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Overseas Aid – What’s The Point?

Even in times when the domestic economy is not under such pressure and public finances are not so stretched, what is the justification for overseas aid?

Does it really bring millions of vulnerable people long term relief from poverty, starvation, disease and conflict – or are those problems endemic and unalterable? Even if aid is capable of addressing these challenges, does not experience tell us that it is too often misappropriated or misspent? At best, does it not encourage dependency and prevent impoverished societies from developing their own economies? And even if it salves consciences in the developed world, is it not also often cynically exploited by donor nations as an extension of foreign policy?

Or is there evidence that aid is actually working? Are there models which not only guarantee that it can be strategically focused, adequately safeguarded and make a significant and sustainable difference where it is needed most? Should aid be regarded as investment rather than charity and can it really help poor countries become less poor, more stable and more independent? If so, what do such models look like?

Max Lawson of Oxfam and Dr Stephen Davies of the Institute of Economic Affairs bring very different insights to bear on these questions.

Max Lawson

Oxfam

Max Lawson is Head of Advocacy and Public Policy at Oxfam GB which he joined in 2002 since when he has worked with over 25 country programmes across the world.

He has experience in organisational development, tax, structural adjustment, aid quantity and quality, macro-economics, governance, agriculture policy, social protection, HIV and AIDS, health, education and water.

Max has specialised in World Bank and IMF issues and also in the G8 and G20. He was heavily involved in the Make Poverty History campaign in 2005 and is currently playing a key role in the campaign for a Financial Transaction Tax,

the so called 'Robin Hood Tax'.

Oxfam is a global movement of people working with others to overcome poverty and suffering. Originally founded in Oxford in 1942 as the Oxford Committee for Famine Relief, it is an international confederation of 15 organisations working in 98 countries worldwide to find lasting solutions to poverty and related injustice around the world.

Oxfam takes a rights-based approach to its development, humanitarian and campaign work. It believes that all people are entitled to decent work and income security and to essential services such as health and education and that everyone should have gender equality, security from conflict and disasters and be able to participate in social and political life.

Stephen Davies

Institute of Economic Affairs

Dr Stephen Davies is Education Director at the Institute of Economic Affairs. Previously he was programme officer at the Institute for Humane Studies (IHS) at George Mason University in Virginia. He joined IHS from Manchester Metropolitan University where he was Senior Lecturer in the Department of History and Economic History. He has also been a Visiting Scholar at the Social Philosophy and Policy Center at Bowling Green State University, Ohio.

A historian, he graduated from St Andrews University in Scotland in 1976 and gained his PhD from the same institution in 1984. He is the author of several books, including Empiricism and History (Palgrave Macmillan, 2003) and was co-editor with Nigel Ashford of The Dictionary of Conservative and Libertarian Thought (Routledge, 1991).

The Institute of Economic Affairs is the UK's original free-market think-tank, founded in 1955. Its mission is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA promotes the intellectual case for a free economy, low taxes, freedom in education, health and welfare and lower levels of regulation. It also challenges people to think about the correct role of institutions, property rights and the rule of law in creating a society that fosters innovation, entrepreneurship and the efficient use of environmental resources.

The IEA is an educational charity and research institute, independent of any political party or group.

Proposition

Towards An End of Aid

Aid spending is not and will never be a magic wand; rather it is a shrewd investment in our common future.

Alone, it cannot end global poverty or redress the extreme imbalance of wealth that characterises our world. But good quality 21st century aid saves lives and can be indispensable in unlocking poor people's ability to work their own way out of poverty.  For example, poor health and lack of access to education, training and jobs are all factors that keep people economically inactive and that can be tackled using aid.

Where aid has been delivered effectively, it has contributed to some breath-taking successes over the past decade. Here are just three.

First, aid and debt relief have helped to pay for a 33 million increase in the number of children in schoolœ equivalent to three times the total number of children living in the UK.

Second, there has been a ten-fold increase in the coverage of anti-retroviral treatment (ART) for HIV and AIDS over a five-year time span.

