The development cooperation dilemma: J. Sacks versus W. Easterly and D. Moyo

Dambisa Moyo - "Dead Aid "
In Dead Aid, Dambisa Moyo describes the state of postwar development policy in Africa today and she confronts one of the greatest myths of our time: that billions of dollars in aid sent from wealthy countries to developing African nations has helped to reduce poverty and increase growth.
In her opinion In the past fifty years, more than $1 trillion in development-related aid has been transferred from rich countries to Africa, but this hasn’t improved the lives of Africans. She thinks that foreign aid helps perpetuate the cycle of poverty and hinders economic growth in Africa
In fact, poverty levels continue to escalate and growth rates have steadily declined—and millions continue to suffer. Drawing a contrast between African countries that have rejected the aid route and prospered and others that have become aid-dependent and seen poverty increase, Moyo illuminates the way in which overreliance on aid has trapped developing nations in a vicious circle of aid dependency, corruption, market distortion, and further poverty, leaving them with nothing but the “need” for more aid.
The first stage in her argument is that aid is easy money. If governments had to rely upon private financial markets they would become accountable to lenders, and if they had to rely upon taxation they would become accountable to voters.
Moyo offers a new road map for financing development of the world’s poorest countries that guarantees economic growth and a significant decline in poverty—without reliance on foreign aid or aid-related assistance.
The core of her argument is that there is a better alternative. Governments could find money for development through financial markets, both international and domestic. Historically, the governments of those countries that have successfully developed funded investment by recourse to international markets. In order to borrow, they needed decent credit ratings; to get the ratings, they had to be transparent and prudent. The discipline of transparency and prudence were as important as the money in promoting development. Some of the stronger African governments have at last started down this road. She also sees huge scope for innovations in micro-finance, such as the group borrowing pioneered by the Grameen Bank in Bangladesh.

J. Sacks versus W. Easterly
Jeffrey David Sachs is an American economist who, in his book “ The end of poverty”, sees aid as a large and beneficial factor in development and has continually pushed for a large boost in aid.
He writes “Africa's governance is poor because Africa is poor".
Sachs underlines the role of climate and geography and he asserts that much of Africa suffers from being landlocked and disease-prone but, at the same time, these problems can be overcome.
He also supports establishing credit and microloan programs, which are often lacking in poor areas.
William Russel Easterly, an American economist, in his book “The White Man's Burden” makes poignant arguments about the lack of aid effectiveness, including the fact that large sums of money, in the last half century, have been funneled into foreign aid with no real growth to show for it. Moreover, there are a number of aid recipients that are worse off now than they were before. He affirms that aid has a direct effect on bettering the living standards but in terms of long-term it’s not possible.
He distinguishes two types of foreign aid donors: “Planners”, who believe in imposing plans on poor countries, and “Searchers”, who look for solutions to specific needs. Planners are portrayed as utopian, while Searchers are more realistic on piecemeal interventions. Searchers, according to Easterly, have a much better chance to succeed.
In this video, Easterly clearly explains his point of view about development and criticizes Sachs.
First of all he starts describing what he calls the “two tragedies of the world’s poor”:
- A high number of children die every day due to absolute poverty and these deaths could be prevent by providing resources through money (e.g. dehydration packets costing as little as 10 cents each and can prevent deaths for diarrhea);
- The west already donates a considerable amount towards foreign aid, but the money doesn’t reach the people who need it the most.
The “favored” answer of the international organizations to this problem is increase the amount of money spent in foreign aid, often doubling it, but in this way, according to Easterly, too much attention is focused on “how much is spent” rather on “what kind of incentives can be created”. Moreover Easterly disagrees with the approach of the aid agencies because in the current situation, they make “top-down” plans in which everyone is collectively responsible for any given result, and other actors/factors can be blamed if certain goals are not met.
Referring to the second tragedy he argues that the problem is created by the lack of “CIAO”: Customer feedback (from the people affected by poverty), Incentives, Accountability and good Outcomes in aid plans. So, for Easterly, the system needs accountability, that will create incentives which will generate customer feedback and therefore good outcomes.
In Easterly’s opinion, long term growth can come from private homegrown and social entrepreneurs, and reformist politicians with good “CIAO”, while aid plays a supporting roles if applied to specific problems that can be fixed by outsiders.


