July 30, 2006

Rethinking Development Aid for the 21st Century

This week witnessed the collapse of negotiations over the WTO’s Doha Round, with no indication as to whether serious moves will be made to get the process back on track anytime soon. This is very bad news for global economic development, but particularly for poorer countries (although there is widespread disagreement on the extent to which this round of trade talks would have benefited developing countries, there is no doubt that they would have gained).

Fortunately, there is plenty that can be done to help developing countries, which doesn’t require a difficult round of multilateral negotiations; the priority should be a major revamping of development aid. This would include a paradigmatic shift in how aid is dispersed by all of the major aid institutions, especially the World Bank, USAID, and the United Nations. Aid as it is currently structured is not only largely ineffective and tremendously wasteful, but in many ways counter-productive. Here’s what needs to change and why:

1. Stop funding large development projects (just about everywhere)

Anyone who has taken Econ 1 can probably understand why funding large projects (such as energy projects or other large infrastructure) in almost all developing countries is an exercise in futility. The proper question to ask is why hasn’t this project been undertaken by the private market already? For example, if the private market has not decided to fund a large energy project in a particular country it is probably because the project is either unprofitable (given the low incomes of the population), the political climate is unstable, or the country lacks the proper legal regulatory institutions to ensure that their investment is protected. If this is the case the project is likely to fail or be unsustainable no matter who funds it. And in the cases of middle-income countries where the projects may in fact be profitable and sustainable, why not leave the private markets to fund such projects? It makes no sense for people in the rich countries to subsidize large projects in such up and coming nations such as Brazil, which have the markets and institutions already in place to fund such projects. There is a slight caveat, however, which brings us to point number two.

2. Focus only on projects where the social returns are much greater than the private returns

In a market system where profit is the ultimate motive there are some types of projects that may have huge social benefits but may not be initiated by private entities. For example: a water delivery system for poor rural areas or roads and bridges for which it would be difficult to collect toll revenue. Therefore, there may be examples of larger-scale projects, particularly in some of the most cash-strapped least-developed countries, where assistance is needed to build basic infrastructure, which is the prerequisite for sustained economic development. However, since many of the least developed countries suffer from immense political instability, civil strife, and corruption such projects should only be undertaken when there is a substantial chance for success (otherwise the money is likely to be captured by corrupt elites and further entrench their power). Major aid organizations should in general stay away from supporting major physical projects altogether, and instead focus on a class of intellectual property that I now turn to that has the greatest potential social returns.

3. Shift the majority of aid resources to the development of common intellectual property in key areas

The greatest gains to be achieved in the developing world are to be derived from new technologies in health, energy, agriculture. Just as with many large infrastructure projects in much of the developing world, private corporations do not find it profitable to invest in vaccines that afflict poor people, small-scale water purification systems, crops grown by households or small farmers, or small-scale energy systems for rural communities. Aid that is directed at developing new technologies in all of these areas for the masses in the developing world would yield benefits orders of magnitude greater than from most of projects currently being funded by the major aid organizations.

Creating new technologies and making them part of the public domain such that all entities– governments, NGOs, and private corporations– have equal access to them would lead to massive diffusion. For example, a vaccine for malaria or a bioengineered drought-resistant seed that was part of the public domain could be produced for pennies by any organization anywhere in the world. Since knowledge is easily transferable and allows for local production of the finished goods it creates much less opportunity for corruption and ensures a much higher probability that benefits will actually accrue to those most in need. (For an example of an organization that is a model for this type of development aid check out One World Health. Coincidentally, there is a great article on a recent success by the organization in Monday's nYT.)

Making a major shift in development aid will be extremely difficult because there are so many vested interests in the current system. The people who work for development organizations such as the World Bank are well-intentioned but the “poverty industry”, with its extremely high salaries and first-class perks, has enamored them to a failed system. It will require some very courageous employees as well as outside pressure to radically shift a bureaucratic culture that is stuck in its largely obsolete ways. In addition, since what I have outlined would decrease the coffers of the ranks of corrupt officials throughout the developing world, who are all too happy to continue failed models that line their pockets while their people continue to suffer, there would no doubt be fierce resistance from the rulers in many of the countries we are actually trying to help.

But in the end, it is only fair to the billions of people mired in undeveloped societies, as well as those in the developed world who are subsidizing aid projects to the tune of tens of billions a year that aid money be spent wisely. We know how; what we need is public recognition and the political will.

Jason Scorse