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Beyonce’s Secret for Greater Aid Effectiveness

One of the oldest ideas in economics is gains from specialization. Adam Smith talked about it 233 years ago. All of us are good at a small number of things and suck at most everything else. The economy as a whole produces more because we each specialize in what we do best and then trade with everyone else.

beyonce-performing-3.pngWe see Beyoncé specializing in music videos, which she trades to Bill Gates for his specialized production of software. We will get more of both music videos and software from Beyoncé and Gates than if each (without the possibility of trade) had been forced to supply their own needs for software and music videos.

Beyoncé would be forced to take time away from videos to try to figure out her own software, and Gates would have to divert time from software to learning how to sing and dance in a swimsuit.

bill-gates-picture-2.png

Economists are often congratulated for their impressive grasp of the obvious. Yet if this principle is so obvious, why is it routinely violated in the aid world? It’s gotten worse with the Millennium Development Goals. Each aid organization tries to meet all MDGs and each fails to specialize. Therefore some aid agencies are forced to supply things they are bad at – the equivalent of Gates’ music videos – for which there is no demand.

UNICEF is working on swine flu, the traditional province of WHO, who is distracted by trying to do development research, which is the traditional specialty of the World Bank, who is in turn distracted by a new emphasis on children, which is the strength of – just to complete the circle – UNICEF.

Even very small aid agencies fail to specialize – Luxembourg’s $141 million aid budget was divided among 30 different sectors (out of a possible 37). The tiny Luxembourg budget also went to 87 different countries.

With high overhead costs for each separate activity for each country, the ratio of overhead costs to funds for the activity gets extremely high, sometimes over 100 percent. UNDP has one of the very LEAST specialized aid budgets by country and by sector, and it actually does have a ratio of overhead costs to aid disbursed of 129%.

One suspects overhead costs devoured even more of program costs for the $20,000 Greece spent on worldwide post-secondary education, the $30,000 the Netherlands spent on promoting worldwide tourism to developing countries, the $5,000 Denmark spent on worldwide emergency food aid, or the $30,000 Luxembourg spent on conflict, peace, and security. (Remember, these small sums may have been split even further among country recipients.)

One could think of many political economy reasons why aid agencies resist specialization. From my casual experience in a large bureaucracy (the World Bank), the primeval bureaucratic instinct is to give a tiny piece of the pie to every possible lobby group (internal or external). But what’s most clear is that it shows aid agencies lack of accountability, because it is such a wasteful practice that also drives the aid recipients crazy with duplication of efforts by every aid agency in every sector in every country.

So please, aid agencies, go back to Adam Smith, and try to capture some of those enormous gains from specialization. And NGOs, kudos for doing a much better job than official aid at specializing at what you do best, and please resist pressures to have a piece of everything.

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18 Comments

  1. geckonomist wrote:

    The overhead is the goal of development aid (= jobs for first world people), not the means towards development.

    Where’s the evidence that development aid causes development?

    There’s however lots of evidence that it produces well paid jobs for “experts”. You’re a prime example, Prof. Easterly.

    Posted September 1, 2009 at 5:28 am | Permalink
  2. George wrote:

    “Economists are often congratulated for their impressive grasp of the obvious. Yet if this principle is so obvious, why is it routinely violated in the aid world?”

    Hear, Hear!

    Posted September 1, 2009 at 7:14 am | Permalink
  3. mister z wrote:

    Quite. I think quite a number of (bigger) NGOs learned their lessons with the tsunami, where they got drawn into sectors in which they had little expertise, through both govt & public pressure for rapid results on everything at once, as well as all the great pots of cash to be spent obviously.

    Doesn’t stop the occasional spats and elbowing over who’s going to do what in emergencies though, when you’ve got overlapping swimming lanes.

    Posted September 1, 2009 at 7:28 am | Permalink
  4. Jeff Barnes wrote:

    There is more specialization among contracting aid organizations than donor organizations. Donor agendas are driven by politics more than principles of efficiency or comparative advantage. Not providing funding in a particular area (HIV AIDS, malaria) implies that the donor organization has not recognized the importance or the critical need posed by the problem leaving the donor open to criticism by aid activists and celebrities who testify to congress. Some say that the WB moved out of infrastructure and more into social services in response to political pressure. Too bad since no one filled the gap in funding infrastructure which is badly needed to work in all sectors.

    Contracting organizations specialize to the degree that they can convince donors they have the expertise to tackle a particular aid problem. If there is enough money in a new area of development then this creates an incentive for the contracting organization to buy the expertise to avoid missing out on funding opportunities.

    Posted September 1, 2009 at 7:57 am | Permalink
  5. Wayan wrote:

    Jeff is right, to an extent. The effective contractors (and NGOs) do specialize, to the point of passing on proposl opportunities that are not a good fit with their expertise. Then there are the contractors who bid on every proposal, no matter the domain, and hire for that expertise if they win.

    Still, I say contractors & NGOs who go after competitive bids are on the whole much more specalized and efficient than most donors they work with.

    Posted September 1, 2009 at 9:28 am | Permalink
  6. Ian wrote:

    Fully agree that specialization should also apply to development work – and that taking on too many issues at once with too little resources is a big issue.

    One caveat though is that in economics, competition drives specialization. Since publicly funded aid is not subject to the same competitive forces as private business then the pressure to specialize for competitive advantage isn’t the same. There have been some efforts by donors/aid agencies on division of labour such as IASC clusters in emergencies or EU agreements on division of labour under the Paris Declaration. Problem is that this division of labour is that it isn’t certain that it will result in the best agency leading in a particular sector since this is a centrally made decision made in part on politics not something that emerges from competition.

