Category Archives: Foreign Aid

Trade vs aid: Gross value vs value added

Bono and Ali Hewson: If Africa increased its share of world trade by one percentage point, that gain would dwarf all the aid it receives.

Shorter Owen Barder: We care about value added, but trade flows are measured in gross terms. The net benefit of exports is not equal to export revenue; it’s the value added that is some fraction (say, 10%) of the export revenue. The sum of development assistance to Africa will dwarf that number.

Me: Development assistance flows, as reported by their donors, are measured at gross value as well, so we’d need to estimate the value added of development aid before we really made any comparisons.

Previous editions of gross value vs value added.

Disaster-driven trade liberalization

EU members are thinking about helping Pakistan’s economy by liberalizing tariffs on some of its imports:

The most realistic option, according to some diplomats, would be for the EU to identify a list of products beneficial to Pakistan and then unilaterally reduce the so-called “most-favoured nation” tariffs it charges trading partners. Depending on the products and the tariff reductions, such a move could result in €100m to €150m in additional annual exports for Pakistan, according to preliminary calculations.

One challenge in devising a list, say people familiar with the matter, would be to help Pakistani exporters without providing unintended benefits to their Chinese rivals.

It’d be nice to see “preferential” liberalization come via MFN tariff reductions.

[HT: Seb]

Focusing the World Bank on public goods

Arvind Subramanian says we should reorient the World Bank towards public goods:

It is awfully hard to find evidence that traditional World Bank–type aid works. In a series of papers, Raghuram Rajan, former chief economist of the IMF, and I were unable to find any positive effects of aid on long-run growth but did find evidence consistent with some of the negative effects of aid in depressing manufacturing exports and worsening domestic institutions.

On the other hand, it is widely accepted that some of the biggest contributions to development have come from global public goods such as the green revolution and medical breakthroughs, especially related to the development of antibiotics and vaccines…

India should rather put forward a new vision for the World Bank, with a central focus on global public goods, a point also emphasized and elaborated by Devesh Kapur, the author of the definitive history of the Bank. Nancy Birdsall of the Center for Global Development and I have argued that the governance structure for global public good activities should be quite different from current arrangements. This could be the thin end of the wedge for perhaps eventually breaking up the World Bank into two institutions: first, an aid agency devoted to traditional lending activities that could continue to be dominated by the G-7; and second, a new institution that focuses more on the creation of global public goods, one in which middle income countries such as India, China, and Brazil could start making greater financial contributions and, in return, obtain commensurate power and influence.

Dead Aid

Out this week is Dead Aid by Zambian economist and former World Bank consultant Dambisa Moyo. She’s hawking a tough sell – not merely arguing that aid has had negligible impact on average, Moyo is pressing the case that aid has been “an unmitigated political, economic, and humanitarian disaster“:

The aid money pouring into Africa, she says, underwrites brutal and corrupt regimes; it stifles investment; and it leads to higher rates of poverty — all of which, in turn, creates a demand for yet more aid. Africa, Ms. Moyo notes, seems hopelessly trapped in this spiral, and she wants to see it break free. Over the past 30 years, she says, the most aid-dependent countries in Africa have experienced economic contraction averaging 0.2% a year. [WSJ book review]

The Wall Street Journal published an excerpt (the book’s preface) this morning, but that passage doesn’t even begin to make the anti-aid argument. But Bill Easterly is excited about the book, so it’s probably worth a closer look.

Update: See this (negative) review. Thanks to Luis Enrique in the comments for the pointer.

Bill Easterly on Peter Singer's new book

Two weeks ago, I suggested that Peter Singer erred by suggesting that “economic development is impeded more by a lack of appropriate motivation than a lack of appropriate knowledge and incentives.” I predicted that he’d be due some grief from Bill Easterly. Such is the power of Trade Diversion that that has now come to pass in the pages of the Wall Street Journal:

Suppose you see a small child drowning in a pond. If you save him you will ruin your expensive suit. Do you save him? Of course you do. Now think about the world’s extremely poor children who are going to die unless you give enough to a charity designed to help them, such as Unicef or Oxfam. Do you save them? Not often enough. In “The Life You Can Save,” Peter Singer argues that the two situations are ethically equivalent. Such immediacy is compassionate and inspirational — you want to give more after reading Mr. Singer.

