Category Archives: Foreign Aid & Civil Society

India should refuse UK development aid

India recently decided to declare the French Rafale as preferred bidder in its long-running order for 126 multi-role fighter jets. In doing so, the Rafale has trumped the only other fighter in the race – the Eurofighter Typhoon.

One would think that this decision would be received in the UK (one of four partnership in the Eurofighter consortium) with some reflection on why the bid lost out? Rather, it is leading to some fairly childish complaints emerging from the once great colonial power that suggest the UK hasn’t entirely gotten used to its new place in the world.

For one, comments from Britain’s politicians suggest that the Typhoon is actually the far better aircraft and the Indians are essentially idiots to pick the Rafale. It is hard to comment on which of the two are technically superior, but someone should tell David Cameroon that calling your prospective client an idiot is not the best way to get back in the game. Moreover, even the UK’s own analysts suggest the Typhoon may eventually be the better aircraft, but one that the Brits themselves don’t support at the moment. Then why should India?

The Brits go one further, asking how India has the temerity to accept millions in development aid and not reciprocating by giving the UK defence contracts worth several times as much.

Here’s why. For one, a little bit of aid does not a true ally make. The Calcutta Telegraph has an excellent article that highlights how, over the past several decades, it is the French and not the Brits that have stood by India in its time of need. Whether politics was a consideration in the final decision is hard to say, but again the Brits would do themselves a favor by looking at their own actions rather than blaming India for poor judgment.

Second, the question of development aid is, in general, irrelevant to the fighter jet order. It cannot be denied that India can use help in poverty alleviation but to my knowledge, has never asked Britain for aid money. Indeed, it is India that does Britain a favor by allowing it to assuage its colonial, developed world guilt. Indeed, this may be a good time for India’s Prime Minister to preempt the British debate by banning aid from the UK. You keep your aid money, we will keep our freedom to make our own decisions, which we gained when you left the country in 1947. Fair trade.

Should taxpayers subsidize philanthropists?

David Morris has an excellent piece in the Huffington Post decrying the increasing influence of private charitable players in public policy. In a system that is often bereft of any self-critique and usually celebrates the rise of philanthrocapitalism as an unequivocally good thing, the article raises two very important points.

First, it decrys the increasing influence of philanthropic institutions backed by private individuals in public policy. Two examples:

In 2008 Koch, or rather the Charles G. Koch Charitable Foundation, entered into an agreement with Florida State University to support the school’s economics department. The catch, according to the St. Petersburg Times was that Koch would have the authority to approve who ultimately filled the positions.

Gates (The Bill and Melinda Gates Foundation) financed the New Teacher Project to issue an influential report detailing the flaws in existing evaluation systems. The National Governors Association and Council of Chief State School Officers developed the standards and Achieve, Inc., a non-profit organization, coordinated the writing of tests aligned with the standards, each with millions of dollars from the Gates Foundation. The Alliance for Excellent Education received half a million dollars “to grow support for the common core standards initiative.

Concerns have been raised previously, including by the NYTimes and BMJ, that philanthropists may today have undue influence over public priorities and spending in ways not previously imaginable. A recent study found that giving by UK foundations for international development was just under half that of the DFID. Relying on philanthropy to solve public good challenges is simply a delegation of public responsibility but increasingly philanthropy is seeking to not just complement but change public financing, and this is not without consequence.

Morris, however, adds another critical argument. That such big ticket philanthropy is actually being subsidized by the state – and by extension the taxpayer.

We should bear in mind that what is reported as charitable giving by the 1% significantly overstates the actual private sacrifice, as economist Uwe E. Reinhardt points out. If the wealthy donate $10,000 and are in a combined 50% federal, state and local tax bracket their effective sacrifice is $5,000 and society as a whole, without its advice and consent, subsidizes the rest.

In the last few years a growing number of billionaires have established their own private foundations. They receive an immediate tax deduction for the full value of their contribution even though the foundation is only required to give away 5% of that endowment each year. Which means that for every $1 million contributed, which can mean a $500,000 loss to the public sector, the foundation must give away only $50,000.