Development assistance

More than fifteen years after the end of the Cold War, the world seems poised to fall into another deep seated polarisation: the one between the developed and the developing world. After more than 60 years of activity of the UN and an incredible amount of funds allocated to support development in least developed countries, today the world is confronted with a question : Is development aid useful ?
The answers are different, either those proposed by the Academia and circulating among professionals. On the developing world side, there is a growing distrust against the rich countries, fed by the widespread persuasion that the developed countries are not sharing opportunities with the less fortunate, supporting development and fighting poverty. What is outstanding is that there are also people from the « beneficiaries » countries, like Dambisa Moyo, who claims that development aid creates more damages that benefits.
On the “developed world” side, the public opinion, after a number of scandals and the evident poor results of decades of ODA, consider development assistance like nothing else than a way to finance corruption and waste, to instigate a culture of dependency, to buttress undemocratic regimes and unsustainable economic policies.
These polarised views find an echo in the scientific literature, which itself is becoming polarised between the ODA preachers and the ODA bashers.

- The relationship between aid and growth

It is generally argued that most foreign aid tries to achieve one or more of four broad economic and development objectives (Radelet, 2006):
i. to stimulate economic growth through building infrastructure, supporting productive sectors or bringing new ideas and technologies,
ii. to strengthen important sectors, such as, education, health, environment or political systems,
iii. to support subsistence consumption of food and other essential commodities, especially during relief operations or humanitarian crises, or
iv. to help stabilize an economy following economic shocks.
Although policy makers have discussed these broader objectives for aid, economic growth has always been the main criterion used to measure aid’s effectiveness. But in empirical terms, there are controversial results and positions concerning whether development aid can be measured just as the impact on growth. Three broad views have emerged to disentangle the complex relationship between aid and growth:
1) Aid has a positive relationship with growth on average across countries (although not in every country), but with diminishing returns as the volume of aid increases. There are three main channels through which aid promotes growth:
i. Aid augments savings, finances investment, and adds to the capital stock (Sachs et al, 2004).
ii. Aid increases worker productivity through investments in health and education.
iii. Aid promotes the transfer of technology or knowledge from donor to the recipient countries.
2) Aid has no effect on growth, and may actually undermine growth
A number of studies (Dowling and Hiemenz 1982, Boone 1994, Rajan and Subramanium 2005) have suggested a variety of reasons as to why aid might not support growth:
i. Aid encourages corruption.
ii. It perpetuates poor economic policies and postpone reform.
iii. Limited absorptive capacity in the recipient country reduces the effectiveness of aid.
iv. Aid reduces both domestic private and public saving.

3) Aid has a conditional relationship with growth, helping to improve growth under certain conditions such as:
- Recipient country characteristics - The view that aid works better in countries with sound economic policies and institutions has become the accepted norm among donors, partly based on the research and partly due to development practitioners that believe this to be the case based on their own experience
- Donor practices strongly influence aid effectiveness. For example, multilateral aid might be more effective than bilateral aid, or untied aid might be more effective than tied aid.
- Type of aid

According to one of the third view position on development aid, there are conditions under which ODA produces higher rates of economic growth on a sustainable basis can be summed up in two basic factors: economic integration and subsidiarity. ODA is growth inducing only to the extent that (i) development assistance stimulates and supports the integration of national and local economies at the international level, both globally and regionally, (ii) determines institutional reforms and sound economic policies at the appropriate level of government (global, regional, national and local), and (iii) leaves the private sector to play its fundamental role. This approach is proposed based on a review of the literature and by drawing on the experience of European economies, particularly in the last two decades.

