Foreign Aid & Civil Society

Why More Aid Will Not Work - The Limits of Sachs

Gillian from St. Jude asked me to comment on an article by Jeff Sachs on the role of the World Bank. Sachs is well known for his theory that the only way out of poverty for Africa is to double, triple, or quadruple aid.  Gillian supports the view that such aid is necessary, indeed critical, and has often criticized my skepticism for, indeed opposition to, development aid.

In the article Sachs argues for the World Bank to worry less about corruption in Africa. He urges the new chief to instead channel more money into Africa, simply because “African governments do not have the fiscal means to invest in what’s needed, and that would be true even if Mother Teresa were running the local treasury.” His basic premise is correct, that a) Africa needs massive investments in infrastructure, and b) African governments do not have the means for many of those investments. Sachs concludes by suggesting the only player that can provide this investment is the World Bank.

While the premise is correct - in itself - it is not complete and the conclusion does not follow. But before unraveling the macro argument let us look closely at the micro examples he uses to support his point.

The Micro View: The Track Record of External Aid in Ending Poverty

The article uses four examples to justify the need for massive, external, aid. Two in particular are interesting, for they do not stand close scrutiny.

The first is the Green Revolution in India, in which Sachs claims the “the Rockefeller Foundation brought high-yield seeds, and the U.S. government shipped massive amounts of fertilizer”. Sachs does not mention that high-yielding varieties (HYV) were only one of three factors contributing to the “green revolution.” Second, as pointed out by the Cato Institute, support for HYV development accounted for only 2% of foreign aid to India in that period. So, its success does not suggest that massive aid is necessary - only that small amounts of aid can be very useful. Finally - and most important - there is sufficient disagreement amongst academics on whether the “green revolution” even occurred. As the Cato paper points out, a number of studies reveal that while wheat yields did rise substantially, “the overall rate of growth of agricultural output did not accelerate after the Green Revolution.”

The success of the second example Sachs uses - the Millenium Village Project - is even more dubious. Sachs writes that

Seasoned practitioners not held back by ideology and posturing know how rapidly results can be achieved. The philanthropy Millennium Promise, which I helped start, has raised over $100 million in private funds for Millennium Villages. This demonstrates how rural life can be improved dramatically from one season to the next.

It is interesting that Sachs’ laces his arguments with normative attacks on his readers - anyone challenging the Millennium Project, must not be a “seasoned practitioner”, nor “objective”. But to declare success now is to put the cart before the horse. That he raised $100 million for the Project does not indicate that such villages can permeanently “transform” rural life, only that he is a consumate fundraiser, to whom people will give generously. I visited the Sauri village myself, and hold little hope for its long term prospects. In an even more damning criticism of the project, Sam Rich writes 

This is not to say that Sauri cannot change, or that investment in the village is wasted. But if Sauri is to become a useful model for development on a bigger scale, and not just another development expert’s white elephant, Sachs and others working on the project must acknowledge that they are still learning about Africa. Sauri is not yet a ­success.

The Macro View: The Problems of  Massive Aid

Sachs’ overall argument for large amounts of aid also fails to convince on the macro level. Indeed, there is no better case study of the failure of Sachs’ hypothesis than India.

India has been the largest recipient of aid, ever, and between 1951 and 1992, is estimated to have received $55 billion in IDA. The Cato paper, which analyzes that entire period was published just before India had a balance of payments crises. Its conclusions are almost clairvoyant, given the timing. While the paper is painful reading for an Indian, the conclusion is unequivocal:

Except for a few cases of alleged foreign aid success– such as critical food relief when millions were on the verge of starvation in the early 1950s and again during the mid-1960s–foreign aid to India has been an unmitigated disaster. It has acted as both a catalyst and an encouragement for the politicization of the Indian economy. It has supported central planning and facilitated the growth of the public sector at the expense of the private sector and the establishment of a private-property-oriented market system. It has also encouraged corruption, rent seeking, and graft in the Indian economy. Foreign aid has been–and continues to be–predicated on an outdated and false theory of development economics that assumes that only capital and access to technology are needed for economic development.

What Sachs proposes is nothing new. Centrally planned resource allocation and development has been tried before. And it has failed.

Causality Which Way: Governance or Resources?

Sachs argues that the problem for Africa is not corruption or bad governance - something Wolfowitz focused on too much - but lack of resources. He views the challenge as an either-or, arguing that huge amounts of resources should be invested regardless of governance. But what if the problem is lack of resources and bad governance? Which should come first? I would venture, good governance.

There is good reason to believe that where governance is good, resources are not a problem. Again, India is a good example - in the post-reform period it has tripled its economic growth rate. The July 5 issue of The Economist presents another - Mali. It is a country where “Western governments and aid agencies, to say nothing of Libya, the Islamic Development Bank and the Chinese, are all flocking.” The secret of Mali is a Mr. Amadou Toumani Touré, the leader of the country, who seems to have institutionalized good governance and remains committed to reducing poverty. As a result, Mali has received USD 460 million - a massive amount compared to its public budget of USD 1.5billion.

This aid neither proves nor disprove Sachs’ theory - it is much too early for that. But it suggests that where governance is good, money will come. In Freakonomics, economists Levitt and Dubner found a similar counter-intuitive trend in election campaign finance - that it was not money that led to success in elections (the myth that money buys elections), but rather that perceived success in elections led to more money being contributed to a candidate.

Sachs holds the former view - money buys development. But Mali suggests the causation here is also inverted. It is not money that buys development, but rather the prospects of development, underlined by good governance that bring money to the table. If that is indeed true, it would conclusively weaken Sachs’ argument that the Bank should not be focussing on corruption, but on resource transfer.

© 2007 The Discomfort Zone.