6 Myths About Foreign Aid

By Kevin Burke | May 11, 2010 at 1:02 pm | Opinion | 10 comments | |

 

I made this in video form for the Forum’s Idea Night at the Ath, but due to logistical snafus it wasn’t possible to present it. Here it is now, 8 Myths about Foreign Aid:

Myth #1. There’s a magic bullet that will lift poor people out of poverty.
Economists and donors have spent a lot of time searching for the one instrument that’s going to lift people out of poverty. It’s not likely that one exists. Here are some examples of false cures.

  • In the 1960′s, we thought we could get growth by filling the gap between a country’s savings rate and some necessary amount of investment. That was a mistake, because countries had an incentive to save less.
  • Then we thought that providing primary education for everyone would lift people out of poverty. Now, we have almost universal primary education around the globe, but it’s had virtually zero effect on growth.
  • Then we thought that poor people were having too many kids, dividing their nation’s resources too many ways. It turns out that people everywhere are having about as many kids as they’d like to.
  • Then we tried to withhold aid unless a country made certain reforms that would help growth. But Western governments weren’t happy that their foreign aid budgets weren’t being spent, so they often gave the money to poor countries anyway.

If you’re worried about wasted money, be more wary of unhelpful programs than bureaucratic spending. Overhead is not a good way to evaluate charities.

Myth #2. Earmarking money for “sexy” projects helps.

Sexy projects are buzzwords, tangible items that get donors really excited, like building orphanages, houses, donating modern technology, or microfinance. Unfortunately money for these causes is often wasted.  After the tsunami in Thailand in 2005, everyone wanted to give money for orphanages and boats. Much more money was spent on these causes than was actually necessary. Orphanages had trouble finding enough orphans to house, and some families actually abandoned their children at orphanages because they couldn’t afford to feed their children. If the money was not earmarked, it could have gone to helping those parents afford to keep their kids.
NGO’s also built way more boats than were actually lost in the tsunami, leading to overfishing and waste.
Money is fungible, so the only result of earmarking your donation is that certain sexy projects will be over-funded. There’s a whole lot of boring work that goes on in aid, like logistical support, and helping people apply for government services. Beware of giving money for projects and causes that sound innately sexy.

Myth #3. Gifts in kind are useful donations.

The only people who know what an area actually needs are the people that are on the ground in that area. Most gifts in kind may not be appropriate for the season, or culture; for example, warm clothes for Haiti, expired medicines, or shoes. Disaster areas need to import a lot of urgent equipment, as fast as possible. Sending over your old goods can clog up ports and prevent more urgent shipments from getting through. NGO’s also have to pay someone to go through all the gifts and sort the useful ones from the non-useful ones.
More generally, sending gifts in kind can increase aid dependency, or destroy local markets. For example, someone who made or sold shoes in Haiti would not be able to compete against free shoes from abroad.
Maybe you’re concerned that if you give cash, the aid agency won’t spend it effectively. But if you don’t trust the agency with your cash, then why are you willing to give them your donated goods? And they might simply decide to sell whatever goods you’ve sent along and buy more useful ones.
Unless you’ve spoken to someone in the region and they’ve specifically requested gifts in kind, it’s better to give cash.

Myth #4. Brain drain is a bad thing.
Some people worry that poor countries waste money training workers who plan to emigrate, or that when skilled workers leave a poor country, they leave that country worse off. These assumptions are false. Wages in the West for skilled workers are often ten or twenty times as high as they are in the home country.1 These high wages give workers an incentive to invest in education, which they wouldn’t have if they couldn’t migrate. Earning a higher wage allows skilled workers to send more money back home than they could ever make if they hadn’t left. Workers retain close ties to the nation of their birth, and many move back home later on. These workers often have leadership skills. For example, 46 current heads of national government received their education in the United States.
From a human rights point of view, people everywhere have a right to freedom of movement. Allowing skilled workers to migrate to rich countries is not “stealing” labor from poor countries. More migration encourages more people in the home country to develop skills in the first place.

