The following post was written by Glenn Hubbard and William Duggan, authors of The Aid Trap, which we reviewed last week.
We are delighted that the blog site that Bill Easterly oversees, Aid Watch, has reviewed our book, The Aid Trap. And we are further delighted that on balance the reviewer agrees with what we say in the book. But the reviewer also makes one major objection that we have heard many, many times in the months since the book came out. We have not replied to this objection yet: Aid Watch is perhaps the best venue for such a reply. So here it is.
First, here is the objection.
The Aid Trap proposes a ‘new Marshall Plan’ for the world’s poorest countries, along the lines of the original Marshall Plan’s support for the local business sector in Europe after World War II. The Aid Watch reviewer – and many others – point out that poor countries today, especially in Africa, never had the business infrastructure that Europe had before the war. Rebuilding Europe’s business infrastructure is very different from building a business infrastructure from scratch in poor countries today. So our proposal for a ‘new Marshall Plan’ won’t work.
Now, here is our reply.
We begin by invoking Bill Easterly’s key distinction between ‘searchers’ (good) and ‘planners’ (bad). Aid planners design and fund projects based on what they want to happen, while aid searchers find something that works and do more of that. But of course, when your search yields something that works, you never apply it wholesale to another situation. Easterly, correctly, makes that very clear. In this he echoes T.S. Eliot: “Immature poets imitate, mature poets steal.”
In the Aid Trap, we do not propose to ‘imitate’ the Marshall Plan. We propose to ‘steal’ from it. If you see nothing to ‘steal’ from the Marshall Plan for poor countries today, then you have no imagination. If you see a little to steal, then you have a little imagination. If you see a lot to steal, then you have a lot of imagination. That’s why the most creative aid pioneer in modern history, Muhammad Yunus, says this about our book:
The Aid Trap is not about the failure of conventional aid but provides the outline of a solution that can work if taken seriously. It is that rare prescriptive book, and the world must pay attention.
And Bill Easterly says we:
persuasively argue that thriving private businesses are the best hope for the world’s poor and have taken a practical and pragmatic approach to allow business to thrive.
Do you think that Yunus and Easterly do not realize that post-war Europe is different from poor countries today? Of course they know that. We have a whole chapter in the book giving some preliminary details on how to adapt the successes of the Marshall Plan to the very different situation today. It really calls for a whole book devoted just to that. But these details will fall on deaf ears unless you recognize that development calls for ‘searching’ and then creatively applying what you find to different situations.
We also cite more recent programs that support local business, also worth stealing from. The ANDE and DCED networks alone provide plenty of worthy examples. But these programs amount to perhaps 5 percent of current aid – scaling them up to 50 percent, which is what poor countries need, calls for some larger coordinating mechanism that operates very differently from the core practices of the major aid agencies. That’s what the Marshall Plan offers.
We would also like to reply to a somewhat less common objection to our book, that the Aid Watch reviewer also makes: institutional reform in poor countries to help their local business sectors will make aid unnecessary, because private loans will supply the necessary capital. So you don’t need a Marshall Plan to channel the aid. Well, here’s the problem: you will never get lasting institutional reform without a middle class that comes from the local business sector. For better or worse, aid is not going away anytime soon: the best you can do is channel more of it to the right thing – local business – as the original Marshall Plan did. Otherwise, it goes to the wrong things, as Aid Watch correctly and relentlessly reminds us.
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Related post: Could aid revive business instead of stamping it out?
2 Comments
Interesting debate. As someone who has supported the development of water- and sanitation-related businesses in Africa (Moz, RSA, Zim, Malawi, Rwanda, Uganda) I find this all quite refreshing.
Some thoughts:
1. Many focus on increased foreign aid for water and sanitation but its the same old same old, and the impact of past efforts has been somewhat poor to say the least. The current feeding frenzy around USAID’s recent RFP is telling – the program sucks, bang in boreholes, build toilets, but all are in.
