Rafe Champion asks, apropos of nothing in particular, whether ‘well-meaning socialists and big government interventionists learned anything from the failures of local policy and foreign aid to the poor states of the world?’ Of course, it’s a rhetorical question, because – as any regular reader of Rafe’s posts will know – the answer is: obviously, no.
This is why Rafe thinks that now is the right time to invoke the name of Peter Bauer (1915-2002), the British economist and development expert. He quotes from an obituary of Bauer by ‘palaeo-conservative’ Paul Roberts, who takes the opportunity to reiterate the inherently monstrous character of development aid, in passages like this:
Foreign aid, Bauer noted, made control of the government a life-and-death matter, causing genocidal warfare between tribes. He did not spare his muddle-headed colleagues, who fervently believed they were doing good by socializing poor lands when any fool could see that not even England could afford socialism”¦ Bauer’s books on development economics are the only ones worth reading.
Notwithstanding the libertarian conceit that establishment icons like Bauer are heroic dissenters, statements like this express perfectly the received wisdom on foreign aid in Tory and Republican circles for the last three decades. Reviewing Bauer’s 1981 polemic Equality, the Third World, and Economic Delusion, one of Bauer’s muddle-headed critics, Amartya Sen, put it like this
Bauer isn’t particularly isolated himself. His arguments develop and reinforce deep-seated conservative beliefs. Also, as it happens, both in Bauer’s own country¢â¬âBritain¢â¬âand that of his publisher¢â¬âthe United States¢â¬âthe governments in power share Bauer’s economic outlook, even though that outlook is rarely defended as fluently and cogently as Bauer defends it. Bauer is, in fact, an eloquent, original, and influential member of the powerful conservative tradition in political economy.
Sen praises Bauer, whose ‘political and economic analysis powerfully illuminates various aspects of international economic relations that are often ignored.’ He continues:
All this could have formed the basis of an undogmatic and balanced reappraisal of the relations between rich and poor countries. But despite several sensible suggestions for policy, such a reappraisal does not, alas, take place. I believe there are two reasons why it does not. First, Bauer is not content with throwing light on unexplored aspects of aid and international relations; he wants to draw his policy conclusions exclusively from these aspects, ignoring many of the other things that we do know. Many of the countries whose economic achievements Bauer praises (e.g., South Korea and Taiwan) have received a great deal of aid¢â¬âsome of them appearing at the top of the list of recipients, if aid is measured on a per capita basis. He also overlooks the fact that some of the countries with the fastest growth performances have policies involving deep government intervention in economic life.
The point is that you can tell innumerable stories of aid projects that failed, fostered corruption, or dashed the hopes of this or that community. But it doesn’t follow that aid in general, or on balance, is useless or harmful – any more than a hundred tales of police corruption and judicial incompetence prove that the criminal justice system ‘doesn’t work’. The only way to tell, if any exists at all, is through statistical methods. And it happens that the past decade has produced a spate of these.
The best known was a series of papers by Burnside and Dollar, culminating in an article in the American Economic Review. The full version is accessible on the web only through databases like JSTOR, but un updated version of their work is described in a 2004 World Bank Working Paper that can be downloaded from this page.
In the authors’ words ‘the basic hypothesis that we want to explore is that the effect of aid depends on the same institutions and policies that affect growth directly’. Using panel data from 56 countries from 1970 to 1993, they estimated the effect on growth of aid expenditures and an index of institutional variables. In coutries that scored favourably on the index, the aid variable turned out to be highly significant. Two alternative hypotheses were also considered. They rejected the hypothesis that ‘aid has a positive effect on growth that is the same regardless of the quality of institutions and policies (that is, aid works the same in Mugabe’s Zimbabwe as inreformist Uganda)’. They could not entirely reject the hypothesis that ‘aid has no positive effect in any institutional environment: it is always money down the rat hole.’ But this is a long from saying they found any support for it.
They also investigated the interaction between aid and institutions, concluding that contrary to the view that aid undermines institutions, it strengthens them where they are on a sound footing in the first place.
Two groups of reseachers protested that the results were not robust, but were on the contrary sensitive to the inclusion and exclusion of a few countries and years. On one side William Easterly, author of The White Man’s Burden (and arguably Bauer’s successor as leading academic aid sceptic), reproduced the study with more countries and less clear-cut results. A non-technical version of Easterly’s critique was published in the Journal of Economic Perspectives (again available in full only to database subscribers). On the other, Hansen and Tarp (pdf alert) found that when some outlying is excluded, the data ‘aid works even in countries hampered by an unfavourable policy environment.’
Who was right? Burnside and Dollar was only the best known of perhaps several dozen econometric studies in the last ten years. A survey of the literature by Addison et al. (pdf alert) concludes:
When we review the literature we find that the overwhelming majority of recent empirical studies do conclude that aid increases economic growth, and below we cite more than 30 studies that find that growth would be lower in the absence of aid. There is also evidence that aid increases public expenditure, including expenditures that are pro-poor in orientation (for example primary education and basic health care). One can reasonably infer that on the basis of these findings, poverty would be higher in the absence of aid. Thus much of the criticism of aid is not supported by research, and we submit that it is research that should guide aid policy not anecdotal evidence.
The strength of the evidence that aid benefits countries with appropriate institutional arrangements (well-defined property rights, rule of law etc.) is reflected in a widespread bipartisan support for the UN’s Millennium Goals which, according to the Millennium Project, would require a doubling of official aid over the next ten years.
Even the Bush Administration has jumped onto this bandwagon by creating a Millennium Challenge Account, which has helped to reinvigorate interest amongst conservatives in the design and evaluation of aid projects. Meanwhile, the Economist, not normally a cheerleader for soft-headed aid projects, has praised the Millennium Project and accepted, in however qualified terms, that progress is occurring in making aid efficient.
The Project’s director Jeffrey Sachs has become a champion of development aid*, highlighting successes such as the green revolution and reductions in infant mortality due to public health measures.
There is no doubt Peter Bauer’s insights have contributed to improvements in the targeting, design and evaluation of aid projects. But the World Bank and the various United Nations agencies have been responding to these kinds criticims for years, as a quick perusal of the Millennium Project’s Overview Report will confirm. It shows a wanton ignorance of all these development – in terms of data, theory and practice – to portray these institutions, and the governments who support them, as the tools of ‘well-meaning socialists and big government interventionists’; to imply that they are, even now as we speak, veering ever further off the path of wisdom, and in dire need a wake-up call.
I hope Bauer does not become the pin-up boy for a new wave of uninformed criticism of aid agencies and their efforts. The notion that aid is mostly (at best) a waste of money, far from being a long-suppressed truth, known only to a wise minority, is in fact a deeply entrenched belief, and one that needs putting to rest, not revitalising. As Severino and Charnoz (pdf alert) put it:
“Poor countries are still poor. Those countries that are helped are not able to grow economically. The few exceptions benefit only an elite. Aid has only ever had onedestination: the bottomless well of useless projects and misappropriation of funds.” Deeply rooted within public opinion indeed, practically the level of the collective unconscious this point of view is bandied about so often that it is nearly impossible to count the number of individuals that support it.
(They forgot to mention genocide.) As Sachs himself argues, this is precisely the wrong time to spread cynicism and score ideological points about development aid. However, for those bent on doing so anyway, I guess it remains true that ‘Bauer’s books on development economics are the only ones worth reading’. Well, almost the only ones. People who have already made up their minds on the issue can also safely add Easterly to their reading lists.