How Foreign Aid Succeeds and Fails at the Same Time

There is a sharp dichotomy in opinions about foreign aid.

Many, from Jeffrey Sachs to Bill Gates to Charles Kenny, have argued that it has been a great success. As Gates explains:

Aid money can and does work. It improves people’s lives and makes the world a better and safer place. . . . Wasteful and corrupt aid projects are probably inevitable, and they should never be tolerated. But overall, when you look at the big picture, quite a lot of good things are happening.

Others, most famously William Easterly and Dambisa Moyo, have argued that aid has not delivered on its promises. As Easterly puts it,

Each foreign aid bureaucracy is responsible for everything, all the aid bureaucracies together are collectively responsible for all this “everything,” and in this bureaucratic maze with no exits, nobody is individually responsible for anything. . . . It is a fallacy to think that overall poverty can be ended by a comprehensive package of “things,” like malaria medicines and clean water.

Is there any logical explanation for this divergence beyond the biases that these personalities have? Is there any way that both groups might be right (or wrong)?

The source of the disagreement can be traced to differences in what is being examined—and what aid agencies have focused on in recent decades.

Optimists look at changes at the level of the individual. They focus on the condition of the poor, and see improvements in how people live across a wide range of indicators. Fewer people are destitute and diseased. More people are going to school, living to old age, and speaking on cell phones.

Pessimists, on the other hand, look at country performance. They focus on economic results, and see little evidence from the data that aid can boost growth or increase productivity. The poor may have better lives, but they are not necessarily richer. If there have been some gains in income, it is because China and other Asian countries are driving it. States are still misgoverned, and exports are still dependent on commodities.

Therefore, both factions are right to some extent. The poor are doing better, but despite a commodities-fed boom in many countries, governments are failing to make the structural and institutional changes necessary to sustain improvements in lives over the long-term.

Part of the problem is that aid agencies are much better at projects aimed at helping individuals than they are at trying to catalyze economy-wide systemic change. They have repeatedly showed that they find it institutionally difficult to reframe their mental models in order to work with local politics and customize their approaches to local context. Better to play it safe and do what they can easily understand and justify to their constituents— alleviate hunger, build more schools, and vaccinate more children.

In recent decades, there has been a large shift in resources away from programs that contribute to overall development—such as building universities, improving rural economies, enhancing government institutions, and investing in infrastructure—in favor of programs that are aimed at individuals.

Donors in North America and Europe, for instance, have ramped up funding for programs that improve individual health outcomes—making it the largest sector of most bilateral agencies—at the expense of anything that is hard to justify in the short-term. In the U.S., spending on health has increased from six percent of the foreign aid budget in 1995 to nearly 30 percent in 2008. In contrast, only four percent of USAID spending, excluding Iraq and Afghanistan, went towards rule of law and governance programming, which are typically hard to quantify and verify, even though these are crucial to state building and helping the poor. The biggest American new initiative in aid over the past decade—the President’s Emergency Plan for AIDS Relief (PEPFAR)—was focused on a few narrow healthcare outcomes at least partly because only something with such appealing and measurable objectives could get through Congress.

This emphasis explains why improvements in the health of the poor have been aid’s greatest achievement so far. But such programming does little to help with bigger issues—especially when it depends on NGOs and companies to deliver services and does not focus on strengthening healthcare systems. Governments are not improved, economies are not diversified, and countries are not made any more resilient. Avoiding local institutions—because they are unpredictable, liable to make mistakes, corrupt, and unable to keep good records—means that aid does not contribute to development at the country level at all.

The same general logic drives programming in other areas too. There is much greater emphasis on getting students into the classroom than on creating education systems able to ensure they are well taught. Ending hunger gets the highest priority, but building robust agricultural sectors do not. The Millennium Development Goals (MDGs) focuses on improving individual lives, but says little about building up local institutions, often producing schemes that do the former with little regard for the latter.

As a result, systems of governance are not improving in most places. And this matters to sustaining the gains made at the individual level. After all, increasing education levels and reducing healthcare risks requires improving governments’ ability to manage and regulate those systems.

Increasing learning outcomes, for instance, is about far more than just attending school, especially given the precarious state of most schools in the developing world. Getting more poor children into the classroom—which many countries have done in recent years—does not necessarily mean that they are learning much. In India, for instance, more than 50 million school-going children cannot read a very simple text. In South Africa, only 15 percent of those children who finish grade nine acquire a basic level of competency in math and science skills as measured on internationally comparable tests. The average math ability of Brazilian school students is no better than the abilities of the bottom 2 percent of Danish students.

Optimists have a lot to cheer about right now. But the pessimists have not given up.