Third, eliminating malaria from Africa could add 1.3% to the continent's GDP growth. The millions of free mosquito nets distributed over the past five years coupled with strengthening of health systems mean a stronger African economy which in turn can reduce their dependency on aid.

Successes such as these make a real difference to both individuals and economies and attest to the fact that aid works if well-designed and delivered. It would be wrong to pretend that all aid is perfect; too often it has been tied to the national interest of the donor rather than to the needs of those it is supposed to help. But the good news is that in the past 15 years or so, the UK has helped lead an improvement in the quality of global aid.

Sustainable planning is an essential element of effective development and poverty reduction and aid in support of the long-term national plans of the governments of developing countries is what is needed. Where practical, it should be aligned with recipient government plans. Oxfam research repeatedly shows that the countries receiving significant budget support have substantially scaled up spending on basic social services, including health and education. Aid money direct to the government enables it to finance its own plans for increasing access to public services, including paying for essential recurrent costs such as teachers' and doctors' salaries.

Take Rwanda: the past 15 years have been dominated by economic recovery and the rebuilding of national institutions following the 1994 genocide. Budget support, totalling 26% of aid flows between 2004 and 2006, allowed the government to eliminate fees for primary and lower secondary school education, increase spending on treatment for people living with HIV and AIDS and provide agricultural loan guarantees to farmers.

A criticism often levelled at government-to-government aid is that it can be siphoned off by corrupt leaders. Yet Oxfam has found that this kind of aid can also foster budget accountability and transparency and enhances anti-corruption reforms in recipient countries.

For example, Zambia through a corruption crisis brought to light by local whistleblowers in 2009 was able, with support from donors, to develop and implement robust Public Finance Management and anti-corruption systems which have enabled it to make tremendous progress in addressing corruption and gaining donor confidence.

Aid on its own will not be enough to achieve the change that is needed - fair trade, private investment and a global system that does not allow companies to avoid paying taxes in poor countries also have a part to play.

But already, aid provided direct to governments to support the effective building of state institutions, deliver essential services, catalyse crucial agricultural development and empower people to demand more from their governments is working to reduce poverty and inequality.

Aid in the right way has resulted in huge successes and this kind of aid - 21st century aid -œ is the kind that will work itself out of a job.

Proposition

Good Intentions Misdirected

Raising the living standards of poor people worldwide, and in particular those of the "bottom billion", is an objective that all well meaning people support. There is no argument about the end - but there are disagreements about the means. The debate is over whether government aid programmes are an effective way of helping to realise the goal.

This is not an argument about financial stringency and the need for fiscal consolidation.  The debate is one that we should have in any event, even if the Treasury was financially flush with revenues. The question is whether government aid to poor countries does what we want - make the world's poor better off.

The record in this regard is poor. The evidence shows no correlation between receipt of aid and measures of well being such as life expectancy and economic growth. In the 1970s aid was low and Africa's economy grew at about 2% per annum. In the 1980s and 1990s aid grew rapidly but growth was negative. Since 1998 aid to Africa has fallen but growth has revived. In Asia aid has halved since the 1970s yet the same period has seen rapid growth.

At best government aid makes no difference. But it can also be harmful, not because of bad policy but because its inherent features mean that problems are always going to arise despite the best intentions and efforts.

First, government aid is subject to political capture at both ends of the process. Donors often use it as an instrument of foreign policy and to serve their own geopolitical ends.

Much aid, including US aid for example, is used to subsidise influential corporations or voting blocs in donor countries through mandated purchases which force the recipients to spend it on specified products from the donor country. This happens simply because in politics the concentrated interests which stand to benefit are easier to organise and more effective than the large, diffuse body of people who support aid for its proper purposes.

In addition, in recipient countries the flow of aid is often captured by local elites and used to strengthen their own positions.

Second, aid ultimately is money and money is fungible - that is, money intended for one purpose can be effectively used for any other, such as buying arms.

If money is given to governments for aid, to develop education for example, it is easy for them to reduce existing spending in this area, replace it with the aid and then use the freed up cash to buy weapons. So there is no improvement in well being and aid money has in effect been used for quite a different purpose from its intended one. This is impossible to prevent in the real world. Aid thus promotes bad governance which, as all the evidence shows, is the biggest single obstacle to economic development.

