Thoughts About Foreign Aid

My friend Julianne pointed out an article in Foreign Affairs magazine by Jagdish Bhagwati. It is a review of a new book by an African born economist, Dambisa Moyo, and Bhagwati makes the useful point that we need to hear more from knowledgeable Africans about development policy.

Bhagwati writes:

Foreign aid rests on two principles: that it should be given as a moral duty and that it should yield beneficial results.

Comment: I doubt that anyone feels that aid should be given as a moral duty if the aid doesn't actually help people "in need". If there is a moral duty it is to help people, or at least to make a serious effort to do so.

On the other hand, U.S. foreign aid is often given to achieve objectives such as enhancing U.S. national security or developing foreign markets for American products. Again, it would be foolish to give money for such purposes if you knew in advance that the means would not lead to the desired ends.

Development is extremely complex, and my reading is that economic models that try to develop predictive approaches to foreign aid allocation or justification tend to be too simple to be trusted. (A project economic analysis I worked on won a prize by pointing out that if the project only succeeded in wiping out the bureaucratic impediments to efficient operations introduced by the previous project, it would have economic returns that justified its costs.)

One of the key findings after years of analysis is that financial indicators don't tell the whole story of the impact of foreign aid. The elimination of smallpox and the effect of the green revolution in avoiding famine in Asia can't be properly measured on financial terms. We might be able to measure how much it has cost to explosively expand educational opportunities in developing nations, but how do you put a dollar value on the benefits people have felt from the education they received, benefits that include not only increased lifetime earnings but also the consumer benefits of better understanding their world and being better able to manage the non-economic aspects of their lives.

A problem that I perceive often is that time frames in which results are measured are far too short. Politicians, who will run for election every 2, 4 or 6 years, tend to think in time frames bounded by elections. The development of the United States might best be measured in terms of centuries, and is still continuing. So too, the development of Asia and Africa is going to take a long time. Indeed, many of the important investments may not have evident returns in a few years, but may pay off in a few decades. (Think about the benefits from electification which took 4 decades to begin to pay off, or those from computerization which came after a similar delay.)

I liked Bhagwati's comment that there is a moral hazard in development aid, in that rewards to the practitioners of aid are often based on programming and spending money, and not on the much more difficult to measure effects likely to flow from that money.

It may be important to recognize our limited rationality. It is certainly important to recognize the multiple objectives of foreign aid. Indeed, the objectives of donors may differ one from another, as the objectives of donors and intermediaries often differ one from another. Thats life! But the number of people living in abject poverty is less now than it might have been, and some of the worst aspects of such poverty have been ameliorated.