This has long been the elephant in the room that no philanthropist will acknowledge. Most large foundations do not operate as charities – which spend all of their money each year. Rather, they operate as investment funds with large grantmaking teams, that spend only modest amounts on actually charitable causes. The rest goes to preserve the institution.

Charity enthusiasts also claim that philanthropy supports the public good and in many cases that is indeed the case – responding to humanitarian disaster, feeding the hungry, and supporting the local community. But the largest philanthropists are not content with those modest goals and are targeting more challenging issues – reforming public education, improving health systems, addressing the global AIDS epidemic, encouraging entrepreneurship.

These more ambitious objectives often tread on the public space. This would be good, if it led to a debate on how these challenges should be addressed. In reality, however, the wealth of these groups mean they not only advocate a particular viewpoint but also can finance its implementation. And the general popularity of philanthropy implies organizations, and viewpoints, not affiliated with them get short shrift in public opinion. The net result is not to increase, but decrease, debate.

This may well be unavoidable until philanthropists become more self-critical but does the taxpayer have to subsidize Bill Gates’ view on how education should be offered to people? Particularly when people are not even motivated by the tax incentive?

The OLPC (should be) Dead, Long Live the Aakash

Engadget and a number of other technology blogs are rife with coverage of the imminent launch of the OLPC XO 3 tablet at the Consumer Electronics Show (CES) starting today. Unfortunately, this attention to this third iteration of the 100-dollar-computer-that-never-was could not be more misdirected and misses the real story – that technology has moved on from the OLPC and will evolve even faster in the future.

Over at the WSJ’s Speakeasy blog is a story much more relevant to technology for the masses – about the Aakash Ubislate 7+. This 7-inch table runs Android, has support for 2.5G GPRS and wifi (the OLPC did not have both), is currently shipping, and one month after launch has pre-orders for over 2 million units – essentially more than the OLPC has delivered in its either 6+ year lifetime.

This obsession with a project that failed long ago is unhealthy for a number of reasons.

First, it encourages the disc0nnect between the real world and the development community – represented by the OLPC organization and those that comment on it. Much of this community believes it knows best how to help the poor and what technology developing countries deserve. Meanwhile, the poor (or the aspiring middle class in this case), are busy helping themselves to technology that is good enough.

Second, (and this doesn’t happen often), it vindicates a decision taken by the Indian government years ago to refuse rolling out the OLPC in India. Back then critics claimed India was reinforcing the digital divide amongst its citizens. In hindsight, it seems, the Indian government may have saved the taxpayer billions and seems to have had a better grasp of how to incentivize the private sector to deliver a more functional product for less. This is a useful lessons to governments – if they must support such initiatives it is not by subsidizing purchases but by ensuring a large enough market exists for the private sector to do what it does best.

Finally, and perhaps most important, it allows Mr. Negroponte to hog more money and media attention. The founder of the OLPC has a long history of failing to achieve his own constantly downsized objectives. The OLPC  has  captured the attention of millions of do-gooders in its lifetime and has helped raise the profile of many. But even if it now reaches the USD 100 target, lower priced alternatives already exist.

In any darwinian system, a project that failed so completely and spectacularly would have been shuttered long ago. So it is a sad commentary on the non-profit sector that the OLPC plods along. It is time this relic too went the way of the dinosaur.

Catalytic Philanthropy and the Delegation of Public Responsibility

Writing for the Fall 2009 issue of the SSIR, Mark Kramer talks about a new kind of philanthropist – the “catalytic philanthropist.” This philanthropist, in Kramer’s opinion, distinguishes himself from both the “traditional” philanthropist (the check writing kind), and the “venture” philanthropist (the investor) by having “the ambition to change the world and the courage to accept responsibility for achieving the results they seek.”

How different is this philanthropist? And what does it say about philanthropy and society?

The first question is answered by Kramer himself, who sees this as a new approach that brings together four elements – taking responsibility for the change they seek, engaging others to build coalitions, using structures and partners from outside the non-profit sector, and creating knowledge to influence the behavior of others.

It would appear from this that what venture philanthropy did at the level of the institution, catalytic philanthropy does at the level of society. Venture philanthropy focuses on addressing the fundamental challenges facing institutions – lack of long-term funding, organizational limitations in expertise, etc. Similarly, the common thread amongst catalytic philanthropists seems to be that they are addressing a single societal challenge (such as meth addiction in the example used by Kramer).

