Aid

The Economist has a fantastic article on aid. (The Economist doesn’t have bylines. Henry Curr tweeted the article (x’d it?) and credits Cerian Jones.)

At half the dinners I go to, someone says, well, yes, a lot of the USAID money was mis-spent, but what about the poor starving children in Africa? If you are in that situation, this is the article for you.

This article is about about the centerpiece of aid: “development” aid, designed to boost economic growth, not about the politicized “nonprofits” that USAID was supporting and their bloated staffs, funneling aid money to political advocacy and employment, promoting American self-loathing around the world, and so forth.

Development spending accounts for almost three-quarters of all aid.

And the enterprise is a colossal failure.

The capital of Malawi, one of the world’s poorest countries, runs on aid. A city built in the 1970s by the World Bank, Lilongwe’s straight streets are filled with charities, development agencies and government offices. Informal villages house cooks and cleaners for foreign officials; the entrance to each is marked with the flag of its national sponsor.

The money is small compared to advanced country GDP, but huge compared to poor country government resources

…Rich countries spent $256bn (or 0.4% of gdp) on foreign aid last year—enough to provide sub-Saharan African governments with a sum as large as their total tax revenues.

The average Malawian has had more money spent on them by international agencies than by their own government every year since the country gained independence from Britain in 1964.

Savor a good sentence:

Lilongwe’s current state shows development aid’s ambitions; the country’s poverty reflects its failures….

Failures:

Things did not get going. From 2014 to 2024, the world’s 78 poorest economies grew more slowly than in the decade to 1970, when aid was first emerging.

Surprise, surprise? No.

This is perhaps unsurprising, given earlier studies….

I remember reading several books by P. T. Bauer in the 1980s, making exactly these points. It’s not news.

What lies behind this failure?…they [Aid organizations] have no idea how to encourage economic growth…Each generation of development spending has failed in its own way.

The first way is naturally the impulse to bring the industrial policy instinct to poor countries where naturally it works even worse than in rich countries.

[Development spending]most often subsidises favoured industries, frequently funds infrastructure construction and sometimes pays the salaries of teachers…

Early efforts built a lot of bridges, many to nowhere.

…it is hard to hand out enormous sums without turning poor countries into miniature command economies. Development projects mostly attempt to build entire industries, such as dairy farming or fisheries, from scratch.

Many problems are similar to those that plague industrial policy in rich countries… In 2015 Lindsay Whitfield of Copenhagen Business School and co-authors looked at 14 African industries that received aid. They found that after handouts just two had raised output…

The results of such spending are no better in Malawi than in the US — even if it’s free to the recipient. Add the preference of aid advocates for “sustainable” or “appropriate” and “green” technology, including these days hostility to GMO foods, and social or environmental wrappers, “climate justice” and so on, indeed even the hostility to capitalism, “consumerism” and growth itself and it’s not a surprise this is a rathole. (Again, it’s cheap from our perspective. The problem is that it’s wholly ineffective. If money really could jump start growth, that would be great.)

One of the central conundrums of aid is that it can destroy local industry. Sending food, for example, seems like a no-brainer of mercy. And in a war, crop failure, or other catastrophe it is. But sending food on a regular basis bankrupts local farmers.

Central idea 1: Imagine just how happy the US might be if China decided in its mercy to tax Chinese citizens, buy crops at overvalued prices (which incidentally pleases Chinese farmers), and send bags of rice to the US for free, marked “gift of the CCP,” thereby bankrupting US rice farmers. Or if it decided to send us really cheap electric vehicles to help us speed towards net zero, thereby undermining our own state-supported EV business. Well, you know exactly how our government feels about this sort of thing! And this is exactly what aid does.

Now, a good free market economist welcomes subsidized imports, and a push to leave agriculture and move to export-oriented manufacturing or other higher value industries. But Malawi doesn’t have other higher value industries, and exporting anything to the advanced economies is getting harder and harder. Extending the old proverb, send a man a fish a day forever, and he forgets how to fish.

The article opened my eyes (some more) to the delicate intertwining of economics and politics. We really don’t live in a free market world in the US (note our executives rushing to change ideology and please the new team in Washington), and even less so in poor countries.

Western aid officials often want to prevent local politicians, who control crucial industries, from profiting as a result of their projects, meaning they select obscure sectors for tax breaks, credit and subsidies. With few investors willing to stump up capital, and little interest from local politicians, the businesses duly flop.

Here is a conundrum for you. Without 10% off the top for the big guy, businesses will flounder.

As the article notes, the first generation of aid tried to purchase democracy-promotion and political reforms. That failed.

In 2005 David Dollar and Jakob Svensson, both then of the World Bank, and Dani Rodrik of Harvard University, looked at disbursals tied to political reforms—and could not find a country where they had produced better policy…

Last year Avi Ahuja of New York University concluded that it [aid] produces less competitive political systems, as incumbents wield the cash to win votes….

