International Development Aid Xavier Sala-i-Martin Columbia University May 2006

International Development Aid

Xavier Sala-i-Martin

Columbia University

May 2006

International Development Aid

• International AID takes a variety of forms:– International Institutions (World Bank, United Nations,

IMF, OECD,..– Development Ministries of rich countries (USAID,

Sweden, etc).– NGOs– Left-Wing radicals (antiglobalization people)– Right-Wing radicals (including churches)– Great Men and women (from Che Guevara,

SubComandante Marcos and Rigoberta Menchu to Jeff Sachs-Angelina Jolie, Bono, Tony Blair, Bob Geldof, the Pope, the Dalai Lama …)

Theory

• Growth is a function of investment• Poor countries cannot afford to invest• International Aid “fills the gap”• Thus, aid promotes growth

– This assumes that investment generates growth (empirical evidence on this is weak)

– This assumes that aid generates investment (empirical evidence on this is weaker).. Peter Boone (1996) finds that aid helps finance CONSUMPTION, NOT INVESTMENT!

Empirical Evidence

• There was little consensus by the early literature on whether economic growth was correlated with international aid.

• One prominent view was that during the cold war, most international aid had little to do with real development. It had to do with politics, military and strategic geography.

• But the empirical evidence was mixed.

Empirical Evidence

• Then a very Influential paper was written by Burnside and Dollar (2000):

• They find α2 close to zero and α3>0. That is, AID has a positive effect on growth ONLY if the country at the receiving end conduct good policies.

• After this paper was published, IFIs and the whole world demanded more international aid and conditionality on good policies.

esGoodPoliciAIDAIDX *3210

Empirical Evidence

• Problems with the paper: it is NOT robust to the definition of “aid”, “growth”, or “good policy” (Easterly, Levine and Rodman (2003).

Empirical Evidence

• Definition of Aid:– Burnside and Dollar use “Grant Aid” (excluding

subsidized loans and debt rescheduling).– Normal definition (called ODA) includes

subsidized loans and debt rescheduling.– The two measures are highly correlated (0.933)– But when Easterly et all use this second

measure, α3 becomes insignificantly different from zero.

Empirical Evidence

• Definition of Good Policy: – Burnside and Dollar construct a measure which is an

average of inflation, fiscal deficit and a measure of openness (originally proposed by Sachs and Warner 1995)

– Easterly et al use TRADE/GDP instead of Sachs-Warner qualitative measure, they add “Black market premium” and “financial depth” (ratio of M2/GDP which is a measure of financial development) and…

– … the coefficient α3 becomes insignificantly different from zero.

Empirical Evidence

• Definition of growth– Burnside and Dollar use 4 year averages– Easterly et al criticize this because it contains

business cycle noise.

– If use 10-year averages… α3 becomes insignificantly different from zero.

Source: Easterly (2003), JEP

Source: Rajan and Subramanian (2005)

Notes on Causality

• Aid could systematically go to countries that are in trouble (like a natural disaster): if natural disasters tend to generate low (or negative) growth, this will tend to generate a negative association between growth and aid.

• Aid could systematically go to “reward” countries that did things well in the past. If growth persists, then there will be a positive association even though aid does not really cause positive growth.

• In order to solve this problem, econometricians use “instrumental variables”. IV estimates are supposed to see the correlation between exogenous aid and growth

Source: Rajan and Subramanian (2005)

Why has international aid failed?

• Because, unlike markets:– They don’t listen to the beneficiaries – They don’t get penalized if they fail (on the contrary!)