Myth #5. Foreign aid is the best way to help poor countries.

We’ve been doing development and foreign aid for fifty years, without having much effect on a poor country’s level of growth. There are two things that have made poor countries better off: Free trade, and immigration.
Free trade makes US consumers better off because the increased competition lowers prices. It also gives producers in poor countries access to markets around the world, and lets them compete with richer producers in the US. Free trade’s effect on unemployment in the US is mostly short-term, and must be compared with the benefits to producers in poor countries and to consumers around the world.
Right now the economy of Haiti is destroyed. The best way to help Haitians is to allow them to immigrate to the United States, where they could find jobs, and send money to people who choose to remain in Haiti. That will help the Haitian people much more than billions of dollars in development and foreign aid money. But our government is more interested in sending money than actually helping Haitians.

Myth #6. We know better than the locals.

A lot of Westerners assume that because we are wealthier and we have fancy educations, that we know better than the people we’re trying to help, and if only we could teach them, if only they would listen to us, they could escape their desperate situations. This is a dangerous belief; if it was easy for people to escape poverty they would have done so a long time ago. It’s extremely difficult to make things any better without an extensive knowledge of the local culture, the language, and the people. The people who know best what to do are those closest to the affected areas. Our job should be to help them out.
So, be really careful about believing you can take a trip to India, or Africa, and change the world.

Here are some ways we can do better. The most important thing is to be aware of the difference between showing that you care and actually caring. Many people give money, or wish to go volunteer, because they’re interested in showing other people that they care about the poor. It’s good to want to show other people that you care, but it’s important to do it in a way that helps reduce poverty.

Showing that you care:

Disaster relief
Volunteer tourism
$0.10 donation
Sending your old clothes

Caring:

Disaster preparedness
Paying a local
$4 donation
Giving cash

Most importantly, do some research for yourself, hold charities accountable, and spread the word about how to be smarter about foreign aid.

For more, take a look at the GiveWell project, which evaluates the effectiveness of aid organizations, and Bill Easterly’s blog about foreign aid follies, aidwatchers.com.

1 Bill Easterly, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics.

2 Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven, Portfolios of the Poor: How the World’s Poor live on $2 a Day (Princeton University Press, 2009).

More posts by Kevin Burke »
Kevin Burke

Kevin once inadvertently left Waiting for Godot during the intermission. He runs a link blog and a daily CMC newsletter.

 
 
 
 
  • Andrew

    I feel as if myths 2 and 3 are MIA.

  • Andrew

    I feel as if myths 2 and 3 are MIA.

  • http://claremontconservative.com Charles C. Johnson

    A very spot on analysis of what’s wrong with the current aid mentality.

    A few quick remarks.

    I’m surprised you didn’t talk about the work of Dambisa Moyo, who absolutely ought to be an Ath speaker (especially after the $100,000 scandal that was Bono’s vist to campus.) She has a very provocative chapter in her book about the Chinese and how they understand that the way to help Africa is through business deals and resource development, not from assuming that those poor Africans can’t make it on their own, which is the racist presumption of aid agencies.

    I’m surprised that you didn’t mention the public choice problem of aid agencies that pressure elected to official to wind up just voting for more and more budgets without any real evidence. It reminds me of that old quip Ronald Reagan had about the war on poverty — that poverty wound up winning!

    You talk about free trade and yes, I’m with you 100% of the way, but let’s be real. The IMF and the United States has encouraged Third World Nations to eliminate their subsidies for agricultural while simultaneously increasing subsidies for themselves. How can that be a good idea?

    Finally, you mention sexy projects, but you fail to mention what many of us think is the largest diversion of resources, which is the HIV/AID struggle, which has been a bit overblown as the devastator of all things African. I’m surprised no one has done any research into PEPFAR subsidizing the risk of contracting HIV/AIDS.

  • http://claremontconservative.com Charles C. Johnson

    A very spot on analysis of what’s wrong with the current aid mentality.

    A few quick remarks.

