Clarifying Two Central Questions in Foreign Aid

May 19, 2009     
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Spurred by a fragile global economic psyche and some controversial recent writings, foreign aid has entered a new cycle of scrutiny in recent months. This is not altogether surprising in light of widespread market malaise and the tendency of many to turn inward during times of crisis. But it is nonetheless risk-ridden at a time when intensified international collaboration is required. It is also ironic since rich countries were already falling dramatically behind, well before the onset of the crisis, on their commitments to support basic services in the poorest countries.

In practical terms, the debate around foreign aid tends to confuse two basic questions. The first is whether aid-financed programs achieve what they are meant to achieve. The second is whether the same aid-financed programs boost economic growth. The latter topic is important for understanding when countries can graduate from the need for aid to finance public programs exclusively from their own resources.

On the first question, the past decade has shown many unambiguous aid-financed successes. Programs for AIDS treatment, for example, have brought life-saving medicines to more than 2 million people in Africa. Likewise aid-financed programs helped to cut measles deaths in Africa by 90 percent in just 6 years, saving more than 1,000 lives per day. They have also helped Malawi double its food production and supported the distribution of more than 140 million long-lasting insecticide treated anti-malaria bednets within just 3 years.

Have all aid-financed programs achieved such success? Of course not. Does the lack of success in some quarters mean we should cut back on other areas of success? Of course not. Cutting back life-saving health programs would not only have horrific consequences for the millions of current beneficiaries, but it would also leave hanging the millions of others who have yet to be reached by programs that are still being scaled up. The key task is to understand why some aid programs have been so successful while others have not, and to scale up those that work. Common elements of success include clear delivery targets, ground-level ownership of success, transparent allocations of responsibility, and adequate finance to get the job done.

The second question of aid’s effect on economic growth is more complicated. Macroeconomists tend to focus on this topic as a short hand measure of aid’s overarching value. Many think that if aid cannot be statistically linked to growth then it must have been a failure. This framing is short-sighted when it overlooks the first priority of discerning direct programmatic results. We know, for example, that emergency humanitarian aid is inversely correlated with growth, since that aid is (by definition) delivered to avert catastrophe rather than to make long-term investments. But at another end of the spectrum, if aid helps eradicate smallpox but doesn’t create any jobs, is that a failure? Likewise should a program that helps save 2 million people from dying of AIDS be considered a success or failure if it does not create new jobs? And when aid to Africa amounts to approximately $35 per African per year, how many successes should one realistically expect in any case?

At core, economists still have difficulty measuring all the mechanisms through which successful aid programs might contribute to growth. For example, economic theory and evidence teach us that better health and education contribute to better economic outcomes. But macroeconomists have so far had trouble confirming all the statistics to map every link in the chain from aid to health and education to country-level growth. That notwithstanding, it is an interesting if preliminary fact that Africa’s economic growth rates have picked up over the past decade at the same time as aid started to rebound from historic lows, with a particular emphasis on health and education.

Another possible explanation why aid is not more closely linked statistically to growth is that aid programs have not yet directed adequate practical emphasis on productive sectors like agriculture, which dominates the rural economies of sub-Saharan Africa. Total worldwide aid to agriculture from all rich countries to all poor countries amounted to roughly $5 billion in 2007, equivalent to approximately $2 per person for all people living on less than $2 per day (or $4 per person if we assume that roughly half of that population is rural). It is possible that subsistence economies’ biggest and most discernible economic growth returns to foreign aid will lie in productivity boosts among smallholder farmers. Malawi, for example, has enjoyed robust economic growth amidst its boost in food production over the past three years.

The bottom line is that any assessment of aid needs to be unpacked and measured against its purpose. It is unquestionable that aid is helping to finance vast human success stories throughout the world, especially in Africa. These are of merit unto themselves, even when the evidence linking to GDP growth is still pending. They should provide lessons for other programs that can provide key complements for economic development, and might indeed have direct growth consequences.

A humane and strategic approach to aid should boost poor countries’ ability to tackle the challenges of today while helping to build the economic autonomy that will allow them to address the challenges of tomorrow. In the meantime, the global community has an obligation to keep supporting and expanding programs that work, especially during a period of fragility and strain.

John W McArthur is CEO of Millennium Promise.  He can be followed on Twitter.com as “johnmca” and emailed at john.mcarthur@millenniumpromise.org.

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8 Responses to “Clarifying Two Central Questions in Foreign Aid”

  1. Susan Kishner on May 19th, 2009 8:54 pm

    I must say this is a great article i enjoyed reading it keep the good work :)

  2. AndrewBoldman on June 4th, 2009 7:26 pm

    Hi, cool post. I have been wondering about this topic,so thanks for writing.

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  5. John W. McArthur on June 17th, 2009 5:45 am

    Thanks! I think the Global Brief editors would be fine with you using the content as long the source is cited. I’m certainly happy for you to share elsewhere. Best regards, John McArthur

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  8. Richard McPharlin on July 13th, 2009 11:50 pm

    Hey
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    Cheers





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