Central idea 2: Healthy states have governments that must fund themselves from their own taxes. Then, they work hard to maintain the tax base, allowing the economy to grow and regulating and taxing reasonably, even if that effort is difficult politically. Governments that get their money from other sources, such as natural resource extraction fees or international support, work to please and keep going those sources of funding. At the extreme, Hamas is kept alive because it pleases outsiders (including many in Europe, the UN, and even the US) who send it money to keep a war going rather than having to please a tax or electoral base.

And the same is obviously going to be true of economies whose government budgets depend so crucially on aid.

Recipient countries have created entire bureaucracies devoted to planning, securing and documenting aid. The Malawian state, for instance, employs many more people to manage aid than to oversee trade. …

In many countries, everything from the banking system to import permits is designed to accommodate donors’ needs. Embryonic industries that are not favoured by aid officials barely stand a chance.

The business of Malawi is, apparently, aid. This ties in with a great disappointment. Surely education is something we could give poor Malawians, that would jump start their economies. Growth thinking is converging on human capital as one of the centerpieces of growth, and “improve education” seems to be a growing mantra now that infrastructure and industrial policy are proving not to work. Yet

…research has found little link between primary-education aid and output… There were not enough businesses to make use of locals’ new skills…

Every year the best-connected and most-educated Malawians return from university abroad not to start a business, but to start a charity. On a weekday they pack out Lilongwe’s smarter dining spots, meeting with diplomats. Most live a stone’s throw away from downtown, on the site of offices paid for by aid agencies, and enjoy salaries far beyond those available in the private sector.

This is a real tragedy. In addition to the brain drain that smart entrepreneurial Malawians would much rather stay in the US, the business at home is… aid.

Central idea #3: Balance of payments. In the end, dollars flowing in to Malawi finance Malawi’s ability to import goods. That’s not a bad thing per se, but that’s what it is. A mercantilist should love aid as it gives foreign countries dollars, and the only thing to do with dollars in the end is to buy US goods. (That our mercantilists in Washington also hate aid is a bit confusing. But they don’t seem to live in accounting identities the way I do.)

However, that also means that other things the same, it drives up the real exchange rate and makes it hard for Malawi to export. The healthy way to get dollars to finance imports is to produce things others want to buy. Now Malawi produces good feelings in return for dollars.

Many also rely on assistance to keep foreign reserves cushioned, lifting living standards. “The first reason we can’t survive without aid is that it is all our dollars,” says an African official.

Development aid, coupled with tariffs against exports from countries such as Malawi to the US, seem like the sort of thing future anti-colonialists will rail at as a device to ensure perpetual poverty and dependency.

The number one way to spur growth in poor countries? Buy what they have to sell.

But what of the good works, in addition to education which might be worth it for its own sake?

Health spending has had some real successes. The provision of HIV treatment helped halve deaths from aids in the two decades to 2020, for instance. But it has not prompted economic growth.

…In Bangladesh free health care killed private provision. In Africa aid-funded hospitals struggled to absorb knowledge from American doctors.

The hard-nosed enforcers of the emerging approach are willing to sacrifice spending that did lots of good, including vaccination regimes, infectious-disease control and other interventions. In one of Lilongwe’s public gardens, a bureaucrat formerly in charge of usaid’s east Africa office lists the many clinics, schools and government offices now under threat. The idea that Malawi’s clinics might never re-open is agonising for aid workers, and uncomfortable for anyone who believes rich countries have an obligation to help the world’s poor.

These seem like easy cases for aid, but here too life is full of uncomfortable tradeoffs. When Africa did not know how to treat HIV, as in a war or crop failure, for the US to run in and get it going was unquestionably, as far as I can see, a good thing. But it’s 30 years later. The knowledge of how to treat HIV is, with 30 years, easily transferrable to Africans. The money is small even by their government standards. Why should international aid be forever in charge of public health, education, and public offices? These are indeed the most important things for a government to show a people it governs wisely. “Free health care killed private provision” seems like another story just like “free food bankrupted local farmers.” Locally provided is much more sustainable. Getting a medical degree in the US should be more attractive than getting a political science degree and returning to start a charity.

“Rich countries have an obligation to help the world’s poor” sounds nice, and it is right in the abstract. But there is a lot of very patronizing “white man’s burden” thinking even in achingly progressive aid circles that keeps the world’s poor poor. Help by buying what they have to sell rather than running industrial policies is still help.

Update:

By the way, the main economic argument for tariffs is monopoly pricing: that the US may be able to transfer some wealth from, say, Malawi to the US. Even if possible, in my view, that’s not the US role in the world. And why one would want to do that to Malawi and simultaneously send economic aid requires artful squaring of circles, or a desire (perhaps unintentional) to really impoverish them and make them eternally dependent on aid.

Update 2

Aid agencies are a classic case of spending other people’s money on other people. Except they are twice removed from the source of money. Taxpayers give money to governments who give it to NGOs who give it to local governments etc., often with little accounting for effect. Stupendous waste and inefficiency should not be a surprise. Foundations like Gates who give away the founders’ money, and look for evidence of effect, have a hard enough time finding useful projects.