Sunday, April 15, 2007

Guest Column: The Case Against The Case Against Aid

Why common counter arguments against giving aid are mistaken.

By Terence Wood

In my previous post on New Zealand's need to give more aid I argued for increasing overseas development assistance both on moral grounds and with respect to our own enlightened self-interest.

These are, I think, persuasive arguments for increased aid. So it is unsurprising that critics of aid generally don't argue against them directly. Instead, they usually make one of three claims: (1) that aid doesn't work; (2) that trade not aid is what is needed; and/or (3) that corruption is the main problem in developing countries and that aid will do nothing to help this.

In this post I will examine each of these arguments in turn.

Aid Doesn't Work

The first and probably most common argument against aid is that it simply doesn't work.

Australian academic Helen Hughes (not to be confused with the New Zealander of the same name) made this argument forcefully in her polemic Aid Has Failed the Pacific [PDF]1. Appealing at one point to research on the matter:

Aid appears to be inversely related to growth. Recent research shows that worldwide aid has not even been effective in countries that have adopted pro-growth policies.

Which sounds convincing until you realise that Hughes has engaged in a rather selective reading of the evidence at hand. It is true that there are some cross country regression analyses that show that aid has little impact on economic growth2. However - and you won't read this in Hughes' polemic - the majority of recent empirical evidence actually shows the opposite: that aid does have a positive impact on growth (I've written more about this here, there's a good discussion of recent research here, a summary of much of the positive research here [PDF]3). I've noted elsewhere my scepticism of cross country regression analyses and I think they are a particularly problematic tool in assessing aid effectiveness. So my intent here is not so much to use the positive studies of aid effectiveness to make the case for aid, but rather to simply point out that people such as Hughes who cite "empirical research" in their arguments are telling less than half the story.

Another strategy employed by people who claim that aid doesn't work is to point to a failed aid project and then use this as an illustration of aid's inevitable worthlessness. Once again, at first glance, this can appear persuasive: the history of aid, it is true, is strewn with white elephants.

Yet people who point to aid failures as evidence that aid doesn't work are doing the exact same thing as those who selectively mine empirical research: they are engaging in a one-sided reading of the evidence.

In the long and winding history of development, accompanying the failures are numerous examples of aid success stories. Aid money was involved in the eradication of small pox and the near eradication of polio worldwide, and aid contributed to the control of river blindness in Africa. Aid money also funded oral rehydration therapy in Egypt which saved hundreds of thousands of lives, and aid appears to have played a role in the economic takeoff of Botswana, South Korea, Bolivia and Vietnam4.

If there's one lesson to be learnt from the history of aid giving, it is not that aid doesn't work. Rather, it is the simple point that aid given well is more likely to work, while aid given poorly is likely to fail. And, in New Zealand we are lucky in that we have a very good aid agency and so can be confident that much of the aid we give will actually help people.

Trade Not Aid

Another argument often employed in the case against aid is that, compared to the benefits of international trade, aid's impact is trivial. And because New Zealand has very low trade barriers we are already "doing our bit for development".

To me the central premise of this argument is flawed. Why does the fact that we are doing one thing right mean that we shouldn't do another? (And, while we're at it, exactly how again is trade going to stop that HIV epidemic in Papua New Guinea?) Worse than this though is the fact that the trade not aid argument is based on a misunderstanding of the role that trade plays in fostering development.

On the surface the case for trade as tool of development is persuasive. Theories of specialisation, and comparative and competitive advantage have a distinguished pedigree in economics, and one needs only to look at the impact of sanctions on countries such as Iraq and Cuba (not to mention self-imposed autarky on North Korea) to see the importance of international trade in building affluent societies.

The trouble is, however, that trading one's way to wealth isn't as simple as opening your borders, hoping everyone else will do the same, and then watching your GDP rise. In reality, the relationship between trade and development is more complicated5, with the countries that have done the best from international trade typically engaging strategically and often shielding their "infant industries" from competition. Perhaps the most important point though, is that the countries that benefit most form international trade are those that have the capacity to do so. And our low trade tariffs are of no benefit to countries that lack this capacity. At present capacity constraints can be found in many of the countries that we give aid to. Hopefully, aid and domestic reform may mean that these nations will one day be able to benefit fully from international trade. But, until that time, it is wrong to use the argument that our own near absence of tariffs means that we are doing enough6.

Corrupt, Corrupt, Corrupt

The final argument made by opponents of aid is corruption is the main obstacle to development and that until it is tackled in developing countries other efforts such as aid giving are going to be of little use.

Once again this argument has prima facie appeal: it can hardly be denied that corruption poses a challenge to development. And some of the world's most corrupt countries are also some of its poorest. However, a closer look shows that things aren't as simple as they appear at first glance. For a start, the relationship between poverty and corruption probably runs both ways: while corruption slows development, many poor countries are also more corrupt simply because they are poor and cannot pay their civil servants well. On top of this, corruption, while a challenge, isn't an insurmountable obstacle to development. Countries such as China, Indonesia and Vietnam are undeniably corrupt yet in recent years (outside a dip associated with the Asian crisis) these countries have all grown rapidly, and done a good job in reducing poverty [press play].

