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BOOK REVIEW – SEPT 16, 2013 FINANCIAL WORLD – THE AID REMIT by: Andrew Hilton, CSFI TITLE: Development Without Aid AUTHOR: David A Phillips PUBLISHER: Anthem Press (£18.99)

Fascinating… It is pretty much old hat now among the development mafia that the traditional approach to aid doesn’t work. A few rock stars – Bono, Bob Geldof, Jeff Sachs – still persist in the belief that pouring more good money after bad will eventually work, will eventually turn some poverty-stricken, God-forsaken kleptocracy into (say) South Korea. But the real world is not like that. As Peter Bauer pointed out 40 years ago, develop- ment is internally driven – and the aid establishment that we have built up (headed by my alma mater, the World Bank) probably does more harm than good. Of course, it collects lots of data and organises conferences (which means lots of opportunities for generous per diems and shopping), and it pays tax-free salaries to smart people from both developed and developing countries. But, as Bill Easterly and Lant Pritchett (sic) have proven beyond doubt, as a vehicle for shifting, say, Malawi into the same league as Korea, it does not cut the mustard. All it has done is ensure that for most of sub-funds, und so weiter… I feel we have been there before. But David Phillips has a new wrinkle. He is that low- est of all pond-life, a development consultant. But he has been around (he grew up in Malawi, where his father was a cabinet minister under Kamuzu Banda), and he has written an excellent book – one that I hope star- struck journos at the FT and Economist (yes, Mr Wolf, that includes you), who have given the Bank a free pass over the years, will read. The first half is as good a précis of the debate over aid as I have read. Clearly, Pritchett and Easterly are the good guys; Sachs and Nick Stern are not. (Paul Collier, surprisingly, is also damned with faint praise.) The second half expands on Phillips’s own preferred approach, which is to rely on funding through the (large and wealthy) diasporas that many sub-Saharan countries have established, especially in Europe. It is an intriguing idea. The CSFI published a report on immigrant remittances in 2006, and saw huge poten- tial in them. Now, that potential seems overwhelming. There are, it seems, 220m first-generation migrants around the world, most of them well above average in terms of skills and earning capacity. No one really has a clue what they remit, but it could be as high as $40bn a year to sub-Saharan Africa alone. It seems safe to assume that (even if much of this finances weddings and fancy homes) less of it is wasted than if the money came from the Bank, or DfID, or even the Gates Foundation. Moreover, that may just be the tip of the iceberg. According to Collier, 38 per cent of Africa’s private wealth is held overseas. Start repatriating this, and pretty soon we are talking about real money, the kind of money that (in a throwback to the old days of Walt Rostow) could push a country towards lift-off. Oh, and, best of all, we could close down about 90 per cent of the existing aid infrastructure, concentrating what is left on healthcare, In SubSaharan Africa, aid now consti- tutes more than 50 per cent of government revenues. For a while, it looked as if microfinance might do the trick even though I was (and am) deeply sceptical of the multi- national claque that attends Mohammed Yunus. I was certainly seduced.    It seemed to me that a bottom-up approach to aid, in which we cut out the first-class travel, the private school fees and the overweening bureaucracy in Washington or London, was the way forward – if only we could scale it. But then things started to go wrong. We spotted them first in the CSFI’s Microfinance Banana Skins surveys: in particular, borrowers get cute and start to game the system. Now, the aid establishment is talking about out- put-based aid, cash-on-delivery, global funds, challenge well documented, but hawala and hundi are now suspect on both sides of the Atlantic. Then there is the dead hand of the aid establishment, which is trying to co-opt the diaspora initiative (just as it did microfinance through CGAP and the MIX). Cross-border infrastructure, that sort of thing. Too good to be true? Probably. Phillips ignores the efforts of governments (notably the UK) to kill the remit- tance movement stone dead in the name of counter- terrorism – even though, by doing so, they will also kill a lot of poor people as well.The one thing diaspora groups in London and Paris do not need is advice from some jumped up bureaucrat with a PhD from Maryland and a lot of attitude. But it is a good book, and it ought to start a lively debate. If Phillips comes back to London, I will be delighted to find him an audience. Andrew Hilton  



IA-Forum: Is it possible that the poorest developing countries selected for analysis in your book possess characteristics that affect their disposition to foreign aid? Specifically, your case-study concentration is in Africa, which is comprised of countries with high aid inflows.
DP: In my book I point out that the poorest countries, who have tended to have the highest ratio of aid to GDP, are in that position because their need for development aid has become partly self-perpetuating. This has because aid inflows have created incentives in their societies which require continuing infusion of outside money even when the country, objectively, may not need it. For example the presence of a large aid sector may change behavior by increasing lifestyle expectations and consumption, reducing long term savings rates. Or, large numbers of people inside Government have their careers tied to managing aid programs and cannot easily find other jobs. These situations lead to what might be called structural aid-dependence.
IA-Forum: What are the profound anomalies mentioned in the book’s blurb which subvert foreign aid’s effectiveness?
