What can aid do?

Since central planning cannot promote economic efficiency, it cannot promote economic progress. Nevertheless, like anyone else, central planners can increase a given output by devoting more resources to its production.

There is nothing surprising about this fact. The nature of the physical world, including the positive relationship between inputs and outputs, is as true for central planners as for anyone else. The distinction between a central planner’s ability to increase a particular output by devoting more resources to its production and his ability to solve the economic problem is where most evaluations of foreign aid go awry.

That’s David Skarbek and Peter Leeson writing on foreign aid in The Cato Journal.

I think they make a nice point: that the beauty of the market is it helps solve the economic problem of how to produce something efficiently, or even whether to produce it at all. The debate about aid effectiveness, however, concentrates on a physical problem: whether by investing resources to effectively produce assistance. These are two different questions evaluated by two different critieria.

Thus, aid boosters are correct to say that aid has done important things: cured this disease, ended that problem. But aid critics are likewise correct to complain that aid doesn’t provide a solution to the economic problem, and so is not really a solution at all.

It’s a point worth making, and the short piece is well worth reading. But I think the authors build and tear down a straw man that represents only some, and possibly little, aid.

Quick thoughts:

  • Not all aid is centrally planned. A remarkable number of small communities and organizations compete for scarce funds, allocated by multiple competing donors. I don’t have the numbers at my fingertips, but private donations are a huge chuck of giving.
  • Must we only judge aid by efficiency? Many people value equity or some sort of fairness principle, and give to satisfy that preference, individually or through a collective. And depending how you put this into your aggregate welfare calculation, redistribution may be optimal even if grossly inefficient.
  • What about market failures, like credit constraints? What if millions of young Africans want to go to school, but lack the resources to pay or the capacity to borrow, even if the net present value is positive? What if governments (or companies, or non-profits) want to build the schools and system to deliver education, but private debt markets won’t make these long term bets? The World Bank was set up precisely for this seeming market failure, and much aid is simply loans offered at longer terms and lower rates than available in the private sector. You can debate whether this is a market failure at all, but that’s my point: you must debate it.
  • What about externalities? There are negative spillovers from an AIDS virus run wild, or from large poor populations going to war, or harboring terror. Likewise, there are failures of collective action that a public body, or public funds, can help solve. Think malaria vaccine research and distribution. Aid that shows a zero return to national income may show a huge positive return to global health and stability. Before damning aid, these assertions too must be tackled.
  • Last, what if you believe in multiple equilibria, like poverty traps? If manufacturing sectors or rural families need a big push, then central money and organization are needed. I don’t know if I believe in poverty traps, but the development successes of the last century almost all see central planners play a role. What each does may be irreplicable, but that does not make their role any less important.