What's wrong with aid anyway?

In a previous post, I mentioned that there's a growing number of critics of aid, chief among them Dambisa Moyo. Aid is often synonymous with appeals for helping poorer countries, and many well-intentioned people donate money to various charities and causes. Many of these do have positive effects, and the people who work for these causes should be rightly applauded for their selfless sacrifices and attempts to make the world a better place.

But what I found when I worked in the non-profit sector in Uganda was that a lot of aid was being wasted, whittled away, or outright stolen. It was often difficult to see the benefits of what little of it remained, and many people would say you're not likely to see positive changes in so short a timeframe. The majority of aid is handled by state-to-state transfers, known as Official Development Assistance.

The question for me was, why don't we see positive changes, especially when there's billions of dollars being spent on aid? There's several reasons:

1) A lot of aid never reaches the poor. Some of it is 'aid' in the form of contracts awarded to companies, usually of the donor nation, to construct some project or other for the benefit of the people there. In this form of 'aid' a company's main responsibility is only to demonstrate that the work was done. Usually there's no quality control, there's little justification for the project, there's little local involvement, and the end results are things like roads that don't last through the first rainy season.

Another misnomer is "technical assistance", which is another term for sending overpaid consultants to a foreign country to tell people what to do, usually without understanding local conditions, and their Western market-rate fees are considered to be foreign 'aid'.

2) Accountability systems are inadequate or inefficient. Most accountability procedures are checked through a paper trail, not by actually examining the long-term sustainability or local ownership of the project (because locals just don't know how to manage these things, they say!), and this encourages rampant cheating, cutting corners for 'least cost' imperatives, and outright theft.

The bureaucrats who dispense aid, instead of restructuring the entire broken process, usually come back with even more bureaucratic paper checks, and these are even harming the honest organisations with huge accountability documents to fill in sometimes monthly. So aid organisations now have specialised fundraising and donor relations staff and departments that even when well-intentioned, reduce even more of the money that reaches those for whom it's intended.

3) Needs aren't properly identified and aid isn't effectively distributed. I'm going to be very controversial here, but I believe that aid distribution works the same way as that of a command economy. Yes, the kind of economy you may last have heard about in the former Soviet Union.

In the aid industry, local 'needs' are identified through studies, usually by career NGO people and young students, and these get passed on as recommendations to donors and then the donors respond with money (but often in open-bidding which means the money may not go back to the same people who identified the problems). The awarded NGO takes its cut then dispense the rest of the aid. A lot of these studies (from the so-called briefcase NGOs especially) can be self-serving and designed to keep NGOs in business; recommending actions that are specifically within the NGO's area of expertise.

And where they don't have the expertise, they very quickly reinvent themselves as if they do. There's quite a remarkable (and while it is a lament, I found it oddly humorous) account by Senegalese entrepreneur Magatte Wade, on the time Jeffrey Sachs' Millenium Villages people came knocking trying to promote their entrepreneurial villages. I encountered a slightly different version of this experience in Uganda, when the European Union announced it was going to disburse $2 million for northern Ugandan reconstruction. The meeting with NGOs was absolutely packed - the small meeting room in the EU office overflowing, and you could practically see the gears grinding away as people worked out ways in which their NGO could apply for such a large cake. Sadly, people in the non-profit sector usually have no experience in the private sector, and thus do not know how to create sustainable, self-perpetuating businesses, because it's quite another skill to look at income-generation, productivity and assessing markets outside the aid model.

Communist bureaucracies worked in similar fashion, appealing to the central government for money based on needs of their region or industry. They constantly had to work for their budgets, reinventing their needs if appeals in one direction failed. In particularly large states, extremely large and inefficient bureaucracies were formed to manage the allocation of resources, halt corruption and monitor operations. When they opened their markets, most of the state industries collapsed instantly, while the ones to survive were primarily in oil and mineral extraction or ex-state monopolies like telecommunications. State bureaucrats didn't know how to segue into the the free markets, yet this is the most crucial factor in getting countries to grow. Can someone who's never been an entrepreneur teach people entrepreneurial skills? Or will they perpetuate themselves through recommendations that keep their niche interventions alive?

The aid industry does not have a state bureaucracy, though it has a hefty amount of paperwork to keep up with. At worst, you get reports of theft and corruption, at best you get a system heavily weighed under by the responsibilities to prevent misuse. The aid industry - which is certainly led mostly by well-intentioned people, is and will be learning the same lessons as the communist bureaucracies did, and it's going to be incredibly tough.

4) Aid removes accountability to the people. Large chunks of any poor country's budget comes from aid, and this distances governments from their people in two ways. Firstly, they don't really have to listen to their people when the majority of their budgets come from elsewhere. Secondly even well-meaning governments are now saddled with a burden of accountability to their donors. While this may seem effective in practice, what happens is really that governments become more and more proficient in creating excuses or fogging the trail of accountability.

And when that fails, and donors try to come knocking, the politics of aid are turned into a weapon for generating nationalistic sentiment against the donors, usually relying on well-worn diatribes about colonialist or racist meddling. And ultimately the non-negotiable boundaries of state sovereignty will never be broached over something as piddling as aid (which often amounts to less than 0.2 or 0.3 percent of a developed nation's budget). In effect, bad governments are simply accountable to no one, and good governments (what few there are) are torn between their people and their donors.

5) Aid upsets national priorities. A recent and timely publication by the Lancet medical journal examined the track record of global health initiatives (GHIs). These GHIs have often been held up as sterling examples of aid practiced correctly, with quantifiable benefits and effective interventions in some of the worst and easily preventable diseases. But the verdict by the Lancet has been less than glowing. In an accompanying editorial:

Some of the most troubling harms include steepening inequalities in health services, reduced quality of services because of pressures to meet targets, decreases in domestic spending on health, misalignment between GHIs and country health needs, distraction of government officials from their overall responsibilities for health...

With several sectors taken care of by these massive initiatives such as HIV/AIDS, tuberculosis and malaria, governments are effectively freed of their responsibility to deal with them. And in nascent democracies largely controlled by coup leaders-turned-democrats, they tend to re-focus their budget, not on other national priorities, but on military and security to maintain their grip on power.

But look at what else the Lancet observes, in the very same sentence:

...the creation of expensive parallel bureaucracies to manage GHIs in countries, the weak accountability of a rapidly expanding GHI-funded non-governmental sector, and increased burdens on already fragile health workforces.

These are the very issues we're talking about here. To effectively control aid distribution and align it with national needs, you need bureaucracy that will continue to grow. The main limiting factor of the aid industry is the very limited resources it is given in which to function. But as you increase the funding, diminishing returns created by the ensuing evaluation, oversight and needs identification grow far in excess of the growth in actual aid.

The question finally, is with all these problems affecting aid, can it be fixed, or should we start thinking about alternatives? In the 1990s, the prevailing sentiment was that aid had been improperly managed and that this could be solved by strengthening accountability. But now with huge unwieldy bureaucratic accountability checks in place, aid has managed to create a new set of costs that may prove to be just as costly as the corruption it replaced.

We know the command economy didn't work. It is time to start thinking of alternatives.