Third, aid is most often used to fund projects that are unprofitable and this by definition does not lead to the most efficient use of resources. Not only is it a waste of money but there is also a high opportunity cost because the resources taken up in the recipient country would have been more productive if used elsewhere and would then have created greater wealth.

All this is not a counsel of despair. There is much we can do in place of government aid which can have a beneficial impact.

For example, private action by non governmental organisations that work through civil society is much more effective and user driven. Microfinance and internet initiatives such as Kiva Microfunds are an effective way of getting money to where it is needed.

Above all, we can push for freer trade and movement and for removing barriers such as the outrageous agricultural policies of the EU and the US.

Many people have been lifted out of poverty in the last two decades. There is no reason why we cannot do much more, but government aid is not the way to do it.

Response

We agree that aid used to further the donor's political and commercial objectives is not only morally wrong but will not relieve and could exacerbate suffering. But relatively little aid is misused in this way.

We disagree that aid suppresses growth. There are many other social, economic, political and environmental factors which have greater influence. In particular, the IMF's imposition on Africa of ill-conceived liberalisation and privatisation programmes seriously undermined both growth and the positive impact of aid in the 1980s and 1990s.

It is also not the case that the impact of aid to governments is 'at best negligible'. As research by the World Bank has shown, aid and debt relief to governments in Africa have helped pay for hundreds of thousands of new nurses and teachers and get millions of children into school.

Moreover, far from substituting aid for investment, many governments have increased their own spending even faster. Take Mozambique's national plan to tackle poverty and inequality, funded by both aid and taxation. Just 20 years ago the poorest country in the world, Mozambique has increased its spending on health care by over half. This investment in more trained health workers and new health centres across the country providing people with direct access to medicines has in the past decade helped reduce by 20% the number of children who die before their fifth birthday.

By any measurement, this is success - and on a scale which can be achieved not by piecemeal charitable projects but only through strategic government action.

Of course corruption is an issue: aid is an investment in some of the riskiest environments and it is impossible to guarantee that none of it is wasted or captured by powerful elites. But in recent years, significantly stronger scrutiny has made it much harder for aid to go missing.

As we know from our own political and media scandals, corruption is a problem that affects all countries and sectors not just the poorest.. But ending aid will not put an end to it: the best remedy is to empower active citizens to hold their own governments to account and aid has a vital role to play in providing the resources to help themdo this, as in Sierra Leone, for example, by paying the salaries of the police and judiciary to investigate and prosecute.

Aid systems are by no means perfect but they are a lot better and significantly more effective than Stephen suggests.

Response

No sensible person would argue that all efforts to aid development and improve prospects for the world's poorest are misguided. The question is: what strategies will generally work? Cost benefit analysis shows that voluntary action of the kind typified by Oxfam and campaigns where states work through civil society are much more likely to be effective - and modern technology has made possible new developments that have enormous potential, such as peer to peer lending.

Many of the biggest gains come not from aid or political action but from trade, inward investment and technology. Chinese trade and investment in Africa is transforming the continent's infrastructure and contributing to growth in countries like Mozambique and Zambia. Meanwhile, everyday African economic life is being transformed by the mobile telephone which is being used for a whole range of functions such as banking and payment services that make ordinary Africans much more productive.

None of this startling progress was the product of aid or, indeed, by design.

As I'm sure Max will agree, the main barrier to growth is misgovernance - corruption, insecure human and property rights and cronyism. He cites Rwanda as a country where aid has enabled the reconstitution of a lawful government. This is good but is it typical? The evidence suggests that government aid tends to perpetuate bad governance.

What would be the best package of measures? The first should be removing barriers to trade and investment - not just those imposed by the US and EU but also those between developing and poorer countries - and by tackling less obvious obstacles such as the misuse of intellectual property, particularly by the United States.

The second is to reduce violent conflict. This can be an intractable proposition not least because the easiest way to reduce conflict is by securing economic growth which often cannot be promoted until the conflict itself is resolved. But the payoff is so great that the attempt is always justified.

