Foreign Aid (Good and Bad)

Stephen DeAngelis

July 13, 2009

Among those eager to tell the incoming Obama administration how to do its job were Lorne Craner, the president of the International Republican Institute; Bill Frist, a former Republican leader of the Senate; Kenneth Hackett, the president of Catholic Relief Services; and Alan Patricof, a founder of a venture capital firm. All of them are appointees to the Millennium Challenge Corporation’s board of directors and together they wrote an op-ed piece last December about how U.S. foreign aid should be dispersed [“U.S. Aid Should Be Earned,” New York Times, 20 December 2008]. They wrote:

“Not all foreign aid is the same. Hard lessons learned over the past five decades have taught us that good governance, accountability, local ownership and long-term engagement are the keys to success. In January, the new administration will inherit the five-year-old Millennium Challenge Corporation, which was created by Congress to ensure that foreign assistance operates according to these principles. He would do well to adopt it as a core development tool. Aid works best in countries whose governments are capable and committed. Before directing any American aid to a country, the corporation measures its performance on 17 indicators of democratic government, anti-corruption efforts, investments in health and education (particularly for girls) and economic freedom. Only those countries that perform strongly are allowed to compete for a five-year compact that makes them eligible to receive American aid for programs intended to reduce poverty and stimulate economic growth. By building its program around independent measures of policy performance, the corporation has been able to catalyze reform in poor countries — sometimes before any aid money is spent.”

As readers of this blog know, I’m a big fan of standards. The fact that those administering the Millennium Challenge Corporation have witnessed reforms in recipient countries even “before any money is spent” underscores the truth that given goals to achieve most countries will make an effort. The World Bank found this to be true when it established its Doing Business Index. Countries immediately began reforms that would help them move up on the Index without the World Bank having to invest a dime. The MCC directors continue:

“Aid programs are sustainable only when they are designed and carried out by the country that needs them. The Millennium Challenge Corporation insists on playing a robust consulting role to ensure that any program the United States helps finance has a good rate of return and a clear effect on reducing poverty, and that the highest standards of accounting are followed. But it also requires that poor countries assume primary responsibility for their own development to ensure that our assistance truly helps the poor help themselves.”

One challenge to this approach has been that countries like China and Venezuela have offered some poor nations aid without conditions (see my post entitled Rogue Aid). They provide this “no strings aid” because, as Moises Naim writes, “they seek to further their own national interests, advance an ideological agenda or even line their own pockets. Rogue aid providers couldn’t care less about the long-term well-being of the population of the countries they aid.” Countries that have accepted such aid are now seeing the downside of depending on it [“As Chinese Investment in Africa Drops, Hope Sinks,” by Lydia Polgreen, New York Times, 25 March 2009]. Reporting from Conakry, Guinea, Polgreen wrote:

“With a no-strings-attached approach and a strong appetite for risk, China seemed to offer Africa a complete economic and political alternative to the heavily conditioned aid and economic restructuring that Western countries and international aid agencies pressed on Africa for years, often with uninspiring consequences. Rising China, seeking friends and resources, seemed to be issuing blank checks. … But Chinese companies are now driving harder bargains and avoiding some of the most chaotic corners of the continent. African governments facing falling revenues are realizing that they may still need the West’s help after all.”

The Economist reports that rogue aid hasn’t completely gone away [“An (iron) fistful of help,” 6 June 2009 print issue]. The magazine writes:

“Authoritarian governments are using their money to buy influence abroad. Sometimes the money comes as a commercial loan; sometimes, as a grant; frequently, as both. These flows are changing the business of aid, undermining attempts by Western countries to improve their programmes and encouraging recipients to play donors off against each other.”

What prompted the article was the release of a study entitled Undermining Democracy that was conducted by Freedom House, Radio Free Europe/Radio Liberty, and Radio Free Asia. The study took a detailed look “at the use by China, Iran, Russia and Venezuela of what it calls ‘authoritarian aid’. The study is the first attempt to estimate the global scale of such operations.”