2. Until we get to a place where the business case for water supply and sanitation can be made WITHOUT having to get into silly debates on privatization we will get nowehere. I have written quite a bit about actual experiences with pro-LOCAL business models, and think the case can be made to governments and investors
3. The sad reality is that all poor countries are not the same. So, a really interesting challenge is to look at where such business opportunities exist, where smart seeds planted now could create a better business environment in the future (so be careful how you program) and where, for the time being, the push for business opportunities does not really exist and so alternatives are needed in the short term. To illustrate – Rwanda is ready now, Malawi needs creative programming and Somalia, Eastern Congo and southern Sudan have a long way to go.
4. Finally, while I support microfinance, it is overplayed on a good day.
Thanks
The aid industry is a free-for-all made up by a continuum raging from the very good to the very bad and outright predatory. I am not comfortable with the application of concepts and phrases such as ‘Make Poverty History’, ‘Big Push’, ‘Marshall Plan’ or guaranteeing 0.7 of a developed country’s budget towards aid due to the marketing and rent-seeking opportunities that accrue on the part of the dark side of the aid industry.
Criticism of the Marshall Plan concept in aid is an old one going back at least, if not earlier to P.T. Bauer:
“The peoples of Western Europe had the faculties, motivations and institutions favourable to development FOR CENTURIES before the Second World War; rebuilding not development, was the task after the war. Hence the rapid return to prosperity in Western Europe and the termination of the Marshall Plan after four years,…Western Europe would have recovered without the Marshall Plan, though somewhat less rapidly.” (Equality, the Third World and Economic Delusion. p. 110).
Like management consulting, beneficial aid is a short-term single or near single factor service rather than a multi-factorial long-haul process which is what economic development is. Overall, I enjoyed reading Aid Trap apart from page 93 etc. where I came to the line: “For aid to support business, we need a new institution with its own large budget devoted to only that task” and so on. Really? With in Appendix II, a multi-million $, 10 year budget? Basically, if a country wishes to develop, it is more or less on its own due to Bauer’s dilemma:
“If the conditions for development other than capital are present, the capital required will either be generated locally or be available commercially from abroad to governments or to business. If the required conditions are not present, then aid will be ineffective and wasted.” (same book. p. 100).
If we follow Mancur Olson’s dictum of the logic of power, it goes beyond aid being ‘ineffective and wasted’. Aid, when there is too much of it and in the wrong place can become a disincentive to the creation by government of those public and quasi-public goods needed to create, expand and sustain the conditions needed for development and a market economy.
Olson in ‘Power & Prosperity’, using very colourful and politically incorrect language sets out two conditions before a government will invest in such encompassing goods:
a) monopoly of power within the domain.
b) dependence upon revenue from that domain.
Too much aid can create resource trap effects by releasing governments from such dependence and in extreme cases create the perverse incentive to reduce goods investments in favour of the greater rent collecting opportunities that can accrue with external assistance.
Taking another Olson comment, this time from his essay ‘Big Bills Left on the Sidewalk’: “The best thing a society can do to increase its prosperity is to wise up.” Considering, especially in this internet age, how low the cost of obtaining productive knowledge is, some societies, like some individuals, do not ‘wise up’ since they have an alternative available. In such cases, a good dose of tough love is necessary by reducing the alternative – in this case the ready availability of long-term external developmental aid.
Aid, as occurs in many federal systems of government, is a wealth transfer from one domain to another. Yet in a federal system such as Canada’s, resource trap effects do not occur (they actually do, but not very much) on the part of recipient domain. The reason is that such transfers are dominated by the matching fund concept – the recipient has to pony up its own money raised from its own tax base. Since it has its own equity to protect, the domain will protect its tax base and revenue source from predatory behaviour yet still receiving the transfer payments.
I am all in favour of planning, programmes and agencies to administrate them, but they must always take into account possible negative unintended consequences. The problem with aid comes down to whose money and to whose benefit? Setting up another agency, or co-opting an existing one, which is not funded in a significant manner by the developing country will continue the same problems. But then, back to Bauer’s dilemma, if the developing country, through its own efforts, raises the money to invest fully in such an agency, will it do so, or will it take some of that money and invest it back into itself?
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