Seen in this light the catalytic philanthropist is not new, but is still rare. Carnegie’s initiatives to address education, the Rockefeller Foundation’s support of research into high-yielding varieties of seeds, and the Gates Foundation’s efforts to address fundamental shortcomings in public healthcare in the developing world all follow that same trend to varying degrees. If that is the case the catalytic philanthropist is not that different from the subject of the book Philanthrocapitalism: How the Rich can Save the World.

The rise of such a philanthropist may be heralded as a good thing. But is it?

As Kramer says, traditional donors “delegate to nonprofits all responsibility for devising and implementing solutions to social problems.” But by putting faith in catalytic philanthropists, society also delegates responsibility for improving its lot to wealthy individuals, rather than to the elected representatives in government that are usually mandated that task of ensuring societal progress. That, certainly, cannot be a good thing for it implies that either governments have been unsuccessful in meeting society’s demands or that the ambitions of wealthy individuals exceed the capabilities of government.

The real reason for the rise of the catalytic philanthrocapitalist (to combine terms) is probably a mix of those two. But the correct response to a failure in governance is not to delegate the responsibility to another unaccountable individual. And the ambitions of individuals can just as easily do harm as good.

This is not to say that such philanthropy is bad. The basic premise that meaningful, long-term social change cannot happen via check-book philanthropy is correct. But when philanthropists engage in transforming society to match their visions, they must critically ask themselves if changing society is indeed their responsibility? And if they conclude that it is they must still be careful and understand there is a fine dividing line between visions and mirages.

The World Bank: Inventor of Last Resort?

In a timely piece on CGDev economist Arvind Subramanian has an excellent suggestion on how to redo the World Bank. He suggests that instead of spending on poverty reduction programs and the like, the Bank should instead spend on global public goods.

Referring to the two Bretton Woods financial institutions, Keynes once wittily observed that the “Bank’s a fund and the Fund’s a bank.” Whether the IMF should continue to be a bank is being hotly debated. But it is in India’s interest to push the Bank to be less of a financial fund and more engaged in generating and financing ideas and technology for development.

It is refreshing to see this idea put forth so elegantly because the timing is right. As India and China rise in the world they have sought more influence over the world’s financial institutions. During the financial crises much attention focused on a potential future role for the IMF. But in an environment where the efficacy of aid has often been questioned, the World Bank is no stranger to questions about its future either.

Back in 2007 the WSJ had suggested that the bank be disbanded altogether given that it did little more than fund corruption. The same year Prof. Bhagwati suggested that the Bank be a think tank of 300, in contrast to the 8000+ it employed at the time. That is not far from what Subramaniam suggests today.

The premise is simple – that the World Bank suffers from an identity crises as a development aid fund. Its “core” business of financing development projects is irrelevant in fast-growing Asian countries that can access market capital. And in poorer countries where private capital is unavailable the Bank is only one of many players. And anyway, according to their research (see PDF papers here and here), development aid has no impact on growth. So, what is the World Bank good for?

Despite this evidence, the World Bank’s current lending practices overwhelmingly favor traditional lending to governments over global public goods. The numbers are difficult to pin down but global public goods financing is unlikely to exceed 20 percent of total World Bank lending. In other words, current practice is inversely correlated with the evidence. What makes this inverse correlation particularly egregious is that there are many suppliers of traditional aid (bilateral donors, NGOs, private philanthropy) but few suppliers of global public goods. The World Bank should be filling the latter empty space instead of further crowding the lending business.

Global public goods remain dangerously underfinanced, notwithstanding the massive amounts raised by the Global Fund and the Gates Foundation for public health. Research into public health, education, access to water, and climate change has been neglected or has often focused on the interests of the developed world. This explains, for instance, why the climate change agenda has focused so overwhelmingly on mitigation issues, rather than on adaptation or insurance against unavoidable changes.

Clearly, we need an “inventor of last resort” to finance research, development, and scaling of technologies that are necessary but for which there is no viable market return. Subramanian puts forward his suggestion as primarily of interest to India and other fast-growing economies. But his proposed realingment would be useful for most developing countries, given the substantial transformative power of such public good investments.

