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Catalyzing Development Revisited

Homi Kharas

In a recent op-ed in the Financial Times, Bill Easterly wrote “aid spending is a drop in the ocean of the budgets of governments that give it and the economies that receive it. Whether it works scarcely matters for development.”  He goes on to say that “the obsession with aid is a rich-world vanity that exaggerates the importance of western elites.”

There is an alternative view that is probably closer to the truth. It is true that official aid, running at about $130 billion in net disbursements per year, is small compared to developing countries’ own revenue of $7.7 trillion (in 2010). But it is still the case that 20 countries rely on aid for over 40 percent of their total government expenditures. Some of these are post-conflict states like Liberia and Sierra Leone that desperately need to provide essential services to their populations in a peace dividend so as not to fall into a vicious cycle of recurring conflict and instability. Some have been ravaged by natural disasters, like Haiti. In almost all cases, these are among the least developed countries in the world, and in all cases aid is an essential ingredient of stability and a chance for progress. We would all cheer a reduction in aid dependency, but no serious person thinks that whether aid works scarcely matters for development in these places.

The true measure of aid’s impact lies in the difference it makes to the lives of people living in poverty. When used right, aid’s impact cannot be proxied by its magnitude in dollars. It is best viewed, as I have argued in a recent book, as an instrument for Catalyzing Development.  There are countless examples of such catalytic impact, from China’s introduction of procurement reforms following their experience with international competitive bidding (and aid innovation) to the new mobile services that are ubiquitous in Kenya following the aid-inspired innovation of mobile money. The list goes on and on: insecticide treated bed-nets, antiretrovirals and many more examples. The impact can be measured in terms of lives saved, promoting gender equality, local accountability to citizens and empowerment of the poor, and ultimately access to jobs, livelihoods, social services and infrastructure. As any student of chemistry knows, a catalyst is an agent that provokes or speeds up action. It matters a lot, with small amounts affecting large changes. That is how the best form of aid is used.

But there is an easier way of telling whether aid matters. Ask people who are on the receiving end. I had the privilege of leading a small secretariat that supported a high-level panel of eminent persons on the post-2015 development agenda. That panel, co-chaired by President Sirleaf of Liberia, President Yudhoyono of Indonesia and Prime Minister Cameron of the United Kingdom, discussed the issue of the adequacy of aid and other forms of development financing at some length. The importance of aid was emphasized over and over again. Against that background, it is simply bizarre to imagine that “aid is a rich-world vanity…” It is a very pressing and central agenda for the heads of government of low and lower middle income countries, and for the civil society advocates from developing countries, who are surely not western elites. It is instructive that no serious academic from a developing country questioned the importance of aid. Many had views about how to use it better, but none questioned its importance. Easterly quotes Bill Gates as arguing that we should concentrate on how to make aid better. Based on my observations of the High Level Panel, Bill Gates is asking exactly the right question.

All this would be simply a matter of academic debate, if it were not for the fact that aid is today under serious pressure in OECD countries. Bilateral aid has fallen in several countries recently (and in aggregate) and replenishments of aid in important institutions like the Global Fund to Fight AIDS, TB and Malaria and the International Development Association have been smaller-than-hoped for. Partly this is the result of fiscal problems in these countries, but that is not the heart of the matter. Aid, as Bill Easterly rightly observes, is a small line item in the budget of those that provide it. A bigger problem is the political pressure from taxpayers in rich countries who are seriously ill-informed about the magnitude and impact of aid. Sweeping generalizations asserting how small the contribution is of aid to development are not only likely to be wrong, but can have real, adverse and unnecessary consequences for the lives of the least fortunate on our planet. 

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