Unfortunately, there are several differences between these two situations. The most important is that you know exactly what to do to save the child, whereas it is not at all clear that you (or anyone else) knows exactly what to do to save the lives of poor children or how to get them out of extreme poverty. Another difference is that you are the one acting directly to save the drowning child, whereas there are multiple intermediaries between you and the poor child — an international charity, an official aid agency, a government, a local aid worker.

The full review goes into more details, but Easterly’s argument is simply that Singer doesn’t address these two problems adequately to compellingly show that greater giving is a moral obligation akin to saving a drowning child.

Atypical thoughts on foreign aid

Oxford’s Adrian Wood proposes capping development assistance:

Some developing countries, most of them in Africa, have had high levels of aid dependence – in excess of 10 per cent of gross domestic product, or half of government spending – for decades. It is questionable whether this has been helpful.

There are various reasons to be concerned about high aid dependence, but the most worrying is the undermining of good governance by distortion of political accountability. Governments that are highly dependent on aid pay too much attention to donors and too little to their citizens. This might not matter if the interests of citizens and donors were identical. But all donors have some non-developmental motives and, even when they seek to promote development, they have their own priorities. The result is confused and shifting policies, volatile aid and spending and, as a result, slower growth.

I therefore propose that donors collectively set an upper limit on the amount of aid they give to any developing country. This limit should be 50 per cent of the amount of tax revenue that the aid-receiving government raises from its own citizens, by non-coercive means and excluding revenue from oil and minerals…

About 30 countries with populations over 1m, of which more than 20 are in Africa, now get aid above this limit and in about half of them aid is more than 100 per cent of taxes…

A lot of countries, including some in Africa, still get too little aid – well below my 50 per cent limit and below what they could put to good use – so part of the agenda should still be to increase aid. But the dangers to development of too much aid for too long are sufficiently serious that donors also need to think strategically about upper limits.

Update: Bill Easterly notes that it isn’t likely to happen.

Millennium Development Goals: Who's in charge here?

The table in today’s Vox column by Helmut Reisen illustrates the lack of accountability in development assistance — when everyone is responsible, no one is.

Table 1 Unclear institutional assignment to the MDGs

Selected multilaterals working on the Millennium Development Goals
MDG / Thematic area Main multilaterals Other multilaterals with a role
MDG1: Eradicate extreme poverty and hunger UNDP, World Bank, AfDB, AsDB, IFAD, EC, FAO, WFP CGIAR, IADB
MDG 2: Achieve universal primary education World Bank, UNICEF, UNESCO UNFPA, UNRWA
MDG 3: Promote gender equality and empower women UNDP, World Bank, UNIFEM, UNICEF UNFPA
MDG 4: Reduce child mortality WHO, UNFPA, UNICEF World Bank, WFP, UNRWA
MDG 5: Improve maternal health WHO, UNFPA World Bank, WFP
MDG 6: Combat HIV/AIDS, malaria, and other diseases UNAIDS, World Bank, WHO, UNDP, UNFPA, UNICEF UNIFEM
MDG 7: Ensure environmental sustainability UN Habitat, World Bank, AsDB, UNDP CGIAR, UNIDO
MDG 8: Develop a global partnership for development World Bank, EU, UNDP, UNIDO, ILO, UNCTAD UNDP
Human rights OHCHR UNIFEM
Conflicts and humanitarian emergencies UNCHR, OCHA, ECHO, WFP, UNICEF, WHO UNDP

Source: OECD Development Centre, “Financing Development: Whose Ownership?”, Paris, 2008, Chapter 2.