On the other hand, some of the biggest contributions to development have come from global public goods such as the green revolution and the medical breakthroughs, especially related to the development of antibiotics and vaccines. The technical discoveries leading up to the green revolution were financed by official aid and private philanthropy. And the adaptation of the green revolution technologies to varying climactic conditions across the developing world was actually undertaken in the internationally-funded CGIAR network of research institutions (including ICRISAT which is located in Hyderabad) that are now sadly in decline, in part due to international financial neglect.

Finally, this proposal makes sense because it is likely to do the least damage. If aid has no impact on growth at best and can seriously distort a nation’s economy at worst, is it not better to spend the money outside the country? Jagdish Bhagwati suggested as much in an Oped piece for the WSJ in 2005 (better formatted PDF here). Subramanian’s suggestion shows how that can happen in practice.

The need to finance public goods has never been greater. The technology gap between the rich and poor countries is expanding and that trend is only likely to accelerate as we move into a low-carbon economy. Countries with access to technology will reap the rewards of higher productivity, more adaptability, and a higher standard of living. Yet, those at the bottom of the scale will never form a viable market, and their needs will continue to be ignored. There is a strong case for the intervention of a relatively impartial international institution to both invest in the needs of developing countries and to coordinate their replication.

In the end, the success of this proposal will depend less on its actual value and more on the politics of aid. India wants to double the size of the World Bank, but it also wants a much bigger voice in its running. That can only happen at the expense of the Bank’s current masters. So the question is whether the world’s major donors will allow the World Bank to take on a new role, or by obstructing it will make the institution irrelevant?

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.

What Case for a Vulnerability Fund?

Monday’s Wall Street Journal carries an article promoting the case for a “vulnerability fund” for the poorest developing countries:

A vulnerability fund would allow timely help to the poor nations, including in particular those that are heavily dependent on remittances. It is a thoughtful proposal deserving careful consideration by the G-20.

There is nothing new in the suggestion that poor countries need help now. But this article suggests a new reason – that remittances to them are falling. Appearently, those remittances could drop by over 5%, threatening consumption in poor nations.

Remittances account for substantial transfers globally, of USD 318 billion in 2007. There is no question they will decline.  As the article points out, “remittances declined in 2008 for seven in 10 of the Hispanic immigrants in the U.S. who sent money in the last two years. For 83% of those who sent less money, the reason was economic decline and uncertainty.”

Aid: An Alternative to Remittances?

The answer, in Mr. Ghosh’s opinion, is to channel 0.7% of money earmarked by rich countries for their stability plans. And of course, the fund would be managed by the World Bank.

Now how is this any better than asking OECD nations to live up to the commitment of providing 0.7% of GDP to foreign aid? That way we don’t need yet another fund, with yet another bureaucracy. Of course, in this case the World Bank gets a lucrative fund and tons of money – maybe that’s why this option is better?

This proposal will have a serious distortionary impact on recipient nations. The reason remittances are considered good for growth and economic development is that they encourage local consumption and work through normal private and public channels. Aid, on the other hand, undermines local institutions by diverting skills and resources away from these sectors. Worse, in countries where aid is a substantial portion of GDP, it also reduces overall competitiveness – and effect known as the “aid curse” or Dutch Disease.

Mr. Ghosh suggests that while prior aid funds may not have worked, this time it will be different.

This time things ought to be different, for several reasons. First, the pitfalls and limitations of aid are now better understood by both donors and recipients than in the past. There is increased public vigilance over the planning and use of aid, and active participation of the private sector and NGOs in the whole process.

Second, the present global crisis has sharpened political sensitivity in almost every country to any misuse of taxpayers’ money, especially though corrupt practices or ostentatious projects.

But this is hardly convincing. While the problems of aid may be better understood, donors and agencies have yet to come up with a better delivery mechanism. Further, public vigilance over use of aid has hardly prevented waste – over the past several years several cases of corruption have been uncovered, even within the World Bank. And finally, such vigilance is of little use in countries that are run by dictators, or have weak or non-functioning democracies – exactly the countries the aid fund would likely target.

