“First the children will be given something to eat and then we’ll try and make them comfortable for the night. Then the process of getting them financial compensation and returning them to their villages and families will begin,” Mr Ribhu said.

And then what?

What price must these children bear for living up to Mr. Ribhu and his paymaster’s values? What happens to them after they have been fed for a few nights? What are they going home to? After all, if their parents really wanted them home, the children would be home. So, are the children being rescued? Or condemned?

The word “rescue” brings a very recent and scary scenario to mind - of 103 children being “rescued” from Chad by the French NGO Zoe’s Ark for adoption in Europe. It would appear the line between rescue, abduction, and condemnation is fine indeed.

The proverbial road to hell is paved with good intentions. Unfortunately, in Chad - and possibly in Delhi - it is the children that may end up in hell. And all because of someone else’s good intentions. What is terrible about this situation is not that the children were “saved.” It is that those that did the “saving” gave no thought to what they were saving the children from, and what they were sending them to.

We long ago became accustomed to the toothless catchphrases by which the bank shovels money (now more than $30 billion a year) out the door, and it remains to be seen if Mr. Zoellick’s agenda will amount to more than a high gloss on the status quo. To his credit, the former U.S. Trade Rep is emphasizing the importance of free trade to economic development, still a controversial point at an institution that was once home to anti-globalization guru Joseph Stiglitz. But the real test of his tenure will be whether he can restore the bank’s reputation, especially regarding the corrupt uses to which its loans are often put, and the bank staff’s habit of looking the other way.

That point was brought home last month by Paul Volcker’s report on the bank’s anticorruption efforts, which painted a vivid picture of institutional resistance to having its projects “exposed as rife with corruption.” Mr. Volcker avoided specifics, though we revealed the devastating 2005 report by the bank’s internal anticorruption unit (INT) on bank funding for drug procurement in India. The losses in that one case ran into the tens of millions of dollars.

A senior operational bank source has now showed us a second set of INT reports concerning corruption in seven projects in Cambodia. The reports are so sensitive that they were never shared with Cambodia’s government, lest they put the lives of whistleblowers at risk. We have therefore agreed not to publish or quote directly from the documents, as well as to obscure certain details. But take our word for it: These are remarkably specific reports that document corrupt practices and name officials and companies by the dozen. Even more astonishing, senior bank officials have essentially let the Cambodian government get away with it.

…Mr. Zoellick is still new to his job, and no doubt he is eager to win over the staff that ousted his predecessor. Yet Mr. Zoellick’s most basic obligations are not to them. They are to the bank’s donors and to the world’s poor, both of whom are cheated when corruption is tolerated. Cambodia is one country where that happens. If the bank isn’t willing to act against it, then Congress should deny the bank more money until it does.

Where the Wall Street Journal is Wrong

The WSJ is not the only one recommending disengagement from the World Bank. Wolfowitz’s departure sparked debate in all kinds of places on the institution’s future, including at the BBC. In a recent debate on CNN, on the future role of the Bank, Prof. Jagdish Bhagwati went further, suggesting the Bank is, or should be, a think tank with a staff strength of about 300 people, in contrast to the existing 8000+.

These are drastic suggestions from some very respectable quarters. But the World Bank will not go away. Indeed, as the evaluations by the World Bank show, even corruption will not go away. Contrary to popular belief, the World Bank is not all powerful and does not have the ability to pressure even small economies to improve their accountability. And everyone has an incentive to keep it that way. Because the system assuages the concience of rich donor governments, funds the palms of recipient governments, pays the salaries of 8000 employees and scores of consultants, and gives many more diplomats, experts, and NGO representatives a reason to exist. Now who would spoil this party?

What is the World Bank Good For?

Let us, therefore, take the World Bank as a given. The question to ask, then, is not whether the Bank should wither away. Rather, one should ask what the World Bank can do while causing the least damage.

The more recent view, articulated by the new President is that the Bank should advance an agenda of “inclusive and sustainable globalization” by preaching the benefits of free trade. But was that not the role of the World Trade Organization? Is the Bank to become a marketing agency that organizes road shows and conferences for converting free trade skeptics and the poor into free traders? Probably not.

A more deep seated view presented by the Bank’s representative at CNN, in response to Prof. Bhagwati’s suggestion, was that the Bank is essential to “poverty reduction” considering there were still billions living in poverty. But this is hardly accurate. After all, the poverty reduction that has happened in the past half century has had nothing to do with the World Bank and everything to do with countries’ own actions. Indeed, Cambodia itself is doing rather well and will probably do just as well without the World Bank.