The third priority is to improve governance and build institutions. Here the evidence suggests that government aid not only often does not work but can also be counter-productive.

Finally there is scope for voluntary, civil society action of all kinds, particularly when it involves direct contact and some form of accountability. There is much we can do to improve the lot of the poorest. But it's not clear where conventional government aid fits in.

Conclusion

I have to question some of the evidence with which Stephen supports his arguments. Of course good quality inward investment and trade are essential to development. That is why Oxfam campaigns on these issues too, leading the fight to relax intellectual property rights on HIV/AIDS medicines and campaigning for regulation of land grabbing in Africa or on tax evasion by foreign companies.

But investment and trade alone are not enough: the poorest countries need aid too and that in large part has to be aid to governments.  As I've illustrated, contrary to the popular imagination many governments are doing a good job.

British citizens don't expect to rely on charities or voluntary agencies for their health and education services, so why should Africans? Non-state provision can work in part and for a short time but it is neither an efficient nor a sustainable alternative. There is no substitute for governments looking after their people and in Africa aid helps them employ the millions of new teachers and nurses that every day educate and protect adults and kids.

I should also challenge Stephen's assertion that aid undermines growth. There is evidence on both sides of that argument largely because of the complex variety of factors at work. For example, aid may be doing a great job but a global economic crisis or a regional drought can dwarf its impact. Several academics have found a positive relation between aid and growth. For example, Paul Collier recently estimated that over the last thirty years aid has added around 1% to the annual growth rate of the bottom billion.

Stephen rightly identifies good governance, conflict reduction and building institutions as being critical to development. But Oxfam's experience is that the right kind of aid can help rather than hinder the achievement of these aims.

UK aid to the government of Sierra Leone, paying for the implementation of free healthcare and the salaries of the police force, has helped that country get back on its feet after a brutal civil war and to rebuild government capacity to deliver for its citizens. Aid is also used to support local church groups, charities and organisations which hold their government to account. In contrast, US aid to Afghanistan has been a hugely expensive failure, driven more by foreign policy than poverty reduction.

Of course aid is not perfect. But if a school in our community is failing, we work out how to fix the problem, not decide to stop educating our children. We need a progressive and constructive debate about how to make aid to do even more to help poor countries and poor people.

Conclusion

We agree on the end of improving the living standards of the bottom billion - and that not all aid is entirely good - but not about the extent to which government aid can be effective.

Max refers to successes in the public provision of services. But these are by their nature one-offs. The crucial question is the degree to which aid and other policies raise the level of economic growth, because over the longer term the only way to bring about a sustained rise in living standards is through continued intensive economic growth based on sustained increases in output.

We agree too that aid via the voluntary sector is to be encouraged. Max implicitly argues that "piecemeal charitable projects" are too small scale and uncoordinated to achieve the impact of government aid. But not all this activity is charitable; microfinance and peer to peer lending are not. Moreover, there are great advantages to dispersed, decentralised and small scale efforts as opposed to large scale, uniform and centralised ones. The former are better at innovating and quicker to drop what does not work, so mistakes are less costly.

Max is correct to say that aid is not the only factor that hinders growth and is less significant than misguided macro-economic policy or the state of the world economy. But if we look at periods when these factors affected a range of countries at the same time (such as the 1980s), those that got government aid did no better or worse than ones that did not. If aid in general were beneficial, we would expect to see less bad performance from its recipients.

The case of Mozambique and the efforts made by its government to improve access to education and medical care reveal the basic issue between us.  If we grant that in specific cases action of this kind can have a net benefit (after allowing for opportunity costs), will this be the case in the majority of instances, and how much contribution can government action make to an improvement in living standards?

Public choice economics and historical evidence suggests that while we may try to impose the kinds of controls Max mentions, the logic of politics will always tend towards corruption and substitution as this is where the incentives point.

The evidence of over two hundred years of economic history from eighteenth century Britain to contemporary China and India is very clear: the contribution of government action to improved living standards, while not to be dismissed, is much less than that of general economic growth brought about by private, decentralised economic activity. Encouraging enterprise is the key.

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