Conclusion

Let us presume that the article’s premise is correct and remittances will drop sharply. But this does not mean that a) they need to be compensated for by other means, and b) the “vulnerability fund” is the best way to compensate.

The countries where remittances are a large part of GDP might actually need help. But providing them relief via foreign aid will only supplant a money transfer mechanism that works (remittances), with one that causes damage (aid). The alternative of doing nothing might be better.

Second, countries where remittances are not a large part of GDP, probably don’t require that much help. Individuals in those countries probably will suffer, but it is highly unlikely that aid agencies could reach those people effectively.

Here’s a simpler solution. Why not give the money directly to the migrants in the developed world? That way they can send more home and consume locally to kickstart the economy. Or in other words, let the stimulus packages target the poor in each developed country – something they should do anyway.

For once, I must agree with the Heritage Foundation, which calls this proposal a gimmick for the poor. I suspect the reason this idea is not so attractive to the World Bank is that it does not enrich the bank’s coffers. But that goes to show exactly what is wrong with the development aid paradigm. Those involved in giving it out have an incentive to ask for more. So rather than finding the best way to solve poverty, they look for the best way to address poverty that includes them in it.

Analyzing Google.org Grants

In case you hadn’t heard, Google.org is testing a new innovation in healthcare – trying to track and predict flu epidemics by tracking search queries on Google. THDBlog was fairly clear on why this could be game changing:

…fascinating experiment with a new Google tool on the frontiers of diseases surveillance and global health trends. Remains to be seen how useful this will be and lots of validation needs to be done, but this is yet another example of people outside of traditional health/public health communities who are on the leading edge of public health innovation.

Anyway, that set me thinking on what else Google is up to. Turns out, its fairly easy to find out. So what I did was aggregate their projects, and analyze the resulting spending. Here’s what I found out.

Spending and Type

Google.org spending, by type
Google.org spending, by type

Google.org has provided USD 110,225,998 in grants and investments. This itself is hardly a huge figure, considering the size of Google, and the ambitions of Google.org. What is interesting is that a large part of this (44%) was spent as investments into renewable energy and plugin hybrid projects.

This makes me wonder why Google.org is spend so much on the “low lying” fruit?

Field of Activity

Google.org spending by field of activity
Google.org spending by field of activity

A look at which areas Google.org spends its money is also illuminating. Again, it seems a large part goes to energy related projects. I have classified energy as renewable energy as well as power related (e.g. plugin-hybrid) projects.

Relatively little is spent on “traditional” philanthropy – health, education, or environment. Again, is there a capacity constraint?

One additional remark: it seems Google.org is funding the World Bank as well. The World Bank Development Marketplace business plan competition received USD 500,000 from Google.

Recipient Country

Recipient organization, by country
Recipient organization, by country

A look at the distribution of grants, by the country in which organizations are based, is particularly interesting. A few observations:

  • It is not surprising that a majority of money goes to US organizations. The US has one of the most developed non-profit and academic sectors. But the scale of that majority is.
  • India, curiously, is the second largest recipient of Google.org grants. In hindsight, probably not surprising considering India too has a vibrant civil society and an ambitious social agenda.
  • Africa gets the third largest share (USD 7.4 million). Of this, USD 4.2 million goes to East Africa (about 56.7%). It should be noted, though, that a larger amount is probably spent in Africa than in India – because several of the US grants are for projects in Africa.
  • Most of the grants to India are in the field of education. Most going to Africa are in the field of health.
  • Finally, one thing not evident in these numbers is that Google.org often funds technology related projects. HealthMap, for instance, gets two grants. Other grants also focus on weather monitoring, satellite monitoring, and other climate systems that feed into disease control systems. Clearly, the Flu project isn’t Google.org’s only innovation.

In concluding, I can make two overarching statements.

First, Google.org’s spending suggests there is an absorption capacity constraint within the broader non-profit sector. Could it be that there just aren’t enough good projects for Google to fund?

And second, while a majority of projects benefit the developing world, the US-centric spending pattern suggests Google.org is embracing Jagdish Bhagwati’s idea, that if you cannot spend in Africa, spend for Africa, elsewhere: