Evidence Beats Rhetoric, Every Time

Time for a reality check! While some of Bill Easterly’s ideas for improving aid are good ones, unfortunately his attacks are way over the top and totally one-sided. This approach ultimately weakens his credibility and the power of his analysis, and as Branko Milanovic points out, will be used to set back the very agenda he wants to pursue. Alas.

Claiming that aid has been a miserable failure is popular with journalists, ideologues and naysayers (and it helps sell books). But the accumulated evidence over the past decade suggests a much more nuanced and more positive story whereby aid has done a fair amount of good despite it weaknesses and failures in some countries. Certainly, much can be done to make aid more effective. But those that argue the extreme view that aid doesn’t work are just as wrong as those that argue that it is the magic elixir for growth.

I hate to interrupt a spirited debate with facts, but occasionally they are useful. Let’s start with the claim that the West has spent $2.3 trillion in five decades with precious little to show for it. $2.3 trillion! Wow! What a huge number! Except…it’s not.

Take a closer look: $2.3 billion over 50 years is $46 billion a year, a modest amount for any global capital flow. And only about half went to low income countries, with the rest to middle-income countries like Israel that didn’t need it. So we have around $26 billion a year for all the low income countries. This works out to be a rip-roaring $14 per person per year in low-income countries. Much of that goes to consultant reports or is tied to purchases in donor countries where it gets much less bang for the buck. As a result the recipients actually get far less than these figures indicate. So let’s cut the grandstanding. It ain’t much. In Easterly’s judgment, based on his opening vignette, because poverty still exists in Ethiopia after it has received all of $14 per person in aid per year (Ethiopia happened to receive exactly the average amount), “aid doesn’t work.” Please!

So aid amounts have been modest. Have they done any good? Certainly much was wasted on rapacious dictators like Joseph Mobutu, Ferdinand Marcos, and Baby Doc Duvalier (our allies, one and all: I’m shocked—SHOCKED!—to find they didn’t use the money to fight poverty!). Some aid went down the tubes with dumb ideas or even worse implementation. And average income in Africa is about the same as it was two generations ago. But that is only one side of the story. Korea until the early 1970s received more than three times as much aid per person than the average low-income country. Botswana is Africa’s great growth miracle, and since 1960 it has received 8 times—8 times!—more aid per person than the average low-income country (and still today receives more than the average low-income country). More recently, large recipients like Mozambique and Uganda have nearly doubled their incomes since the early 1990s. In much maligned Egypt, since 1960 average real income has tripled, infant mortality has dropped from 189 to an astonishing 35 per thousand, and literacy rates have nearly doubled.

Easterly rightly despairs that millions still needlessly die of disease (despite our generous $14 of assistance), but he neglects to mention those that now live. A recent book documents how millions of lives have been saved in developing countries through large-scale health interventions in the last several decades. [1] Routine immunizations save 3 million lives every year. Small pox was eradicated, and polio nearly so. And there has been enormous progress in fighting river blindness, guinea worm, diarrheal diseases, and others. Aid programs did not always discover these medicines and technologies (although in some cases they did, like oral rehydration therapy to fight diarrhea), but they were central to delivering them to the poor. Without these programs, millions of these people would be dead. Tell them that aid has been wasted, and that we all would be better off without it.

But what about economic growth? After all, everybody knows that the research shows that there is no relationship between aid and growth. Except…um, that’s not what it shows. I used to think it did, because that’s what all the pundits say. But then I did something radical: I read the research. And here is the dirty little secret: most of the published research over the past decade has shown a modest positive relationship between aid and growth—not in all countries, to be sure, but on average across countries over time.

I am not talking about the famous research by Craig Burnside and David Dollar that aid works if countries have good policies or institutions. Easterly and others have shown that these “conditional” results are fragile. I’m talking about the much less sexy yet solid research by people like Henrik Hansen, Finn Tarp, Robert Lensink, Howard White, and several others, much of it published in peer- reviewed journals. [2] Never heard of these studies? You should read them—you’d be way ahead of most of the pundits! You may not agree with this research, but let’s stop misleading the world by telling them it doesn’t exist.

Here is how the research stacks up. One small set of studies, mostly unpublished, which Easterly loves to cite, finds no relationship, but is based on two important erroneous assumptions: (1) aid has a fixed proportional impact on growth, so that the first dollar and the hundred-millionth dollar of aid must have the same impact on growth, and (2) all aid affects growth equally, whether it is spent on emergency food for refugees, consultant reports, or building roads. A second, larger but less publicized set of studies relaxes the first restriction, and allows aid to have diminishing returns on growth (remember that from your first economics class?). A few newer studies relax the second restriction, allowing different kinds of aid to have different impacts on growth. Almost all of these studies find a modest, positive, statistically significant relationship, and they have held up well to scrutiny. Surprise! But don’t bother to tell the journalists—modest good news doesn’t sell.