    I’m surprised you didn’t talk about the work of Dambisa Moyo, who absolutely ought to be an Ath speaker (especially after the $100,000 scandal that was Bono’s vist to campus.) She has a very provocative chapter in her book about the Chinese and how they understand that the way to help Africa is through business deals and resource development, not from assuming that those poor Africans can’t make it on their own, which is the racist presumption of aid agencies.

    I’m surprised that you didn’t mention the public choice problem of aid agencies that pressure elected to official to wind up just voting for more and more budgets without any real evidence. It reminds me of that old quip Ronald Reagan had about the war on poverty — that poverty wound up winning!

    You talk about free trade and yes, I’m with you 100% of the way, but let’s be real. The IMF and the United States has encouraged Third World Nations to eliminate their subsidies for agricultural while simultaneously increasing subsidies for themselves. How can that be a good idea?

    Finally, you mention sexy projects, but you fail to mention what many of us think is the largest diversion of resources, which is the HIV/AID struggle, which has been a bit overblown as the devastator of all things African. I’m surprised no one has done any research into PEPFAR subsidizing the risk of contracting HIV/AIDS.

  • Anonymous

    Dear Kevin,
    In response to your section on Brain Drain, a few comments. Honestly, I think it’s a bigger problem than you make of it, but I’m open to new ideas – perhaps you can enlighten me!

    “ Earning a higher wage allows skilled workers to send more money back home than they could ever make if they hadn’t left”
    Yes, but it’s not that simple.

    1) Those receiving money transfers and migrating are not always the poorest. It’s mostly the middle class who decides to migrate. So we’re not really talking about funds going to those who need it the most.

    2) Urban areas of developed countries receive MUCH more money than rural areas, thus exacerbating the economic problem between the center and the peripheries.

    3) Understandably, funds that are sent back are not used to invest in infrastructure, and often go right towards consumption, especially in the poorest of countries

    4) If these funds DO go towards reinvestment in infrastructure, the price of land goes up as well. We see this phenomenon in the Ivory Coast especially.

    5) Migrants usually send more substantial funds after three or four years, for they themselves need money to settle in. And, it goes without saying that some migrants won’t have such a strong connection to their country after 3 or 4 years.
    ‘Workers retain close ties to the nation of their birth, and many move back home later on”:
    Workers do retain close ties, but not all. It’s for this reason especially that we have Hometown associations that ensure that Mexican workers keep ties with Mexico. The program “trés pour uno”, as well as the “padrino”program were all put in place there to encourage the continual sending of funds, the former eventually going bankrupt. If it were that easy, these kinds of associations wouldn’t exist.
    Moreover, many DON’T move back later on (the farther one migrates to work, the less likely they are to move back) And – there’s little incentive to move back if you have a kid born in another country and thus granted nationality of that country. This is exactly what happened after the “Trente Glorieuses” in France, and how immigration got a bad rep. The French expected migrant workers to move back after they got enough money. Didn’t happen.

    Most importantly, what’s to say that a migrant worker moves back and won’t decide to go into retirement, thus not entering the workforce? We have no guarantee.

    “From a human rights point of view, people everywhere have a right to freedom of movement. Allowing skilled workers to migrate to rich countries is not “stealing” labor from poor countries. ”

    Yay human rights. I’m all for it. But we witness problems of lack of nurses in the Philippines, in the Ivory Coast and in Ghana. No one technically “steals” labor, but migration policies of developed countries DO (understandably) encourage the migration of skilled laborers rather than unskilled laborers.

    “More migration encourages more people in the home country to develop skills in the first place”:

    Not necessarily. In the Philippines, a country with 10% of its population abroad, nurses more easily are given visas than doctors, thus in a way encouraging people to become the former instead of the later.