- Current trends in development assistance

According to the estimates of the UN Millennium Project, achieving the MDGs requires an increase of aid flows to at least $150 billion per year. This would be also consistent with the commitments the donors have made under the Monterrey Consensus of the International Conference on Financing for Development to work towards reaching the UN target of 0.7 percent of GNI.
Following the promises made by the EU and by the G8 at its summit in Gleneagles to increase aid by some $50 billion by 2010, the official development assistance (ODA) from the countries of the OECD to developing countries rose to a record high of $106 billion in 2005.

Net official development assistance (ODA) to developing countries increased in 2008, but aid delivery still fell well short of international commitments. Net aid flows are expected to fall in absolute terms in 2009-2010 as the global crisis has put pressure on the aid budgets of major donors, several of which target ODA as a percentage of their gross national income (GNI). In the aggregate, net official flows to developing countries are expected to remain negative in 2009 and 2010, continuing the trend of the past decade.
For low-income countries with weak fiscal space, in particular, more limited access to aid would not only make it more difficult for them to meet the MDGs, it could also leave them with insufficient resources to address the crisis with counter-cyclical policies. This is recognized by the international donor community, which has pledged at various platforms during 2009 to honour existing commitments to substantially increase development assistance

Peace-keeping and humanitarian intervention as complement to development aid.
It is well known and widely recognised that without peace and security there can be no development. Conflict is among the major factors affecting poverty and underdevelopment. Another major factor is natural disasters: while they hit both rich and poor countries, they leave a permanent scar in countries and regions where development opportunities are lacking and undermine profoundly efforts made to overcome obstacles and barriers to economic growth and prosperity.

Therefore it is appropriate to consider the trends in ODA in connection with those in aid and intervention for peace-keeping, and peace-building and for disaster relief and other humanitarian intervention. If we take an integrated approach to development aid, peacekeeping and humanitarian intervention, the picture of trends in assistance related to development changes significantly. Recent years have seen an exponential increase in peacekeeping budget and humanitarian contribution around the world. The budget for United Nations peacekeeping operations from July 2005 to June 2006 is a record $5 billion.
We can conclude then that the recent period has seen both a relative stagnation of the resources allocated to development assistance, but at the same time an exponential increase of the resources made available for intervention linked to peace-keeping and humanitarian relief.

Official Development Assistance
The OECD Development Assistance Committee has measured resource flows to developing countries since 1961. Special attention has been given to the official and concessional part of this flow, defined as “official development assistance” (ODA). The DAC first defined ODA in 1969, and tightened the definition in 1972. ODA is the key measure used in practically all aid targets and assessments of aid performance.
The DAC defines ODA as “those flows to countries and territories on the DAC List of ODA Recipients and to multilateral institutions which are:
i. provided by official agencies, including state and local governments, or by their executive agencies; and
ii. each transaction of which:
a) is administered with the promotion of the economic development and welfare of developing countries as its main objective; andb) is concessional in character and conveys a grant element of at least 25 per cent (calculated at a rate of discount of 10 per cent).”

Over the years the DAC has continuously refined the detailed ODA reporting rules to ensure fidelity to the definition and the greatest possible consistency among donors. The boundary of ODA has been carefully delineated in many fields, including:

  1. Military aid: No military equipment or services are reportable as ODA. Anti-terrorism activities are also excluded. However, the cost of using donors’ armed forces to deliver humanitarian aid is eligible.
  2. Peacekeeping: Most peacekeeping expenditures are excluded in line with the exclusion of military costs. However, some closely-defined developmentally relevant activities within peacekeeping operations are included.
  3. Nuclear energy: Reportable as ODA, provided it is for civilian purposes.
  4. Cultural programmes: Eligible as ODA if they build the cultural capacities of recipient countries, but one-off tours by donor country artists or sportsmen, and activities to promote the donors’ image, are excluded.
NET Official Development Assistance from DAC Members in 2011
Source: OECD, 4 April 2012


Development Assistance - Bibliography:

2) World Economic situation and prospects 2010, UN