The Munk Debate on Foreign Aid: Be It Resolved That Foreign Aid Does More Harm Than Good? (For or Against?)

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Todays debate:

In a world where over 3 billion people live on under $2 a day, where economies and threats are globally interconnected, and where only small amounts of aid are given, should wealthy nations do more?  Or, given the poor track record of aid, the support it provides to dictators and tyrants, and the actual need for individual entrepreneurialism and free markets, should we focus our limited resources elsewhere?

The third Munk Debate will explore the opportunities and hazards of foreign aid, by debating the question: “Is foreign aid to the developing countries doing more harm than good?”

Foreign Aid is Bad

Argued by: Hernando de Soto and Dambisa Moyo  

The reality of foreign aid lies not in the persuasive moral case for helping those in need, but in the efficacy of our efforts for do so.  Put simply, the billions of dollars spent annually on international development have little positive impact, and may even exacerbate the very conditions they seek to address.  Over the past 30 years there is remarkably little evidence that development assistance actually works.

The case for foreign aid suffers from three principle problems: Its core assumptions are flawed; its history of implementation is problematic; and it has had egregious unintended consequences.   Together they should make donor nations and development organizations fundamentally rethink the way in which they engage with the rest of the world. 

1. Flawed Core Assumptions

The entire foreign aid project is based around three false assumptions.

First, foreign aid, and those that preach its moral imperatives, has long suffered from a staggering intellectual hubris.  Much as Edmund Burk decried the revolutionary zeal of the French revolution, critics of foreign aid have recoiled at the notion that aid planners can transform societies they don’t understand.  The world is a complex place, and positive social change is rarely instigated by bureaucrats a world away, implementing top-down technocratic campaigns.

Second, the rationale of foreign aid (as opposed to emergency humanitarian relief) is based on the preposition that financial aid can cause economic growth.  Sadly the history shows otherwise.  In fact, at an aggregate level, it is incredibly difficult to see any positive effect of aid on growth.  While one study in the 90’s found a slight correlation as long as the recipient country had solid monetary and trade policy (not generally the case), a subsequent study showed no link at all, and in Africa between 1970 and 1995, as aid dependency grew, GDP per capita growth slowed.  Of the 66 countries that have borrowed money from the World Bank for the past 25 years, a vast majority are as poor as they were when they took their first loan, and a third are actually worse off.

Third, and increasingly en vogue, is the assumption that all that is needed is a ‘big push’ of financial aid for countries to emerge from poverty.  From Bono to Sachs, and Geldof to Blair, advocates argue that successful aid is a function of scale rather than strategy.  A lot more of the same, they argue, will allow countries to escape the trap of poverty and put economies on the ladder of prosperity.  This of course is not a new idea, and was urged in the 1950’s and 1960’s.  Since then $2.3 trillion has been spent on ‘big pushes’ with limited results.

2.  A History of Implementation Problems

Even if the grand plans of foreign aid technocrats were to work in theory, in practice most aid has been politically tainted, inefficient and based on false promises, further devaluing the entire exercise. 

First, aid is seldom given out of pure altruism. The bulk of aid transferred from wealthy countries to developing nations over the past 50 years has come with significant strings attached – what is often called, ‘tied aid.’   Aid has been tied to the geopolitical political interests of the donor nation.  This can range from US support for allied nations during the Cold War, to aid given in support of military objectives in Afghanistan, Iraq and throughout Africa. International organizations also have macro economic mandates, which are often tied to their lending. Emergency funds from the IMF and World Bank, for instance, are linked to a wide range of free-market policy prescriptions that many argue make up a new economic imperialism.

Second, foreign aid has too often proven egregiously inefficient. A large percentage of total aid money ends up in the hands of donor nation consultants, as technical assistance and transaction overhead costs.  As Patrice Bemba, an official from the Democratic Republic of Congo Ministry of Finance has stated, "you cannot demand or expect us to produce results or alleviate poverty when only 25 per cent of the donated money gets to us."

Third, the implementation of foreign aid agendas is too often based on false promises.  And the promises are staggering:  G8 nations regularly commit to aid increases they never implement, the United Nations plans to reach all 54 Millennium Development Goals targets, and economist Jeffrey Sachs even announced the "end of poverty" altogether by 2025, which he says will be "much easier than it appears."  These ambitions, while laudable, miss the point, and when promises get broken, our commitments quickly appear empty. 

3.  Unintended Consequences

Finally, in addition to failing in its stated objectives, foreign aid has actually had substantial negative effects.

As a large part of foreign aid is transferred from government to government, much of it never gets to its intended beneficiaries.  Instead, it is absorbed by corrupt governments, used for personal enrichment, to strengthen military, to manipulate elections and to oppress citizens. Worse still, supplying money to corrupt governments is actually advocated by many aid proponents, seen as a lesser evil to giving no aid at all.  As Peter Bauer has noted, all too often foreign aid simply turned out to be "transferring money from poor people in rich countries to rich people in poor countries."

Continued aid over long periods of time has also created unintended structural behavior.  Prolonged institutionalized food aid, for example, in the form of subsidized US crops being sold in Africa, undermines local production, making regions even more dependant on aid to divert famine.  Per-capita food production in Africa has fallen in every year since the 1960s.