    That said. I agree with you on some points. Funds are a stable source of revenue for developing countries especially. Once migration goes up 10% in a developing country, according to the World Bank, the poverty rate goes down almost 2%. Funds are also a unilateral source – developing countries don’t have to pay interest on it or become indebted but receive substantial contributions anyway. It’s a sensitive issue that deserves a bit of nuance. Just wanted to represent the other side of the coin :)

  • Anonymous

    Dear Kevin,
    In response to your section on Brain Drain, a few comments. Honestly, I think it’s a bigger problem than you make of it, but I’m open to new ideas – perhaps you can enlighten me!

    “ Earning a higher wage allows skilled workers to send more money back home than they could ever make if they hadn’t left”
    Yes, but it’s not that simple.

    1) Those receiving money transfers and migrating are not always the poorest. It’s mostly the middle class who decides to migrate. So we’re not really talking about funds going to those who need it the most.

    2) Urban areas of developed countries receive MUCH more money than rural areas, thus exacerbating the economic problem between the center and the peripheries.

    3) Understandably, funds that are sent back are not used to invest in infrastructure, and often go right towards consumption, especially in the poorest of countries

    4) If these funds DO go towards reinvestment in infrastructure, the price of land goes up as well. We see this phenomenon in the Ivory Coast especially.

    5) Migrants usually send more substantial funds after three or four years, for they themselves need money to settle in. And, it goes without saying that some migrants won’t have such a strong connection to their country after 3 or 4 years.
    ‘Workers retain close ties to the nation of their birth, and many move back home later on”:
    Workers do retain close ties, but not all. It’s for this reason especially that we have Hometown associations that ensure that Mexican workers keep ties with Mexico. The program “trés pour uno”, as well as the “padrino”program were all put in place there to encourage the continual sending of funds, the former eventually going bankrupt. If it were that easy, these kinds of associations wouldn’t exist.
    Moreover, many DON’T move back later on (the farther one migrates to work, the less likely they are to move back) And – there’s little incentive to move back if you have a kid born in another country and thus granted nationality of that country. This is exactly what happened after the “Trente Glorieuses” in France, and how immigration got a bad rep. The French expected migrant workers to move back after they got enough money. Didn’t happen.

    Most importantly, what’s to say that a migrant worker moves back and won’t decide to go into retirement, thus not entering the workforce? We have no guarantee.

    “From a human rights point of view, people everywhere have a right to freedom of movement. Allowing skilled workers to migrate to rich countries is not “stealing” labor from poor countries. ”

    Yay human rights. I’m all for it. But we witness problems of lack of nurses in the Philippines, in the Ivory Coast and in Ghana. No one technically “steals” labor, but migration policies of developed countries DO (understandably) encourage the migration of skilled laborers rather than unskilled laborers.

    “More migration encourages more people in the home country to develop skills in the first place”:

    Not necessarily. In the Philippines, a country with 10% of its population abroad, nurses more easily are given visas than doctors, thus in a way encouraging people to become the former instead of the later.

    That said. I agree with you on some points. Funds are a stable source of revenue for developing countries especially. Once migration goes up 10% in a developing country, according to the World Bank, the poverty rate goes down almost 2%. Funds are also a unilateral source – developing countries don’t have to pay interest on it or become indebted but receive substantial contributions anyway. It’s a sensitive issue that deserves a bit of nuance. Just wanted to represent the other side of the coin :)

  • http://kburke.org Kevin Burke

    Dear Anonymous,
    taking your points in turn:

    1) the gap between middle class and poor in most countries is way smaller than the gap between middle class in a Western country and middle class in a third world country – and cash inflows help everyone

    2) as a general economic point, if a city’s income rises by 20% and the rural areas income rises by 5%, is that bad? Note that everyone’s better off in absolute terms. it’s pretty much always been the case that cities grow faster than rural areas. in fact one of the signs of an economy’s dysfunction, ex. after a disaster, is people leaving cities to find work in rural areas.

    3) does consumption spending not help an economy? the money’s going somewhere right? maybe I start paying a barber to cut my hair or someone to wash my clothes, and their income rises at the margin. of course they’re spending the extra money they earn as well.

    4) The price of land generally rises as incomes rise. I’m not sure why this is such a bad thing. Yes, the poor may not own much land, and that’s bad, but it’s not as if they were better off before immigration.