Clearly, the Bank has a serious existential dilemma that has persisted for a while.  But the answer to its dilemma may be the most obvious - and least attractive one. It is based on the old adage, “if it ain’t broke, don’t fix it.” Just let the Bank be, because it is doing ok and so is the world. Getting it to do “better” is both unlikely and fraught with risk.

He says:

Frequently one is left with the impression that UN officials know at least as much, if not more, about countries than government ministers, many of whom spend more time nursing their political careers than their constituents.

It is hard to escape the conclusion that if Africa is not being re-colonised by the UN, then it is certainly being run at least as much from New York as it is from most of the continent’s capitals.

For starters, the UN can harldy “run” itself let along entire countries, and its officials spend just as much time nursing their careers as the politicians Mr. Plaut mocks. For all their experience in Africa, these officials still know precious little about actually getting something done - witness the utter lack of “development” after decades of aid, foreign interventions, and UN presence.

The article is even further off the mark on Africa, exaggerating the problem far beyond realistic proportions. The UN has 50,000 troops in 7 African countries - but how many African countries are there? The UNHCR, according to the report, looks after 2.5 million people, but the continents population is over 680 million. Hardly a pervasive presence?

Perhaps this is just not meant for consumption by the informed, and targeted rather at ignorant people who think the world starts and stops at their doorsteps, those within the UN with an inflated sense of self-worth, and those that don’t know better than to accept what they read. It is provocative posturing not worthy of the BBC, though it might increase traffic to their website.

As a rather more informed counterpoint, please see Nicky Oppenheimer’s (De Beers) opinion piece in the IHT (June 1, 2007).

The comments below the article are definitely worth reading. Two selections:

Ridiculous article. First of all, look up your history and read up on the actions of colonial powers in most of Africa before comparing it to the UN. Second, please quit with the irritating habit of lumping all African countries together. Third, if you are going to subject readers to your analysis, get some first hand information rather than cobbling statistics from the UN site.
Ada, Paris, France

Working with the UN everyday, I very much doubt they could colonize their own backyard. All the faith put into the UN by those who have never worked with them is desperatly misplaced. I had my idealism shattered when I first started working with them. They are more part of the problem, however defined, than they are ever part of the solution.
Henry, Nairobi, Kenya

Thanks to Hope for provoking this reponse (!), and Karan for the IHT reference.

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.

To find policies that are likely to alleviate poverty, it is best to look at actual successes and failures. In recent decades, the biggest single accomplishment is the post-1979 (post-Mao) economic growth in China. The second-best story is the economic growth in India, where the poverty count fell by around 140 million people from 1970 to 2000.

Also illuminating is the greatest tragedy for world poverty — the low economic growth in sub-Saharan Africa. In this case, the number of people in poverty rose by around 200 million from 1970 to 2000.

Foreign aid had nothing to do with the successes and did not prevent the African tragedy.

For Barro the key to poverty alleviation is to get Africa to grow like China and India. He has good reason to be skeptical of foreign aid, and empirical evidence seems to be on his side.

For further evidence, look more carefully at India (see this 1992 Cato policy analysis). The country has been the largest recipient of foreign aid since the end of World War II. In 1992, total aid received was estimated at USD 55 billion since 1951. That year it reached a record high of USD 3.9 billion. Since then aid received has declined consistently.

Again, foreign aid had nothing to do with India’s growth. And during the 1950-1990 period it did not prevent India’s stagnation or improve the “Hindu rate of growth.”

See also:

• More on the Foreign Aid Curse
• Africa Does Not Need More Aid
• No more the ‘hopeless’ Continent: IHT - Nicky Oppenheimer (chairman, De Beers)

1. The FT carries an article on IFC’s plans to create an Africa healthcare fund of about $500 million. According to the report, the agency has been funding work, in collaboration with the Gates Foundation, to develop an equity, debt and technical assistance fund to finance commercial healthcare projects. McKinsey has already conducted a $2.6 million research project on the issue. The eventual fund may be co-funded by the IFC, Gates Foundation, and other funders.