• “The various needs of the rich are met easily enough by a system of decentralized markets and democracy, which utilize feedback from the customers and accountability of the suppliers. Rich, middle-aged men can buy Rogaine to grow hair on their heads, while women can buy Nair to get rid of hair on their legs. No Millennium Development Goal on Body Hair was necessary. The Rogaine and Nair corporations are accountable to their customers for satisfaction. If the customers don’t care for the product, the corporations go out of business; if the customers do like the product, corporations have a profit incentive to supply it. Similarly, men and women in wealthy countries can complain to democratically accountable bureaucrats and politicians if garbage collectors do not pick up their discarded Rogaine and Nair bottles. Private markets also specialize; there is no payoff for them to produce a comprehensive product that both removes hair from women’s legs and transfers it to men’s heads. The irony of the situation is tragically obvious: The cosmetic needs of the rich are met easily, while the much more desperate needs of the poor get lost in centralized, utopian, comprehensive planning. ”

Bill Easterly (2005)


• Because donors put THEMSELVES ahead of the potential beneficiaries (we want to be good, feel good). But what matters is THEM, not US.– “The poor have neither the income nor the political power to hold

anyone accountable for meeting their needs—they are political and economic orphans. The rich-country public knows little about what is happening to the poor on the ground in struggling countries. The wealthy population mainly just wants to know that “something is being done” about such a tragic problem as world poverty. The utopian plans satisfy the “something-is-being-done” needs of the rich-country public, even if they don’t serve the needs of the poor”. Easterly 2005

• One implication of the “it’s-about-us” syndrome is the systematic Confusion of INPUTS (spending) and OUTPUTS (results)


• Similarly, aid agencies have the wrong incentives because they do not respond to the PEOPLE but to governments of rich countries and other donors. Hence, they do not do what is necessary but what is appealing to the rich people of the rich world.– Prostitutes vs. ARVs– AIDS vs. worms– Telegenic disasters vs. silent death


• Benevolent citizens of the rich world suffer from the “something-has-to-be-done” syndrome.– “The “something-is-being-done” syndrome also explains the

fixation on money spent on world poverty, rather than how to meet the needs of the poor. True, doubling the relatively trivial proportion of their income that rich Westerners give to poor Africans is a worthy enough cause. But let’s not kid ourselves that spending more money on foreign aid accomplishes anything by itself. Letting total aid money stand for accomplishment is like the Hollywood producers of Catwoman, recently voted the worst movie of 2004, bragging about their impressive accomplishment of spending $100 million on its production.” Bill Easterly (2005)

– The “something-has-to-be-done” syndrome leads, once again, to the confusion of inputs and outputs (we don’t care as much about the results as about what we are spending)


• Because Donors do not deal with people on the ground but with local government officials and bureaucrats. – The local bureaucrats may be incompetent (or corrupt or unfriendly)– “There are many weak links in the chain that leads from Gordon Brown’s

to actual health outcomes in poor countries. According to research by Deon Filmer et al., anywhere from 30 percent to as much as 70 percent of the drugs destined for rural health clinics in several African countries disappear before reaching the clinics. According to one survey in Zimbabwe, pregnant women were reluctant to use public health clinics to give birth because nurses ridiculed them for not having better baby clothes, forced them to wash bed linens soon after delivery, and even hit them to encourage them to push the baby out faster during delivery. And Africa is not alone—nearly all poor countries have problems of corrupt and often unfriendly civil servants, as today’s rich countries did earlier in their history. Researchers find that many people in poor countries bypass public health services altogether, in favor of private doctors or folk remedies” Easterly 2005

– The governments of the poor countries MAY also have little incentives to promote growth (increasing standards of living may engender political activism that may end up with privileges of the existing elites)


• The goals of the rich governments may not be to promote economic development (but instead, to have the poor country aligned with them in the cold war, the war on terrorism or the war on drugs, they may use aid to promote own exports, buy votes at the UN, or “pay” for past colonial crimes).– Jozelyn Davis’ PhD Thesis:


• Because donors impose their VIEW UNIFORMLY to all countries and circumstances.– Different countries require different solutions– History, culture, ethnicity, religion matter for

optimal institutions– But even if they were the same, non-linear

theories suggest different approaches (remember the government spending theory of growth!)


• Because there are MANY (perhaps too many) donors and they do not coordinate.– This leads everyone to try to deal with the

“sexy” or “telegenic” problem and to expect that the less sexy and less telegenic problems will be addresses by other donors.

– End result: the less appealing (from our point of view) problems are not addressed, even if they might be the more important ones.

Why has international aid failed?: Aid may cause HARM!

