Foreign Aid & Civil Society

More on the Foreign Aid Curse

I’ve mentioned the aid curse before. Well, the topic of provisioning public goods came up today, so I ended up doing some more research on it, to see just how bad it was. Seems its pretty bad, and someone has already studied it.

The Aid Curse originally followed from its better understood counterpart - the “resource curse”. Also known as Dutch disease, the resource curse represents the correlation between richness of natural resources and the general weakening - if not complete destruction - of public institutions and democracy in the target country. Economists of all sorts have found a similar inverse relation between inflows of foreign aid and the strength of public instutitions.

Turns out someone at the World Bank did a study (The Curse of Aid, by Djankov, Montalvo, and Reynal-Querol, 2005) to find out just how bad this effect is and the results are not pretty:

Our findings support the second view. Foreign aid damages the political institutions of the country by reducing democratic rules. The magnitudes are striking. If the average share of foreign aid over GDP in a country were 1.9% over the period 1960-1999, then the recipient country would have gone from the average level of democracy in recipient countries in the initial year to a total absence of democratic institutions. Since most foreign aid is not contingent on the democratic level of the recipient countries, there is no incentive for governments to keep a good level of checks and balances in place. The effect of oil in the long-run is less important: if the average amount of oil revenues over GDP is 12.2% over the period, then the recipient country will go from the average level of democracy in recipient countries in the initial year to a total absence of democracy.

This is not to say that promoting democracy should be the objective of foreign aid. However, as argued in Collier and Dollar (2004), at a minimum donors and international agencies should abide by the Hippocratic oath: do no harm.

The IMF’s Finance & Development quarterly has another, more recent article on the macroeconomics of it all. Yet, despite mounting research, aid donors haven’t quite caught on to that simple fact yet. So altruisim continues to mixe abundantly with both bad and good intentions that pave the way to hell.

Spend For Africa, but Not In?

The problem for the critics of aid is that they are barking up a wrong tree. To suggest that aid be banned altogether is to present no solution at all. Foreign aid, like philanthropy, is driven by many motivations - moral obligation, altruism, foreign policy, economic policy (see China’s interest in Africa). Logic, even economic logic, and empirical studies such as the one above will not supress all these motivations. So the next-best question is to see how foreign aid can do the least harm.

Jagdish Bhagwati, the free-trade proponent has an interesting alternative (WSJ, March 2005; PDF here). If large amounts of foreign aid distort the local economy, but such amounts will nonetheless be spent, just don’t spend them in the local economy. Instead, spend the money where it can be spent - in the developed world.

Much could be done for Africa abroad. Consider, for instance, the development of vaccines and cures for yellow fever and malaria. Just as the British established the Institute for Tropical Medicine, the same approach could absorb far more substantial public moneys today to win the war on disease in Africa.

And that is where the conventional focus on aid — as only what is spent in recipient countries (rather than for them altogether) — needs now to be abandoned. The phrase “foreign aid” encourages this notion; it is time to revert to the older phrase, “development assistance.”

Worth a thought, at least.

© 2007 The Discomfort Zone.