Equally interesting, perhaps, is CGDev’s post on the Global Health Policy blog on this article, suggesting IFC may not find it so easy to develop and disburse such a fund, focussed solely on Africa. As the post points out, IFC will find it extremely difficult to identify commercially viable enterprises in low and middle-income countries, that cater primarily to the poor. As proof, it shows that most current IFC funding in healthcare delivery has been targetted at hospitals and enterprises that target high-income population segments. Referring to the IFC portfolio, the post also points out that only 3 current investments are in Africa. The question it raises is whether Africa can really absorb this funding, except for high-income segments.

2. CNN reports on a deal by the Clinton Foundation to lower the cost of second line HIV treatment for low and middle income countries. The deal between the Foundation and Indian generic drug makers Cipla and Matrix Laboratories, will result in savings of 25% for low-income and 50% for middle-income countries, at a price of $339 per patient per year.

The pill in question is a triple cocktail of tenofovir, lamivudine and efavirenz. It should be noted that Brazil broke the patent on efavirenz last Friday - a drug produced by Merck - following on the footsteps of Thailand.

3. The BMJ has an article (by way of SciDev.Net) suggesting the Gates Foundation could do more for global public health. A long article, it argues that while the Foundation’s work is indeed innovative and likely to deliver significant new drugs and treatment for neglected diseases, its work may languish in labs because there of poor delivery systems to get the treatments to the poor.

observers are starting to question whether all this money is reaping sufficient rewards. For although the foundation has given a huge boost to research and development into technologies against some of the world’s most devastating and neglected diseases, critics suggest that its reluctance to embrace research, demonstration, and capacity building in health delivery systems is worsening the gap between what technology can do and what is actually happening to health in poor communities. This situation, critics charge, is preventing the Gates’s grants from achieving their full potential.

Mukoma Wa Ngugi writes a scathing criticism of Western aid and attitudes towards Africa. He tears away fiction to reveal the truth…the true value of Africa is not in improving its lot, but in being seeing as doing something. For that, Africa is indispensible.

But he is also justifiably critical of Africans themselves:

Instead of policies that would once and for all break our dependency, our leaders trade our long-term livelihood for short-term gains.   In 2003, according to Patrick Bond, a political analyst based in South Africa, the African elite had $80 billion sitting in Western banks. At the same time African governments owed these same banks $30 billion. Or in another startling statistic, between 1970 and 1996, Africa lost $285 billion as a result of capital flight while incurring a $178 billion debt.

Clearly, Africa looses more than it gets, because of development aid. As Oxfam points out, one hand gives what the other takes away. Time the Africans took a stand? Because certainly nobody else will…

Counterpoint

On World Malaria Day, George Bush announced a new effort to reduce Malaria and help Africa. I thought it would make an interesting counterpoint to Ngugi.

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.

Basics

• The foreign aid program is called Indian Technical and Economic Cooperation Programme, or ITEC, and was established in 1964.
• ITEC covers 156 countries, together with the Special Commonwealth African Assistance Programme (SCAAP).
• Both programs are run by the Economic Division of the Ministry of External Affairs (MEA).
• The MEA also runs the Indian Council of Cultural Relations, which provides assistance and programs to improve cultural ties, for instance through student and teacher exchange programs.
• The ITEC’s official aid budget is roughly Rs. 500 million, annually, and over $2 billion has been disbursed since its inception.

Afghanistan as Major Recipient

ITEC is not, however, the only channel for foreign aid. Indeed, large amounts of aid is directed outside ITEC. Afghanistan is by far the largest recipient of that aid. From 2002, to 2006, $650 million had been pledged to India’s Assistance Programme for Afghanistan. The MEA and UN have a list of major commitments:

• $100 million grant (2001-02)
• $70 million grant to build the Zarang-Delaram Highway
• $200,000 to the World Bank’s Afghanistan Reconstruction Trust Fund (2002)
• $4 million grant to repair and build the Indira Gandhi Institute of Child Health in Kabul (2003)
• $4 million grant to build the Habibba School
• $52 million to the World Food Programme, for Afghanistan and Iraq (India is today a net donor to the WFP and IMF).
• $25 million to build the Afghan parliament in Kabul
• A gift of 3 Airbus airplanes to Ariana, the Afghan national carrier.