• Aid may bring corruption (like natural resources, aid money is easy to steal).

• Aid reallocates talent away from productive activities into “bureaucratic” (aid-related) activities.

• Aid brings the “culture of subsidy” to the aided countries.

• Aid may distort prices and incentives (Oxfam’s “Fair Trade” and Cashew Nuts in Mozambique)

A note on MDGs

• By setting a deadline (2015), UN’s Millennium Development Goals may lead countries to NOT follow the policies that are good for long term-growth but those that achieve the short-term objectives.

A note on Debt Relief

• Debt relief has a long history: from Greek city-states that defaulted on loans from the Delos Temple in the 4rth century BC, to Mexico’s default on its first debt after independence (1827) to Haiti today.

• 1977-79 UNCTAD meeting led to forgiveness of 6bn to 45 poor countries

• In 1996 the WB and IMF announced the HIPC Debt initiative to forgive debt to poor countries.

• See Easterly 2002 for a long list…• None of this has led to higher growth

Debt Relief• The argument FOR debt relief is that debt is believed to be the cause

of poverty if they have to pay back their debts: poor countries cannot afford reforms and the necessary investments.

• But debt may not be the problem but the SIGNAL of a deeper problem (much like debt of the compulsive gambler is not the problem but the signal that there is compulsive gambling!).

• One of these problems might be that political leaders want to squander the wealth of the country for personal gain! – If this is true, a surprise will arise if we forgive debt: leaders will squander

the money and debt will increase back to original levels in no time!!!– Easterly (2001): Look at the 41 HIPC countries that got debt relief by WB-

IMF:• Total debt relief for these 41 countries between 1989 and 1997 is $33bn.• Total NEW borrowing during same period $41bn• And new borrowing was highest in countries that got the most relief• Countries that got most relief also sold more assets (like oil and public

enterprises), which are other signs of squandering the future!• Countries with more debt relief suffered lowest rates of economic growth

– Obasanjo (Nigeria) and Museveni (Uganda)

Reforms are needed

• Structural reforms are needed if we want International Aid to be effective

• We need to set up systems that are accountable to the beneficiaries (not to the donors), whose results are measurable and public and that penalizes bad or inefficient behavior on the part of the donors or administrators.

• Somehow, we need to replicate what markets and local democracies do in the sense of being able to “listen to” the beneficiaries and being able to “penalize” mistakes.

In the meantime, what to do?

• Instead of “saving the world”, “ending world’s poverty”, or addressing other “grandiose goals” and “comprehensive plans”, we may want to concentrate our efforts on “small” steps that have been rigorously proven to work.– Banerjee and He (2003) (paper called “what works?”, MIT):

• subsidies to families for education and health costs for their children (progresa/oportunidades),

• uniforms and textbooks, • school vouchers, • deworming drugs and nutritional supplements, • vaccination, • HIV prevention, • indoor spraying for malaria, bed nets, • fertilizer, • and clean water

In the meantime, what to do?: LEARN!!!

• Scaling up and Evaluation (Duflo 2004).– Some programs work in small scale in particular places

(for example, AIDS clinics by San Egidius company in Maputo, Mozambique)

– Before they are “scaled up” we need to know whether they will work “in general”: some programs will work in different environments and learning from experience may be helpful.

– Knowing what works may lead efforts of many (NGOs, governments, IFIs, etc) in the correct direction and not to waste resources on things that do not work (or may be cost-ineffective).

– Good Empirical Methodology for Evaluation: RANDOMIZED EVALUATION

Randomized Evaluations

– Programs targeted to individuals or local communities, such as sanitation, education, and health programs and local government reforms, are likely to be strong candidates for randomized evaluations.

– Not all programs are (for example: effects of central bank independence on inflation may not be)


• Any impact evaluation attempts to answer essentially counterfactual questions: How would individuals who did benefit from the program have fared in the absence of the program? How would those who did not benefit have fared if they had been exposed to the program?