Corruption isn't the only hurdle for development, either. In his book The End of Poverty (see my footnotes for a full reference) Jeffrey Sachs shows that, after corruption is controlled for, African countries have still performed worse than other parts of the developing world. Something that he attributes to geographical constraints and disease burden (having neo-liberalism rammed down their throats by multi-lateral institutions can’t have helped either).

When it comes to the problems of overcoming disease and geography, the role of aid is obvious. Yet, aid can also play an important role in tackling corruption. Aid can be used to fund civil society organisations to act as watchdogs on their own governments. Aid also gives us leverage when working with governments and can be used as an incentive for reform7.

Finally, it is worth noting that poor governance is sometimes merely the result of inability rather than dishonesty on behalf of government officials. Aid can, by funding capacity building, be an important tool in overcoming this.

Conclusion and What You Can Do

Over the week that has elapsed since I wrote my first post on aid more than 200,000 children have died from diseases associated with poverty. Many more have been born into lives of extreme hardship and limited opportunity; likely to be denied even the ability to perform the simple task of reading that you are currently engaged in.

As I said in my first post, surely this is an intolerable state of affairs.

What's more the common critiques of aid are unconvincing. Aid can work. And the potential of trade and problems of corruption are no excuse for not giving more aid. While aid won't solve all of the issues of under-development it will help.

So the question remains: why do we continue to fail to meet our obligations in this area?

If you feel inclined to take action on aid giving there are currently two campaigns running in New Zealand around the issue of aid and development.

The first of these is specifically related to meeting our aid targets. This is the Point Seven Campaign.

The second campaign is Make Poverty History, which campaigns on aid alongside other development platforms.


1. For a good critique of Hughes' paper refer to the conference paper by Ewan Morris on page 27 of this PDF.

2. Two credible, recent papers that purport to cast doubt on aid's impact on growth are "New Data, New Doubts: Revisiting 'Aid, Policies, and Growth'" (Easterly, Levine and Roodman) and “Aid and Growth: What Does the Cross-Country Evidence Really Show?” by Raghuram Rajan and Arvind Subramanian.

3. And for the enthusiast: a meta-study of aid studies that shows that a significant proportion of the positive research is robust and resilient to expanded data sets and changed specifications can be read here. Also worth noting is the point that GDP growth is not the only reason for giving aid. This paper [PDF] by Otago University academic David Fielding (and others) regresses aid levels vs other indicators of human wellbeing such as health and education and finds positive results.

4. My references for these claims are:

  • Sachs, Jeffrey. 2005. The End of Poverty: how we can make it happen in our lifetime, Penguin, London
  • Levine, R. & Kinder, M. 2004. Millions Saved: proven successes in global health. Centre for Global Development, Washington
  • World Bank, 1998. Assessing Aid: What Works, What Doesn't and Why, Oxford University Press, New York

5. And one which is too complicated to discuss in any depth in this post. A very good introduction to the reasons why carte blanche trade liberalisation isn't a good strategy for the Pacific is can be found here [PDF]

6. It is also worth noting that New Zealand's involvement in the arena of international trade is not wholly benevolent. In the case of recent Pacific trade agreements (and the accessions of Pacific Island countries to the WTO) our negotiators have often pushed for rapid and comprehensive liberalisation of Pacific countries without due concern for the costs associated with this.

7. This I should note is not as easy in practice as it sounds and may only work in certain circumstances. Nevertheless, with all but the worst governments, some form of engagement is usually better than none. In the case of the worst governments the dilemma then becomes whether pulling aid out will harm the country's most vulnerable people.


I feel obliged to respond to this in some way (in the same way that the seminar host has to ask a question), but I'm just not sure where to start. It's certainly a thorough demolition.

I think the argument for (fair) trade is compelling. Oxfam has estimated that increasing developing countries' share of world trade by only 5% would deliver them an extra US$350 billion a year - seven times more than they currently receive in aid. And the effects would be dramatic: it is estimated that every 1% increase would reduce the number of people in extreme poverty by 128 million (these numbers are from George Monbiot's The Age of Consent). At the same time, this doesn't mean we can forget about aid and directly funding development and poverty reduction, any more than having a free market here means we can forget about those things in New Zealand. Markets don't solve all problems; the revenue from trade will not necessarily flow to those in need (though it will arguably boost government revenues and give them greater capabilities to help themselves). So, we need to do both trade and aid, together (and this was a core message of the Make Poverty History campaign - a message that the leaders of the west have chosen to ignore in favour of their respective farm lobbies).

Posted by Idiot/Savant : 4/15/2007 04:20:00 PM

What you need as opposed to aid is tax. Aid is like a tax on being nice and in the very long term inclined to undermine itself since it systematically disadvantages those that do it in favour of those that don't and distributes the burden in not very transparent manner.