DP: There are a number of factors, but the important factors are systemic. First of all is the problem of structural aid dependence, which I’ve just spoken about. Over 20 countries in Africa have aid to GDP ratios of over 10%. Some of them have as much as 15%. Liberia has had even more than that. When aid is at that level it is bound to create distortions in the way societies behave and economies operate. Furthermore, there is the issue of what is called aid fragmentation. This essentially means that a large number of donor organizations are providing a relatively small amount of aid. Aid could be fragmented between as many as 100, even 200 formal organizations and thousands of non-government organizations. Governments have to spend time dealing with this complex flow of cash and services under many different channels, and different rules and procedures. Some countries in Africa such as Tanzania have even imposed moratoriums on visits by aid agencies at certain times so that Government can get on with its work.
Thirdly, because of the breakdown in the linkages between the suppliers of aid and the receivers of aid, through all the types of intermediary channels it has to go through, it’s very difficult for anybody to be accountable for what is really happening, and for anybody to really be able to target aid in such a way that it’s going to be effective. That’s simply because of the structure of linkages from supplier to final recipient.
This lack of accountability is encouraged in many ways. One of the most important ways is through aid replacing taxation in many countries. A lot of research has shown that the more aid is given, the lower incentive for the Government to levy taxes. But the levying of taxes is a critical aspect of democratic development, because it is a way that governments learn to negotiate with their own citizens about social and economic decisions. If you think about the Boston Tea Party, for example, that was a precursor of the American Revolution and that was all about taxes. One can say the same thing about the English revolution of the 17th century, which, again, was all about the taxes levied by the king on the burghers and the middle class. Even the Bolshevik revolution was to some extent triggered by the need to pay taxes to support the Tsar’s war, the First World War.
Another way that aid can systemically undermine a society is because it tends to ally itself with elite groups who can deliver results, providing them with legitimacy and favors – ranging from seats on boards, selecting their organizations as local participating voices, providing foreign scholarships, inviting them to international conferences etc. This process is consistent with the tradition of bribing powerful people/chiefs etc, or what is called clientelism, whereby outsiders ally themselves with powerful individuals, sometimes called ‘champions,’ to get results from their projects.
Finally, there’s what is called the resource curse: foreign aid coming into a country in very large amounts actually creates economic conditions which can undermine development because, for example, it can raise wages and the exchange rate which in turn undermines exports. It could be argued that the mere existence of foreign aid actually results in economic problems which undermine its own effectiveness. This is what I mean when I talk about anomalies.
IA-Forum: Did you have any particular experiences while in Malawi to motivate your interest in searching for alternative pathways to international economic development?
DP: My experience in Malawi was fairly impressionistic. I was very young at the time but I definitely had a sense of the unfairness in the difference between the rulers and the ruled. This became more apparent when the new elites arrived, that is, the first aid agencies showed up in the country, and the sense that these aid agencies were even more distant from the native inhabitants than the colonial elites and therefore the problems that were likely to occur in trying to spur development were even possibly greater, even though the motivation of the aid agencies was ostensibly more developmental than that of the colonial government.
IA-Forum: What current organizations, do you feel, come closest to supporting international economic development by concentrating on indigenous development? Non-profits that support micro-financing?
DP: Non-profits that support micro finance are a positive force of development in the sense that they are better targeted perhaps than general forms of aid. But on the other hand they also fall into the general story of aid fragmentation. As I was saying before, thousands of small NGO’s are working in poor countries. They are very difficult for governments to handle and it’s very difficult to integrate them into any kind of coherent development process. They tend to pull in different directions and are not necessarily answerable to any kind of local authority. They basically tend to do their own thing and assume that they are doing good. But if you go back to the systemic issues I’ve been talking about, the presence of very large numbers of external agencies in a country are not good for the country in terms of aid fragmentation, and may be doing harm.
If we look at how to improve aid from the systemic point of view then we probably need to provide money through the government budget as though it was tax revenue. This may sound to some like a recipe for disaster, but if you don’t trust the government by funding the Budget, then the Government is not going to improve its capacity or accountability. It’s going to become sidelined and likely more corrupt. Aid which goes through parallel structures may or may not be consistent with the overall government priorities and is therefore undemocratic. Parliaments know little about it and they don’t know what to do with it. It doesn’t help to build the relationship between the government and the people which is critical for economic and social development in the long run.
Some aid programs such as the Millennium Challenge Fund and Budget Support Funds go through the government and may be available without too many conditions, so they help to build the system and the capacity of government to actually account for the money that it’s spending. But in the end any money that comes in from outside the country, almost by definition, is not going to build democratic institutions. The aid that comes from an external agency is not consistent with the building of the kind of institutions that are required for governments to be accountable to their people.
IA-Forum: How do the world’s diasporas qualify as a quasi-indigenous resource of improving international development, in your view?
DP: As a general explanation, the world’s diasporas tend to be much less risk-averse than foreign investors, or, for that matter, aid agencies. They come into the country and are prepared to take risks and look at what would normally be regarded as difficult investment situations. A good example is Somalia where a large investing diaspora is facing high investment risk. They want to help. They have cultural affinity with the people they’re helping, and, in that sense, I call them a quasi-indigenous resource, as opposed to aid agencies that don’t have a cultural affinity with the country and are doing work as much on behalf of their own political bosses back home as on the country that they’re trying to help, and who see foreign countries as alien places which in the end they really care little about.