    And a small defense of UNICEF, WHO and the Bank. UNICEF is involved in swine flu since it disproportionally affects children and a large part of prevention is communication and social mobilization, an area in which UNICEF specializes – WHO still leads on technical issues. Similarly WHO does have a strong background in health related development research which does cross over with economics, and WHO brings some expertise and perspectives the Bank doesn’t have. (and so on for the Bank). In practice all these issues are interrelated so they are some fuzzy lines as to where organizations mandates and expertise overlap. Some overlap is good as long as there is good communication and co-ordination among those involved (which is of course not always the case).

    Posted September 1, 2009 at 10:02 am | Permalink
  7. Alanna wrote:

    I’d like to hear more about the systemic factors that lead to this kind of redundancy. NGOs aren’t stupid, right? Something must push them into this.

    Posted September 1, 2009 at 10:17 am | Permalink
  8. Lee wrote:

    I’m still trying to figure out why the World Food Programme has such big road-building contracts in Southern Sudan.

    Posted September 1, 2009 at 2:09 pm | Permalink
  9. J. wrote:

    I’ve lost track of the number of “visioning”, planning, and strategy development sessions that I’ve sat in where we all sat around and talked about what we did/do, or want to do. We say that we want to be open to unknown future possibilities, to be “flexible”…

    The hardest thing in the world for NGOs to do is to say what they will not do (and then still refuse to do that thing, even when they are offered funding to do it).

    Posted September 1, 2009 at 5:46 pm | Permalink
  10. Meg wrote:

    Funny you should mention that– World Health Organization Director General Margaret Chan made exactly the same point about the WHO being stretched beyond its core competencies tonight in a speech here at the WHO AFRO Region meeting in Kigali.

    Posted September 1, 2009 at 7:01 pm | Permalink
  11. Marc wrote:

    For a great example of why trading Bill Gates’ specialization in software for generalization and having to provide music is such a bad idea, check out this video at about the 1:36 mark:

    http://www.youtube.com/watch?v=3HA4lSUhlbw

    Probably about as funny as watching Beyonce writing a unit test.

    Posted September 1, 2009 at 8:33 pm | Permalink
  12. Drew wrote:

    I couldn’t agree more.

    What’s equally troubling to me is that not only do many of these aid agencies fail to specialize, but they also fail to work together or acknowledge what others are doing when working on the same project.

    These are not new arguments however, and many people within these organizations will readily acknowledge these shortcomings. I think the far more relevant issue is what can we do to change this?

    Posted September 1, 2009 at 10:22 pm | Permalink
  13. Frank Lee wrote:

    Why does the World Bank implement?

    Posted September 1, 2009 at 10:39 pm | Permalink
  14. Anna wrote:

    The Global Fund for Aids Tuberculosis & Malaria is a good example of aid specialization. The Common Fund for Commodities specializes. The Global Environment Fund is specialized. Gates’ foundation itself focuses a great deal of their money on health.

    Specialized aid agencies exist—the problem is that the agencies giving the most money (USAID, World Bank, etc…) are generalized agencies and there is too little communication across country programs regarding sector specific knowledge.

    Good post. I especially like the lead in with Beyonce & Gates. Very amusing.

    Posted September 2, 2009 at 5:10 pm | Permalink
  15. panOptiko wrote:

    I agree until certain point: what about those situations where specialization is not enough? I was just wondering if your criticism had something to do with “delivering as one”, and other coordinative initiatives.

    (By the way, I skipped the attached WHO document and there is nothing about development there – though they are going to develop many things… It would be strange to find WHO doing something different to health, given their sect-club-style staff)

    Posted September 4, 2009 at 2:25 am | Permalink
  16. Mark wrote:

    One thing missing from the discussion so far is that UN Agencies move outside of their specialties for political reasons. Why is WHO talking about intellectual property instead of the World Intellectual Property Organization? Because developing nations and activists didn’t like the results they were getting at WIPO and found a more sympathetic forum at the WHO. This has happened on a wide range of issues (e.g., the global “digital divide”), where the players keep shifting forums and regimes until they get the results they want. The developed nations provided the template for this strategy in the late ’80s and early ’90s by moving many issues into the trade regime, where they have the most leverage.

    Posted September 5, 2009 at 8:57 am | Permalink
  17. Sam Gardner wrote:

    The secret is in the incentives: aid results are only relevant for the ultimate beneficiaries. And even for them, when you come with a solution against malaria, they might mutter: but I am mostly hungry today.

    The driving force for the “holistic approach” is the fact that the higher bureaucrats, with mostly sociological or political degrees, are the real decision makers on donor budgets. They fund what they understand: in the general direction of “good”without a need for too much technical know how.

    Posted September 9, 2009 at 1:50 pm | Permalink
  18. KenN wrote:

    Lee, the WFP road building is a long-standing practice of paying able-bodied idle hands to do useful low-skill projects rather than giving cash or food for nothing — ie, employment rather than welfare where possible. Make-work rather than handouts goes back at least 40 years.

    It’s very important to read the post carefully: Small aid donors waste funds. This is not “all NGOs”, or large aid donors. The examples are all European countries. (Ian explains why UN specialized agencies overlap — big problems frequently need interdisciplinary efforts). The solution for small donors is for the EU to centralize its aid.

    panOptiko points out the biggest issue that affects nearly all aid agencies and NGO’s: The resistance to working together, or even learning from each other, in their projects.

    Posted September 11, 2009 at 2:21 am | Permalink
  • About Aid Watch

    The Aid Watch blog is a project of New York University's Development Research Institute (DRI). This blog is principally written by William Easterly, author of "The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics" and "The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good," and Professor of Economics at NYU. It is co-written by Laura Freschi and by occasional guest bloggers. Our work is based on the idea that more aid will reach the poor the more people are watching aid.

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