Why is ODA funded? Partly for political reasons. In Australia (as one example) aid is generally used as a foreign policy football in election campaigns. Describing foreign policy to regular voters is difficult; aid programs are quantifiable and provide a ‘feel good’ factor to what is a dull area in public policy. (Compare the potential popularity of spending US$50 million on aid programs or spending US$20 million on multilateral trade agreements with developing countries; the latter will probably have the better economic result, but the former will win hands-down with voters). This presents two clear problems.

First, as usual, good politics can result in bad policy. Aid spending has shifted remarkably over the past 20 years. Spending on ODA that directly supports economic growth (economic infrastructure and services) has fallen from a 28% share of all ODA to 12% from 1997-2007. Aid for environmental prograns and governance outstrips spending on economic programs. The simple fact is that poverty is not as fashionable as it once was. The dominant international issue is climate change. Unsurprisingly, resources that were once oriented towards increased trade, infrastructure, etc., are now being put into more politically palatable areas. Consider the political backlas if an aid agency implemented a program that improved forest management and timber harvesting and manufacturing processes in a developing country – despite the fact that it might increase levels of employment, environmental management, exports, etc.

Second, the political nature of ODA does not require strict monitoring and evaluation. Even when it is closely monitored and evaluated, voters do not care. In these cases aid programs may do no harm, but they may not do much good either. In other words, no result is better than a bad result. Consequently aid programs can become blunt tools that aim for very little.

I would highly recommend the work of Michaela Wrong (“It’s Our Turn to Eat: The Story of a Kenyan Whistle-Blower”), who has highlighted the entrenchment of aid agencies within their host countries and all their failings. She highlights the story of the World Bank and the UK’s DFID in Kenya. I personally have seen the same thing happen with foreign aid in Papua New Guinea and Indonesia.

I would also recommend the following report by World Growth, a free-market NGO. http://www.worldgrowth.org/assets/files/WG_Aid_Paper_final.pdf. It was written be colleagues of mine. They track the spending of aid by OECD countries and in which areas the money is spend. There has been a big change since 1997.

If your argument is correct, then we may not see any growth in GDP per capita due to aid. However, you should observe increases in life expectancy or educational attainment. Aid could also improve governance or the rule of law.

However, how much evidence is there for aid contributing to health, education, or governance?

With this in mind it seams to follow to me that aid could slow growth for a time as mortality rates decline. I too, think that this would be a temporary situation, especially if education is one of the benefits of the aid.

I also agree that aid should be aimed at helping the poor and growth should be a government responsibility. We can see how good planning has helped several nations achieve very high levels of success with economic growth. Aid and economic growth can accur in conjuction with one another, but it would take good economic planning and a bit of luck.

Maybe aid is ineffective because the chief proponents of aid suffer from large cognitive dissonance.

I read your comments here, too and was really interested as well.

I like your name, btw!

I have to compliment you on the sharpness of your comments (both here and on your blog). I am 100% in agreement, but always have a hard time myself expressing relations like this in such an astute and concise manner. Kudos!

This is exactly the kind of perspecitve that is missing so dearly in (development) economics. (Leaning myself a bit out of the window here, but am I correct in sensing SOAS-grown thought here?)

Cheers!

I have to compliment you on the sharpness of your comments (both here and on your blog). I am 100% in agreement, but always have a hard time myself expressing relations like this in such an astute and concise manner. Kudos!

This is exactly the kind of perspecitve that is missing so dearly in (development) economics. (Leaning myself a bit out of the window here, but am I correct in sensing SOAS-grown thought here?)

Cheers!

The punchline is “there is no evidence that the large increase in life expectancy increased income per capita”.

As a macroeconomist this isn’t a surprising outcome, but it raises ethical difficulties related to aid.

1) The fundamental problem of development for growth is that most developing countries are primarily pre-capitalist. They do not have the relations of production necessary for dynamic capitalism to occur throughout the economy. What this means is that vast swathes of the economy (particularly agriculture, where the two forms of organisation tend to be peasant agriculture and plantation agriculture which looks a bit like bonded labour. I did an analysis of the Sri Lankan tea industry which looked at this in a roundabout way). Such economic forms are not dynamic and do not stimulate rapid economic growth.

The vast majority of the economics profession takes capitalism for granted, or associates it with free markets or with entrepreneurship, neither of which are the same thing. As a result the vast majority of economic policy is concerned with making it easier for people to do business, but not with transforming the economic structure within which they function; thus, we make marginal improvements without transforming the economy into one capable of sustained high-growth capital and innovation- driven development.

2) Aid is at best an irrelevance to this argument. We are talking here about socio-economic relations of production. Aid does not seek to transform these. However, this is the best case scenario. However, there is also the real possibility that aid actually hampers capitalism’s emergence. This happens in two ways.
Firstly it entrenches pre-capitalist forms of organisation, primarily in agriculture but also in towns, by making unsustainable activities or marginal activities sustainable in the short term and giving them artificial stability. The creation of a wage-labour force is therefore hugely slowed down and it traps people into being part of either a peasant economy or an unstructured piecework (still pre-capitalist, but closer to capitalist) economy.

Secondly, as Matt points out in the comments above, Aid also completely alters the incentives that all actors face in developing countries. For example, most people who want to earn and build up savings etc. are faced with either trying to create a capitalist enterprise in an essentially pre-capitalist economy or to get a job as an aid worker or NGO manager or project manager or something like that. Easy choice for most. Many of the best, most dynamic minds I’ve met in developing countries are engaged in aid work. Compare this to a place like Hong Kong, where all of the most dynamic minds turn immediately to business.

How is this line of thinking any different than the arguments put forth by Jeff Sachs in “The End of Poverty”? There he offers plenty of arguments that aid will not lead to immediate growth, and that insufficient aid can be wasted aid, in the sense of not being enough to enhance productivity. But I think your line of thinking is complementary to Sachs’: perhaps aid, if in large enough quantities and used wisely enough will eventually facilitate a demographic transition that supports the establishment of industry.