Other Bilateral Aid

Beyond ITEC and Afghanistan, significant amounts of aid are directed to Africa, much of it delivered in the form of loans, or delivered in-kind as consultancy. Some of these are offered under the India Development Initiative and include (partly drawn from IndiaDaily editorial):

• $218 million in economic aid to Nepal (summer 2006). This is in addition to previous loan waivers for military supplies.
• $500 million to West African nations.
• $110 million in long-term loans to finance Indian exports to Africa. Offered through the Exim Bank, these loans funded the sale of 500 buses by Tata Motors to Senegal.
• $40 million to Angola, for a railway project managed by RITES, Indian Railway’s consultancy division.
• Support and upgrade of the Farkhor Air Force base in Tajikistan (since 2004). The base is India’s first permanent military presence outside India, and operated jointly with Russia and Tajikistan.

The Broader Context

These figures combined, India’s aid probably stands at over $150-200 million per year, much more than what is provided through ITEC. However, even this inflated figure hides the vast amounts that are invested through private and public enterprises. For instance, India’s oil exploration company ONGC invested $6 billion for railroads in Nigeria (2005). ONGC has also acquired oil assets in Sudan worth more than $750 million.

Even these amounts pale in comparison to China’s beneficence, only to Africa. Late last year China unveiled preferential credit of $3 billion for Africa. China has also provided loans of over $100 million to Ghana and Egypt.

Africa is all too happy to receive this aid which comes with significantly fewer conditions than World Bank, US or EU loans. However, the aid has accompanied a general increase in trade and investment flows between Africa and Asia - particularly China and India.

Fundamentally, however, it reflects a shifting balance of power in the world. India and China have the resources to play power politics, without the conditional rhetoric of ethics, development, and values.

The focus of my discussion has been on the question whether the recipient nations benefit at all. My guess is that they do not. It is just a guess, but it has support in empirical research.

As pointed by Mankiw, Posner takes a dramatically different view from mainstream development experts (esp. Sachs).

My own, unfashionable view is that charitable giving, both governmental and private, is more likely to increase than to alleviate the poverty, ill health, and other miseries of the recipient populations. That is a familiar proposition with regard to antipoverty policy on the national rather than international scene.

In that, Posner uncovers an exceptionally illuminating contradiction of IDA. The very countries that decry welfare at a national level have no qualms about applying welfare at an international level. He also mentions other problems and limitations of IDA, in particular dependency and incentives of recipient countries, the resource/aid curse, and the true value of charity.

Becker takes the argument further, suggesting the problem of poverty is not resource scarcity, but the domestic policies of poor governments:

Foreign aid programs other than of a humanitarian nature are destined to fail because they involve transfers of resources from one government to another. No economist who has closely examined the evidence concludes that the reason why some poor countries fail to have significant economic growth is because their governments have insufficient resources. The complaint is typically that governments do the wrong things with the resources they have, including their regulatory powers…Foreign aid only makes it easier to continue to promote projects and policies that are not merely neutral with respect to growth, but hinder any take off into rapid growth.

India as a Basket Case for IDA

Becker uses India to support this conclusion:

India is my favorite example to illustrate the failure of government foreign aid. From the fifties until the end of the 1980’s more private and government aid went to India than to any other country. Yet during that same time period, India had a very modest growth in per capita income of about 1 percent per year-sometimes resignedly called in those days the “Hindu rate of growth”.

He would be glad to know that this was pointed out by Milton Friedman in a 1955 paper written after visiting India as a consultant for the Ministry of Finance (via Sepia Mutiny). While the paper spoke largely of the economic policies, it points out clearly that India’s growth decelerated after independence, when it should have accelerated:

…the years after independence saw a great inflow of resources from abroad. External assistance during the decade spanning the first two Five Year Plans averaged about 11/2 per cent of national income, which means that it provided something like a fifth of net investment; and external assistance was disproportionately concentrated in the Second Five Year Plan period, when it amounted to about 2 1/2 per cent of national income or to over a fourth of net investment. On that score alone, growth should have accelerated during the Second Five Year Plan rather than apparently slowing down a bit.

This means India received twice as much money over the 2nd five year plan, and converted it into half the growth of the first five year plan. Clearly, more foreign aid was not the solution.

IDA: Distracting from the Essential
In the final analysis, however, there is a deeper reason for why IDA is - on the whole - counterproductive:

The chalice is poisoned in still another way. The “generous” gifts from wealthy countries–pluming themselves on their greater (apparent) generosity than the United States–enable those countries to hide, perhaps even from themselves, the extent to which their tariff policies immiserate poor countries.

That summarizes everything that is wrong with IDA. There are too many “distortions away from effectiveness on both sides of the donor-recipient equation”, that ensure foreign aid does no good, and may well do harm.