Importing the Rules - Does Aid do more Harm than Good?

Question 1

Definition of overseas development assistance (ODA)

Answer 1

Government aid that promotes and specifically targets the economic development and welfare of developing countries and its concessional

Question 2

Examples of aid

Answer 2

• Grants
• Loans with below-market interest rates
• Debt relief
• Direct supply of goods and services

Question 3

General facts about aid

Answer 3

• ODA vs NGO vs FDI vs Remittances
• ODA can be bilateral or multilateral (UN, WB, GAVI, etc.)
  – Multilateral being that several countries give money to one institution/organization that then manages the funds
• The OECD’s Development Assistance Committee lists eligible ODA countries
• Now middle-income donors are setting their own rules

Question 4

What can aid resources be used to do?

Answer 4

• Provide food
• Build a specific bridge
• Support a rural development program
  – Attempts to raise productivity and development on a local scale
• Support the entire budget (“budget support”)

Question 5

Conditionalities that can be linked to aid (eg. for building a bridge)

Answer 5

• The bridge must be built
• Where the bridge is built, and what type of bridge
• That the company building the bridge is based on the donor country (“tied aid”)
  – Meaning that a lot of the money given to the recipient returns to the donor
• Reporting, monitoring, and evaluation requirements

Question 6

Two logics of aid

Answer 6

• Aid as financing development
• Aid as a lever for governance reform

Question 7

Aid as financing development (two logics of aid)

Answer 7

• Developing countries are too poor to finance their own development
  – eg. healthcare costs $50 per person per year, with average incomes of ~$500
  – Breaking a poverty trap with a “big push”
• Private markets cannot finance such risky investments
• Large flows of aid can have “spillovers”, eg. herd immunity to eradicate polio
• The costs of developed countries are small, target of 0.7% of developed country GDP

Question 8

Aid as a lever for governance reform (two logics of aid)

Answer 8

• Developing countries don’t need more resources - they waste what they already have through the resource curse and corruption
• Investment requires better governance
• “Buying” governance improvements through conditionalities

Question 9

Impacts of aid on public health

Answer 9

• US President’s Emergency Plan for AIDS Relief (PEPFAR) has provided antiretroviral treatment to 19m people
• GAVI: 822m vaccines, saving 14m lives
• Malaria: 0.5m under-5 lives saved each year
• Tuberculosis: 22m deaths averted

Question 10

The impact of aid on economic growth

Answer 10

• The transfer of resources should directly boost growth
• But the bulk of evidence shows no effect
• Aid does benefit the poor more than the rich
• But aid boosts consumption, not investment

Question 11

Why did aid not help development / economic growth?

Answer 11

• White elephants, overly large with too much investment and did not suit local needs
  – eg. Lake Turkana fish-freezing factory, Kenya - didn’t fit with local skills, infrastructure, or demand
• Unsustainable
  – PlayPumps were hard work, quickly broke down and could not be repaired by local people
  – Ultimately reduced water access
• Unforeseen consequences
  – Iron supplements made children more vulnerable to malaria

Question 12

Impacts of aid on good governance

Answer 12

• Hard to measure
• Some evidence that aid worsens governance
• A WB project in Tanzania building local government state capacity had zero impact

Question 13

The impact of aid on democracy

Answer 13

• Probably incentivizes ongoing democratization
  – Particularly in 1990s Africa
  – Once the end of the Cold War made conditional aid credible
• But does not stop democratic backsliding, eg. India, Nicaragua
• And aid can also prop-up dictators, eg. Zaire, Chad

Question 14

The political effects of aid

Answer 14

• Aid creates problems of coordination
• Aid causes corruption
• Aid creates dependency
• Aid reduces local political ownership and accountability
• Aid bypasses the state to NGOs

Question 15

Aid creates problems of coordination (political effects of aid)

Answer 15

• Too many donors
• Too many projects
• Each requiring separate project management, reporting and accountability structures
  – “Project Implementation Units”
• Many countries have no idea what donors are doing in their country

Question 16

Aid causes corruption (political effects of aid)

Answer 16

• Large flows of rents
  – US$700m to President Mobutu’s regime in Zaire in a decade
  – Propping-up corrupt regimes
• Resource curse: rents focus politicians on “accessing” government
• 7.5% of aid is diverted to tax havens
• Corrupt countries get just as much aid
• The development “industry” is judged by how much money they disburse, not its impact

Question 17

Aid creates dependency (political effects of aid)

Answer 17

• Paternalism/neo-colonialism: dependency on western ideas/experts
• Influxes of food aid push down prices, discouraging domestic agriculture
• Another resource curse: less need to collect domestic taxation
  – Undermining the social contract
• Vicious circle: failure -> more aid
• Causing political instability, eg. competition for food aid in Somalia, diversion to finance security forces, eg. Uganda

Question 18

Aid reduces local political ownership and accountability (political effects of aid)

Answer 18

• No organic local debate to determine policy
  – Isomorphic mimicry: “best practice” institutions, not strong institutions
  – No adaptation to local needs
  – No local legitimacy
• Governments accountable to donors, not citizens
  – Donors are overly concerned with corruption
  – eg. USAID support to Afghanistan’s health sector, saving 100,000 children per year, but suspended due to lack of receipts

Question 19

Aid bypasses the state to NGOs (political effects of aid)

Answer 19

• 20% of bilateral ODA went to NGOs in 2011
• Providing humanitarian relief, social services, community mobilization and reducing corruption
• But distracts from improving the state
• Only the state can provide nationwide transformation

Question 20

Why does bypassing the state and giving aid to NGOs distract from improving the state

Answer 20

• Another form of neoliberalism
• Skilled personnel leave the state: NGO salaries in Ethiopia 2-10x the civil service
• Prevents politicians from being held accountable for failures
• Undermining state legitimacy
• A safety net “allowing” the state to fail

Question 21

Why is it only the state that can provide nationwide transformation (instead of NGOs with aid)

Answer 21

• The “monopoly” on the use of force
• NGOs don’t have the tools to promote long-run investments
• Sustainable financing, enforcement of institutions, a social contract, accountability
• NGOs can become dependent, chasing grant opportunities, not development
  – Accountable to donors, not citizens

Question 22

Why give aid to other countries?

Answer 22

• Altruism
  – Aid goes to the most needy
• Preventing spillovers of poverty, refugees, pollution, terrorism
  – Aid goes to neighboring/unstable countries
• Geopolitical
  – Aid goes to trading partners, ex-colonies, UNSC members
  – “Soft Power”
• Domestic politics
  – Aid to “deserving” countries
  – Voters demand zero corruption
  – Racial discrimination or racial paternalism?
  – Competing crises - “Charity begins at home”
  —> Boris Johnson placed UK’s DFID under the control of the Foreign Office (2020)
  – Domestic support necessary, not an afterthought

Question 23

Donor dilemmas

Answer 23

• Where to send aid
  – Need vs ability to use aid
  – Countries in crisis vs rewarding progress
• What kind of aid?
  – Financing development vs incentivizing better governance
• What conditions to attach?
  – Limiting corruption vs maximizing local ownership
  – Maximizing donor’s domestic support for aid vs avoiding paternalism/neo-colonialism
• Which organizations receive aid?
  – Building state capacity vs immediate impact through NGOs