IA-Forum: Traditional foreign aid literature often discusses the point that remittances have increased at a high rate precisely because they represent emergency funding. How can that be sustainable in the long-term?
DP: I don’t think remittances represent emergency funding in general. It’s true that in a crisis, remittances tend to rise so they perform a counter-cyclical function. In that sense you could describe them as emergency assistance, but if you look at the long run trend in remittances, growth has been remarkably stable and at a high rate. Worldwide remittances have grown at about three times the rate of foreign aid and will amount in 2014 to $500 billion, four times the level of foreign aid worldwide. During the financial crisis of 2008 – 2010, one of the remarkable things was that remittances hardly fell, they remained very stable, while since the end of the crisis they’ve resumed growth. So the long run trend of growth and remittance is surprisingly stable. This is not the kind of thing that you would associate with emergency help.
Furthermore, remittances are increasingly coming from a more educated community of migrants, as the skill level of migrants has risen and the education level of migrants has risen. Those sorts of migrants are as much interested in long term contributions to investment as they are in say compensating for increased food prices.
IA-Forum: Can diaspora flows be poverty alleviating in general?
DP: This is an interesting question. Diasporas tend to be from certain communities in their home countries. They may well be the more educated and successful communities, and they send back remittances or investment funds to the communities they come from leading to a problem of concentration of additional income in already wealthier places. So one could argue that remittances are not addressing poverty.
But there are counter-arguments here. First of all, the more concentrated the resources are, the more likely they are to spur investment, so that the rates of investment and growth are likely to rise if these remittances are concentrated rather than if they’re widely spread. In other words, this is an argument about the need to spur investment as much as the need to spread wealth.
The other point is that it is not at all clear that foreign aid has been as poverty-targeted as aid agencies have claimed, or, alternatively, foreign aid has not succeeded in poverty targeting to the extent that foreign aid agencies want. An example of this is that a lot of foreign aid tends to go into conspicuous consumption such as vehicles. A lot of foreign aid cycles back into paying consultants to go to developing countries, because soft aid – advisory aid, where consulting firms are very widely used – accounts for perhaps half of the total amount of aid. So the institution-building type of aid, advisory aid, does not necessarily target the poor well. So remittances are not necessarily poverty-targeted, but then foreign aid is not very well poverty-targeted either. And remittances, if they’re not poverty-targeted, tend to be more likely to be going into basic need goods and investment.
IA-Forum: In your book, you list saving in host countries available for home investment as a potential benefit. What do you mean by that?
DP: What I mean by that is that the very large first generation migrant community in host countries, which is now over 220 million worldwide, and in the case of sub-Saharan Africa is about 20 million, is increasingly well educated and getting more highly-paid jobs, and is able to put savings into financial assets in the host countries. This is different from the traditional migrants who worked in the fruit farms or in the construction sites who did not have a high rate of saving. The World Bank has estimated these host country financial savings at perhaps as $30-50 billion a year. Those funds are available for re-allocation to the migrants’ home country.
IA-Forum: What are the issues with traditional methods of providing aid?
DP: Traditional aid is aid which has come with the systemic problems that I’ve been describing, and other issues. On the other hand, new aid, which may include for example budget support funds and the Millennium Challenge Corporation-type funds go to governments through their budgets and therefore try to deal with the need to support the financial management capacity of government. The problem here is that, first of all, there has to be trust between the government and the aid agency, and secondly it is less well targeted. Other types of new aid have been better targeted, through instruments like business development challenge funds, which go straight to business enterprises and conditional cash transfers that go straight to individual families. That is another way of dealing with some of the anomalies of aid, by a much closer targeting, so that you make sure the aid goes to the right people.
But you have a tension here, between the need to develop systems and capacity by putting aid through governments and the need to target the recipient, by sending aid straight to business enterprises and families. Most major agencies are trying both approaches at the same time which, in turn, is another source of fragmentation and confusion for the recipient, because it’s difficult for Governments to understand why one aid agency is prepared to back with equal certainty two different aid instruments which are inconsistent in their effects.
IA-Forum: Finally, what was your motivation for writing the book?
DP: This book was written on the basis of my interest in really trying to translate some of the more difficult issues of aid policy. There’s been a vast aid research tradition. Huge amounts of research in development aid have taken place. Much of it is not really available to the public. I set out to try to make sense of some of it, and particularly with respect to aid effectiveness and the possible replacement of aid by diaspora investment initiative. And so, while I haven’t done my own field research except through my own experience in managing and delivering foreign aid in several agencies, I’ve read extensively on it. And I must admit that, you know, one of my motives for writing this is because I also wanted to explain things to myself. If I find something difficult to understand I find it much better to write about it and with a bit of luck I start to understand it as I write. So I’m thinking, well, by the time I have finished this maybe I’ll be able to help some other people to understand at the same time.
IA-Forum: Thank you.


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