instead, it measures some outcomes and the government gets money in accord with progress against those outcomes, but it lets the government spend the money any way it wants. The citizens know what the deal is and, in this way, it lets the government become accountable to its citizens.
YJIA: Calls for radical change are increasing, but is there real potential for serious reform or are practices too embedded in the aid industry?
NB: I like to be an optimist but so far the evidence is that practices are deeply embedded for political reasons. I would say that the fiscal pressures that are being faced now in donor countries are not going to help because when you’re under pressure, it’s harder to change the system.
On the other hand, there are a few things that are creating healthy pressures, like entry into the aid business of many more private organizations and philanthropic foundations. There have also been some good initiatives in the last ten years, such as the introduction of much more impact evaluation. So there are glimmers of hope that it’s worth building on.
YJIA: Thank you for your time.
NB: You’re welcome.