Tuesday, April 19, 2011

Aid is a success! No, it’s a failure! Wait, it depends.

Aid evaluation is all the rage. But how is successful evaluation possible if we don’t know the benchmark? Some aid advocates argue that aid can end world poverty while some critics of aid are more modest stating that aid can not increase growth but may ease human suffering. In a recent debate in the Cato Journal, Peter Leeson and David Skarbek argue, in their article 'What Can Aid D0?', that foreign aid is both a success and a failure:

“Foreign aid’s advocates claim aid has been successful. Aid’s critics claim aid has failed. We explain why both camps are correct. Aid can, and in a few cases has, increased a particular output by devoting more resources to its production. In this sense, aid has occasionally had limited success. However, aid cannot, and has not, contributed to the solution of economic problems and therefore economic growth. In this much more important sense, aid has failed” (page 392).

They go on to argue that, on its best day, aid can provide more ‘stuff’ but not find the solutions to the economic problem of poverty:

“So, what can aid do? Like other forms of central planning, aid can increase X by devoting additional resources to X’s production… If planners pick a specific outcome, such as more immunizations, aid can provide additional resources to produce immunizations. All of the “success stories” that aid’s advocates highlight are of this nature (page 394)…Solving the economic problem determines whether a country’s economy develops. It is strange, then, that professional economists have had trouble distinguishing the positive relationship between inputs and outputs from solving the economic problem when it comes to evaluating foreign aid” (page 391).

In a critique, Gustav Ranis claims that “. . . Skarbek and Leeson are ready to throw the baby out with the bath water,” but that different forms of aid, such as grants for projects, can be more effective than past aid. However, Leeson and Skarbek remind us in a follow up piece of the important distinction between positive versus normative analysis:

“The thrust of our original paper, which asked the simple question, “What can aid do?”, was that no foreign aid initiative can solve the economic problem societies must solve to climb from poverty. That problem requires identifying the resource allocation that maximizes resources’ value to society. “Grants for projects” don’t help us identify this. They’re an example of what aid can do—increase a predetermined output by devoting more resources to its production—not what aid must do to make poor countries rich, which is to solve the economic problem stated above. Whether developed countries should use aid to increase a predetermined output by devoting more resources to its production is a normative question. Our original argument analyzed a positive one” (pages 1-2).

So the next time a shouting match breaks out between those who claim aid is successful and those saying aid is a failure, perhaps we need to first agree on what aid can achieve and evaluate aid in this context.

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