    5) Sure.

    About nurses, this paper seems to suggest that the Philippines has more nurses per capita at home than Britain does, even though it’s also the largest exporter of nurses in the world. Migration also encourages skill development; if people couldn’t migrate maybe they wouldn’t invest the years and years of effort that it takes to become a nurse in the first place.

    Your point about nurses and doctors reinforces my point! Filipinos decide to become nurses because they have a better chance of getting a visa to go abroad as a nurse, so the increased nurse migration encourages Filipinos and Filipinas to develop nursing skills. We could debate the merits of giving more visas for nurses instead of doctors.

  • http://kburke.org Kevin Burke

    Dear Anonymous,
    taking your points in turn:

    1) the gap between middle class and poor in most countries is way smaller than the gap between middle class in a Western country and middle class in a third world country – and cash inflows help everyone

    2) as a general economic point, if a city’s income rises by 20% and the rural areas income rises by 5%, is that bad? Note that everyone’s better off in absolute terms. it’s pretty much always been the case that cities grow faster than rural areas. in fact one of the signs of an economy’s dysfunction, ex. after a disaster, is people leaving cities to find work in rural areas.

    3) does consumption spending not help an economy? the money’s going somewhere right? maybe I start paying a barber to cut my hair or someone to wash my clothes, and their income rises at the margin. of course they’re spending the extra money they earn as well.

    4) The price of land generally rises as incomes rise. I’m not sure why this is such a bad thing. Yes, the poor may not own much land, and that’s bad, but it’s not as if they were better off before immigration.

    5) Sure.

    About nurses, this paper seems to suggest that the Philippines has more nurses per capita at home than Britain does, even though it’s also the largest exporter of nurses in the world. Migration also encourages skill development; if people couldn’t migrate maybe they wouldn’t invest the years and years of effort that it takes to become a nurse in the first place.

    Your point about nurses and doctors reinforces my point! Filipinos decide to become nurses because they have a better chance of getting a visa to go abroad as a nurse, so the increased nurse migration encourages Filipinos and Filipinas to develop nursing skills. We could debate the merits of giving more visas for nurses instead of doctors.

  • http://kburke.org Kevin Burke

    Charles,
    I agree about Dambisa Moyo and aid budgets, but I haven’t read her book, and I couldn’t think of a compelling “myth” relating to public choice. I did have a great conversation with a development official from Belgium who lamented the inability of Western governments to credibly promise to withhold aid. Unspent money isn’t allocated again next year, so they’re in the position of being forced to spend all of their money. The result is that African leaders have more power than the development agencies.

    I agree that the US and Europe have been totally hypocritical with regards to their agriculture policy. However, theory and evidence point out that the welfare-maximizing response to tariffs is not more tariffs, but removal of trade barriers.

    You are again correct that HIV/AIDS has gotten too much attention. There was a great piece in the New York Times over the weekend about countries getting money for AIDS treatment but not nearly enough for education and prevention. I actually made a video that was supposed to show at the Ath, and mention HIV/AIDS as a sexy project in the video.

  • http://kburke.org Kevin Burke

    Charles,
    I agree about Dambisa Moyo and aid budgets, but I haven’t read her book, and I couldn’t think of a compelling “myth” relating to public choice. I did have a great conversation with a development official from Belgium who lamented the inability of Western governments to credibly promise to withhold aid. Unspent money isn’t allocated again next year, so they’re in the position of being forced to spend all of their money. The result is that African leaders have more power than the development agencies.

    I agree that the US and Europe have been totally hypocritical with regards to their agriculture policy. However, theory and evidence point out that the welfare-maximizing response to tariffs is not more tariffs, but removal of trade barriers.

    You are again correct that HIV/AIDS has gotten too much attention. There was a great piece in the New York Times over the weekend about countries getting money for AIDS treatment but not nearly enough for education and prevention. I actually made a video that was supposed to show at the Ath, and mention HIV/AIDS as a sexy project in the video.