“Autocracies offer an alternative to western aid in several ways. In the past decade rich countries have tried to improve a dismal record of development spending by linking aid closely to the priorities of recipients (rather than financing a big project which the country does not need) and by demanding good governance. China and the rest do not. Much of their aid is overtly political. Iran’s offer of free electricity to Shia parts of Iraq is one example, Venezuela’s bankrolling of Cuba another. Most is steered towards a few friendly regimes, or (in China’s case) places with natural resources.”

The study was mostly conducted before the current recession hit. Many of deals that China was making in Africa are now in jeopardy Polgreen reports. She continues:

“In 2007 China announced a $9 billion deal with Congo for access to its giant trove of copper, cobalt, tin and gold in exchange for developing roads, schools, dams and railways needed to rebuild a country roughly the size of Western Europe and shattered by more than a decade of war. But that deal is now in doubt as falling prices have left Congo in a much weaker negotiating position.”

In fact, The Economist reports that the Congo “and the International Monetary Fund are arguing about a bail-out. … But the sticking point is, unexpectedly, not the country’s economic policy, but how exactly to repay a $9 billion credit that Congo secured last year from China.” The article notes that the long-term impacts of rogue aid can be harmful.

“Naturally, help from harsh regimes is rarely encumbered with pesky demands for good governance. This makes it welcome to corrupt officials and even to those merely sick of being lectured by Westerners. Alas, it can encourage bad governance. China, the report says, is training 1,000 Central Asian policemen and judicial officials ‘most of whom could be classified as working in anti-democratic enterprises’. The report concludes that authoritarian regimes are using aid to boost their soft power. If so, the spread of authoritarian aid is a challenge to more than just Western ideas of the right sort of giving.”

Current global economic woes make foreign aid a touchy subject in some quarters. Why are we helping people in other countries when there is so much need at home right now? Shouldn’t we be taking care of Americans first? The problem with that kind of thinking is twofold. First, ignoring the plight of others would forever knock out the moral underpinnings of U.S. foreign policy. Second, an improved economy at home may well rest on the recovery of emerging market countries abroad. The World Bank estimates that approximately 50 million more people will “tumble into poverty this year amid the largest decline in global trade in 80 years” [“Haiti’s Woes Are Top Test for Aid Effort,” by Neil MacFarquhar, New York Times, 30 March 2009]. MacFarquhar continues:

“The results ripple through every index. An additional 200,000 to 400,000 infants, for example, may die every year for the next six years because of the crisis, the bank said. Amid the turmoil, the United Nations is reminding the world’s wealthy nations, however embattled their finances, not to forget the poorest.”

One of the recommendations that winds its way through most discussions of aid is allowing recipient countries to play a major role in establishing priorities and methods of implementing development programs. Jeffrey Sachs, the well-known director of the Earth Institute at Columbia University, recommends that “recipient countries … be invited to prepare plans and budgets that would be reviewed by independent experts” [“Homegrown Aid,” New York Times, 8 April 2009]. Sachs continues:

“These plans would describe the inputs needed by the farmers, the expected increase in production, how the strategy would be put into place and how much money would be required. Such plans, if described with care, could then be closely monitored by the United States and other donors to gauge results and avoid corruption. Two international programs during the last decade, championed jointly by the United States, other governments and the Gates Foundation, have demonstrated the benefits of such a scientific, results-based aid approach: the Global Alliance for Vaccines and Immunization, and the Global Fund to Fight AIDS, Tuberculosis and Malaria. These programs have saved millions of lives and protected hundreds of millions more from disease and infection.”

Aid, of course, is not going to bring the global economy out of recession. At best, aid provides a holding strategy in the most desperate countries that buys time to develop a market-driven recovery. I have stressed time and again that foreign direct investment plays a much more important role in sustainable development than does official development aid. Aid, however, is required to help establish some of the pre-conditions necessary to attract FDI. Public, commercial, and non-governmental organizations must work together to move a sustainable development agenda forward. Without goals and standards, such an agenda cannot be achieved. That is why not all aid is good.