Finally, aid creates a dangerous moral hazard.  It rewards anti-democratic governments, giving them little incentive to reform.  In addition, it crowds out local entrepreneurship and leads to bloated bureaucracies.  If a country’s economy deteriorates, the level of aid they receive often increases. This is not a healthy incentive structure.

Foreign aid has not only failed, it has caused harm to the very people it was meant to assist.  After 50 years of experimentation and trillions of dollars, it is high time we do the one thing we can to help:  stop.

Foreign Aid is Good

Argued by Stephen Lewis and Paul Collier

The debate over foreign aid is an example of the perfect becoming the enemy of the good.  While aid, its implementation and its impacts are far from perfect, three points must be defended: (1) foreign aid is absolutely critical, both to our own self interests and to the millions of lives it saves; (2) foreign aid is a work in progress, constantly evolving and improving; and (3) many of the arguments used by the critics of aid are easily dismissed.

1.  Aid is Critical

The positive effects of foreign aid are as abundant as they are compelling.  Together, they leave little doubt that on principle, aid is a worthwhile exercise.

The global financial necessity of aid is becoming increasingly apparent. In an interconnected and interdependent global economy, the extreme inequalities between those that live in poverty, and those that live with abundance is a destabilizing force.  There are clear trade incentives for donor countries in evening this playing field (rich countries will by more of our goods and services), more important though, are the costs of doing nothing.

Disengaging from the developing world has real security implications.  The Bookings Institution estimates that there are 56 states that do not have the resources to provide basic government services.  These countries are far more vulnerable to terrorism, weapons proliferation, organized crime, infectious disease, and armed conflict. Global health threats are also interdependent. A Recent US study showed that a new pandemic flu could kill over half a million Americans, and cost the US economy $70 - $160 billion in lost productivity and medical expenses.

Aside from the self interested rationales for foreign aid, by far it’s greatest value is a human one:  it saves lives. Large scale health interventions have facilitated routine immunizations, the eradication of small pox and polio, and significant progress against river blindness, guinea worm, diarrheal diseases and tuberculosis.  This has led directly to increased life expectancy around the world – typical developing have seen countries saw an increase from 48 to 68 years over the past four decades. The simple fact is that millions of people are alive today because of foreign aid.

2.  How to make it better

It is indisputable that foreign aid has had a tremendous positive impact.  Aid has lifted countries out of famine, improved their public health, and moved nations from economic isolation into the global economy.  This said, getting aid right is an incredibly complex proposition.  Which is precisely why the aid community has relentlessly focused on how it can improve.  Several efforts are of note.

Many of the critics of foreign aid are right, it is about more money.  Jeffrey Sachs estimates that a doubling of aid to roughly $100 billion a year, could end extreme poverty and prevent 8 million annual deaths.  More resources would save more lives.  This increase is needed to lift countries out of the trap of poverty.  When all the money in a society is spent on basic survival, there is no surplus for investment and growth. Only external funds can break this cycle.

But increasing foreign aid and reforming foreign aid are not mutually exclusive propositions. Money must be spent more effectively, be more accountable and not go to support corrupt governments.

Over that past two decades, aid effectiveness has been a central notion in the aid discussion.  Better aid coordination mechanisms, less tied aid, and stricter evaluation have all been adopted. Aid is also getting more accountable to those it is indented to assist, through direct budget support and greater local evaluation of both needs, and aid effectiveness. 

Giving greater local control, however, leads to a high chance of corruption. And here again, the aid community has been proactive.  In Malawi, or example, the British government has supported a strong internal anti-corruption bureau, that both helps to ensure its aid get well spent, but also has a lasting impact on good governance in the country.

3. Problems with the anti aid arguments

Finally, it is worth pointing out some of the more egregious errors in the  arguments of those opposing foreign aid.

First, the notion that there has been a 50 year ‘big push’ of aid is simply not true.  While $2.3 trillion over fifty years sounds like a lot, it equals $46 billion per year, a modest amount for any global capital flow.  What’s more, only about $26 billion per year is spent in the low-income countries, the ones who do indeed require a legitimate ‘big push’.

Second, aid has not been a failure.  Millions of people are alive because of aid, countries have been lifted out of poverty, and the ‘green revolution’ has transformed agricultural productivity.

Third, the connection between aid and economic growth is far more complex than critics purport. The vast amount of research to date has found that aid does indeed have a modest impact on growth. None of these studies, however, take into account the potential deflation of economies should the aid have never been provided, and more importantly, none take into account the human benefits of aid - the lives improved and saved.

Fourth, foreign aid is not anti-market.  If anything, aid has been overly tied to free market reforms in the form of structural adjustment conditions. What’s more, a large proportion of aid goes to public infrastructure, such as roads, railways, power plants, and electric grids, the very development needed to stimulate private enterprise.

Fifth, aid is not all top down.  In fact, some of the largest and most prominent aid projects currently being implemented are precisely the opposite. The Millennium Village project, for example, is decisively ‘bottom up,’ based around community participation and local empowerment and accountability.

Finally, there is a distinct free market romanticism that colors much of the critique of aid.  A romanticism that is particularly hypocritical given the current failures in the global capital markets.  Sometimes, even in wealthy countries, government action is required to help those in need, which is precisely what foreign aid attempts to do.

The global foreign aid project is far from perfect.  There are no shortage of examples of mistakes, missteps and malpractice.  However, the fundamental truth remains: without it, millions or people will die unnecessarily, and millions more will continue to live in extreme poverty.  The rest is academic.