• Problem: Comparing the same individual over time will NOT, in most cases, provide a reliable estimate of the impact the program had on him or her, because many other things may have changed at the same time that the program was introduced. We therefore cannot seek to obtain an estimate of the impact of the program on each individual.

• All we can hope for is to be able to obtain the average impact of the program on a group of individuals by comparing them with a similar group that was not exposed to the program.

Randomized Evaluations• Critical objective: establish a credible comparison group (ie, a group

of individuals who, in the absence of the program, would have had outcomes similar to those who were exposed to the program). – The comparison group gives us an idea of what would have happened

to the program group if it had not been exposed, and thus allows us to obtain an estimate of the average impact on the group in question.

– Generally, individuals who were subjected to the program and those who were not are very different, because programs are placed in specific areas (for example, poorer or richer areas), individuals are screened for participation in the program (for instance, on the basis of poverty or on the basis of their motivation), and the decision to participate is often voluntary. Thus, those who were not exposed to a program are often not comparable to those who were.

– Any difference between them could be attributed to two factors: preexisting differences (the so-called selection bias) and the impact of the program. Because we have no reliable way to estimate the size of the selection bias, we cannot decompose the overall difference into a treatment effect and a bias term.


• To solve this problem, program evaluations typically need to be carefully planned in advance to determine which group is a likely comparison group.

• One situation where the selection bias disappears is when the treatment and the comparison groups are selected randomly from a potential population of beneficiaries (individuals, communities, schools, or classrooms can be selected into the program). In this case, on average, we can be assured that those who are exposed to the program are no different than those who are not, and that a statistically significant difference between them in the outcomes that the program was planning to affect after the program is in place can be confidently attributed to the program.

Randomized Evaluations• Pilot Programs and their usefulness before scaling up.• An Indian NGO, Seva Mandir, decided to hire second teachers for the

nonformal education centers it runs in villages. Schools are plagued by high teacher absenteeism. A second teacher, often a woman, was randomly assigned to 21 out of 42 schools. The hope was to increase the number of days the school was open, to increase children’s participation, and to improve performance by providing more individualized attention to the children.

• Teacher and child attendance were regularly monitored in program and comparisonschools for the entire duration of the project. The impact of the program on learning was measured by testing children at the end of the school year. The program reduced the number of days schools were closed: one-teacher schools were closed 39 percent of the time, whereas two-teacher schools were closed 24 percent of the time. Girls’ attendance increased by 50 percent. However, test scores did not differ.

• Based on the pilot, the NGO decided NOT to scale up and use the money for something else!

Randomized Evaluations• A positive-result example: Progresa (Mexico)• PROGRESA offers grants, distributed to women, conditional on children’s school

attendance and preventative health measures (nutrition supplementation, health care visits, and participation in health education programs).

• In 1998, when the program was launched by Ernesto Zedillo (incidentally, an economist!), officials made a conscious decision to take advantage of the fact that budgetary constraints made it impossible to reach the 50,000 potential beneficiary communities of PROGRESA all at once, and instead started with a pilot program in 506 communities.

• Half of those were randomly selected to receive the program, and baseline and subsequent data were collected in the remaining communities (Gertler and Boyce 2001).

• Comparing PROGRESA beneficiaries and nonbeneficiaries, Gertler and Boyce (2001) show that children had about a 23 percent reduction in the incidence of illness, a 1 to4 percent increase in height, and an 18 percent reduction in anemia.

• An average of a 3.4 percent increase in enrollment for all students in grades 1 through 8. The increase was largest among girls who had completed grade 6: 14.8 percent.

• The program was subsequently implemented in MANY countries around the world


• Sometimes we do not have the luxury of being able to perform randomized experiments.

• However, politicians or “natural events” may perform natural experiments for us by implementing their problems randomly (using arguments of fairness)

Learning

• One of the tragedies of aid over the last 50 years is that billions of dollars were spent, the results were not positive … AND WE DID NOT EVEN LEARN WHY!!!

• We should redirect our aid efforts in ways that, if they fail again, at least we learn why they failed so the mistakes are not repeated.

Documents

International Development Aid Xavier Sala-i-Martin Columbia University May 2006