In a recent study I conducted with Michael Clemens and Rikhil Bhavani, we found that aid actually aimed at growth (about half of all aid) had a positive and significant impact with diminishing returns, with an estimated average rate of return of around 13%. [3] Our results have been tested, re-tested, tortured, and banged on by many observers, but they have held. A recent and well-publicized study by Ragu Rajan and Arvind Subramanian purported to find no aid-growth relationship, but almost all of their results were based on the two false assumptions above. [4] In the few cases where they allowed for diminishing returns, the results were always positive, and where they both allowed for diminishing returns and examined the subset of aid actually aimed at growth, they found positive and significant result, confirming our results.

So where does this leave us? First, the rich countries have given very modest amounts of aid. Second, aid has achieved very modest results in many places, strong results in a few, and failure in others. Third, aid is no panacea – trade policies, institutions, decent governance and the rule of law, private entrepreneurship, and investments in health and education are the mainstays for growth. But aid can help and has helped on the margin in very poor countries, at least in some circumstances. Fourth – and here is where I agree with Easterly—aid programs are not nearly as effective as they could be, much is wasted, and we can and must do better. How do we do that?

First, I strongly agree with everything Easterly says about feedback and accountability. We need clear, measurable goals, and aid programs should be constantly assessed against those goals by independent monitors. Second, we should separate our politically-motivated aid from aid aimed at development. If we want to give aid to Israel, Pakistan, Jordan, and Colombia to achieve other foreign policy goals, fine. But as Milanovic argues, let’s not pretend those funds are aimed for development, nor judge their success that way. Third, let’s get away from one size fits all, and deliver aid differently in different countries. In democracies with better governance, provide most of the aid to the government. But in corrupt dictatorships, give less, make shorter commitments, keep it on a tighter leash, and give most (if not all) through NGOs and faith-based groups on the ground to deliver basic services. But most of all, let’s get away from the broad-brush ideological sound bites on both sides that only fog the real issues, and find ways to deal with difficult problems with practical, hard-headed solutions.

Notes

[1] Levine, Ruth and the “What Works” Working Group (with Molly Kinder), (2004), Millions Saved: Proven Success in Global Health (Washington: Center for Global Development).

[2] See, for example, Henrik Hansen and Finn Tarp (2001), “Aid and Growth Regressions”, Journal of Development Economics, 64: 547-570; and Robert Lensink and Howard White (2001), “Are There Negative Returns to Aid?” Journal of Development Studies, 37 (6): 42–65. Several other studies reach similar conclusions. For a survey see Michael Clemens, Steven Radelet and Rikhil Bhavnani (2004), “Counting Chickens When They Hatch: the Short-Term Effect of Aid on Growth,” Center for Glocal Development Working Paper #44 (November).

[3] Michael Clemens, Steven Radelet and Rikhil Bhavnani (2004), “Counting Chickens When They Hatch: the Short-Term Effect of Aid on Growth,” Center for Glboal Development Working Paper #44 (November).

[4] Raghuram Rajan and Arvind Subramanian “Aid and Growth: What Does the Cross Country Evidence Really Show?” IMF Working Paper WP/05/127 (June, 2005).

Also from This Issue

Lead Essay

  • Why Doesn’t Aid Work? by William Easterly

    It is a tragedy that billions suffer from extreme poverty. The second tragedy of the world’s poor, William Easterly maintains in this month’s lead essay, is that trillions spent on foreign aid have done so little to help. Aid efforts so rarely succeed because they so often lack feedback and accountability. The way forward, Easterly argues, is “truly independent scientific evaluation of specific aid efforts … continuous evaluation of particular interventions from which agencies can learn.”

Response Essays

  • Thought-Provoking and Misleading by Branko Milanovic

    In his spirited reply to this month’s lead essay the World Bank’s Branko Milanovic claims that William Easterly’s argument is misleading. Easterly, Milanovic argues, is not clear about the definition of “aid,” and he both underestimates how much governments can do to help the poor and overestimates the likely effectiveness of his proposed new “grandiose bureaucracy” to assess aid effectiveness. Easterly, Milanovic writes, “provides an argument for those who have long argued that the best policy is to do nothing and ignore the poor world.”

  • There is No Fix for Aid by Deepak Lal

    In his reply essay, Deepak Lal, the James S. Coleman Professor of International Development Studies at UCLA, argues that like almost all aid efforts, Easterly’s proposed evaluation initiative is likely to fail. “Short of direct or indirect imperialism,” Lal argues, “there seems to be little hope of overcoming the domestic political obstacles to the efficient utilization of foreign aid.” Easterly’s proposal is just more fodder for the “Lords of Poverty,” the middle class professionals who derive a good living from the international business of alleviating world poverty.

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