Foreign Aid & Civil Society

Debating Which Aid Works Best is to Miss the Point

The Economist is hosting a debate on which is better to end poverty – international aid, or private enterprise and “philanthrocapitalism.” The debate breaks no new ground, but perhaps it is a sign of where the development community is headed – from seeing foreign aid as a panacea, to putting its hopes in the new generation of philanthrocapitalists. Most of all, it shows how the debate on aid has become as polarized as that about Palestine and Israel.

In Favor of Foreign Aid

Writing in favor of official aid Carol Lancaster writes that “The good works of charity and the impact of investment by entrepreneurs can also make a major contribution to helping the poor. But they are not able to do what governments can do. The impact of their good works is likely to be limited in the absence of public aid.”

This argument in favor of foreign aid is based on the FUD (fear, uncertainty, doubt) strategy pioneered by IBM, implying essentially that ”Yes, those people can do something, but without us you will not be able to achieve your objectives.” The argument goes that the problems are large, and require large scale assistance.

Yet, the size of financial transfers is one of the key objections to foreign aid. As several economists point out, it leads to the “aid curse” and to lowered productivity by stunting the private sector. Indeed, recent excitement that remittances are an effective tool for development is grounded in the understanding that they are small and encourage local consumption. So, while they are greater than total ODA, they avoid the problems associated with aid by being distributed.

That said, Prof. Lancaster does have a point. Most private philanthropists and companies in poor countries do not have the scale to deliver certain critical services, such as subsidizing millions of HIV anti-retrovirals, or providing humanitarian assistance in times of war and natural disasters.

For “Philanthrocapitalism”

On the other end of the spectrum, Michael Green’s arguments are equally polarizing. He puts his faith in what he calls “philanthrocapitalists” - the likes of Bill Gates, Mo Ibrahim, and Pierre Omidyar.

 The philanthrocapitalists’ giving will always be dwarfed by official aid. Yet their ability to lead, innovate and take risks means that they are our best bet for finding ways to make aid work. They are already using their expertise from the business world to find solutions to three big development headaches: stopping epidemic diseases like malaria, building a private sector and fixing failed political systems. Their success depends on the willingness of governments to work in partnership.

The key argument is that these individuals are more innovative and can take risks. Also, by applying principles from the private sector, they can find more efficient and effective ways to solve the world’s intractable issues.

At the macro level this argument suffers from two weaknesses. First, Mr. Green is simply trading one “big brother” for another. If big government cannot solve problems without substantial negative side effects, why would big philanthropy be any different? After all, both are a set of well-resourced interest groups that work outside the local institutional setup. As an example, the Gates Foundation has been criticiszed for having grown so big as to stiffle debate in the medical research community. And an article in the BMJ argues that the foundation’s “special brand of philanthropy is damaging health systems in developing countries and distorting aid priorities.” That sounds an awful lot like what you hear about government aid.

Second, Mr. Green’s faith in philanthropists rests on yet unproven ideas. For instance, he places a lot of hope in microfinance – yet few if any studies have shown that microfinance has any lasting developmental impact. And why is he placing so much faith in capitalism and the financial sector, when the sector has so obviously failed to guard the small investor over the past two years?

And finally, Green ignores Carol Lancaster’s key point – that philanthropic capital is simply not enough. For instance, the Mo Ibrahim Prize for good governance, while an excellent initiative to focus attention to the issue – is hardly likely to turn corrupt politicians into honest ones.

Conclusion

The debate misses the point. Neither foreign aid nor philanthrocapitalism are perfect. Foreign aid certainly works better in some areas. Yet, let us not pretend that it seeks anything more than political leverage or short-term solutions.

Green’s prognosis too is disappointing. He is full of praise for the philanthrocapitalist – yet puts too much emphasis on philanthropy and too little on the capitalist. If anyone will raise Africa’s standard of living, it is the local population. The deserving amongst them will go hungry, beg, borrow, and steal to climb up the economic ladder. The local government can help by not being an obstacle. That is how they did it in China and India, despite public aid. And they are doing it now in Africa, despite poor institutions. To suggest that Africa, or any poor country, needs some patriarch – whether a benevolent government or a benevolent philanthropist, is to continue to propogate the white man’s burden.

© 2009 The Discomfort Zone.