Posted by Anonymous : 4/15/2007 05:22:00 PM

Hi there I/S,

Trade is complicated. I rewrote that section of the post several times, trying be clear while at the same time giving at least a cursory treatment to the complexity of the issue.

An increased share of international trade would almost certainly (and I only include the word almost in there out of respect to the long history of development 'certainties' that turned out to be anything but) raise the wealth of developing countries. And this, in turn, ought to reduce poverty (although the scope of this will depend on the functioning of labour markets and the like in-country)*.

However, the (tricky) question is - how is this to occur? After the troubled decades of neo-liberalism, one answer to this is almost certainly *not* through forcing developing countries to open their markets while certain developed countries continue to project politically sensitive areas of their own economy. In terms of what to do - the answer is not clear. Developed countries reducing their own tariffs (and subsidies) ought to help** but, this, while a necessary condition is probably not a sufficient one.

Developing countries also need to develop the capacity to compete effectively in international markets. Some of this capacity building - I think - can be aided by aid (allowing developing countries space to protect infant industries ought to help too, although what this means in practice is is problematic). Certain institutional structures probably also need to be put in place (or made functional).

Complicated in other words (and not helped by my blood sugar levels plunging pre-dinner - must eat now)

* And a caveat here, the phenomenon of 'Dutch Disease' (the curse of natural resource abundance) would suggest that certain types of trade can actually have adverse effects in the mid-long run. This, caveat, only relates to certain countries though and certain types of trade and so does not invalidate the broader point.
** Even this is not as straight forward as it seems. At present many of the worlds (or maybe just Africa's - can't remember off the top of my head) poorest countries are net food importers. Which means that, in the short term, if the US and EU stop subsidising their agriculture, prices for some staple items are likley to rise. In the mid-term , of course, removing subsidies ought to allow these countries to become net exporters - a favourable development outcome. However, the transition could well be unpleasant for urban dwellers living on the breadline. Potentially (ala Marakesh declaration) aid could help soften this.

Posted by Terence : 4/15/2007 05:47:00 PM

anon - not quite sure what you mean.

Are you suggesting something like a Tobin Tax (or fling tax, are arms trade tax)?

All very interesting suggestions, (although a common misconception of the Tobin Tax is that it will raise money. If it works the money it raises ought, actually, be limited as it will dramatically reduce the hot capital flows that it is attracting money from) but ultimately this sort of money will be disbured as aid, so what do you mena?

Also, Sweden doesn't seem too disadvantaged by being the world's biggest (%) donor nation.

Posted by Terence : 4/15/2007 05:51:00 PM

ok - substitute fling tax with flying tax in that last comment. While, theoretical models suggest that fling taxes may reduce infidelity, due to avoidance behaviour they are unlikely to raise significant revenue. (sigh)

grrr..'and are arms trade' with or arms trade. Really must eat.

Posted by Terence : 4/15/2007 05:55:00 PM

I like the idea of your fling tax although I think the problem is that it might cause a drop in the reporting of flings from negligible to nothing as opposed to causing a drop in actual incidences of it.

But actually I was thinking of a GDP (or similar) based tax to the UN, a little like what exists now but far more extensive and taking the power out of the hands of politicians (as opposed to constantly begging for a certain percentage of GDP you could demand it). You could tie it in with WTO and trade deals to ensure there are the right incentives to join the system.

> Sweden doesn't seem too disadvantaged

but they must be, unless their aid is actually buying influence and fostering dependance in other countries (which MIGHT still be mutually beneficial of course - but still is probably not as good as doing it via a neutral best practice agency).

Posted by Anonymous : 4/15/2007 08:43:00 PM

I think the point about aid well given is what the debate should be focused on - not on how much money is enough.

Writing bigger cheques will have an impact (so long as it goes to the right place, e.g. World Food Program, NGO's etc) but we could also be investing more resource in improving the living standards of poorer nations though our police and armed forces (building pipes or whatever for water, helping after a disaster) - we could even fund sabbaticals for civil servants/teachers/nurses/business leaders to help train and develop communities in developing nations. And as an added bonus, NZ benefits when these people return with additional skills and experience.

Posted by James : 4/15/2007 10:41:00 PM

Hi there anon,

Thanks for your comments. So, essentially, you are suggesting compelling countries to give aid - as a tax - I think it’s an interesting suggestion. But the question remains - and I’m genuinely interested to hear your answer as this ties into a much broader debate about multilateral governance - how would you enforce it?

Hi James,

Thanks for your comment. Everything you suggest is already done. As for the quantity v quality, I agree with Make Poverty History when they argue for more and and better aid. Both are required from the OCED donors (if I lived in Australia I might be placing more emphasis on the ‘better’ side of the equation, here in NZ it is the quantity that needs to be improved mostly).



Posted by Terence : 4/16/2007 10:22:00 AM

If you've made it through the whole post and the comments then I think that there might be a chance that you'll be interested in the latest World Bank thinking on aid. It makes for an interesting read.

Posted by Terence : 4/16/2007 03:20:00 PM