Deaton on poverty and foreign aid - an appraisal

This year's Nobel Laureate in Economics Angus Deaton has worked on human consumption and well-being that led him to view development as a complex process not amenable to improvements through top-down or technical interventions. He considers knowledge as a key to development, which is even more important than income. This has helped him explain the tremendous progress made by mankind in the past 250 years, since the rich world started its 'great escape' from poverty and destitution, in his book The Great Escape: Health, Wealth, and the Origins of Inequality (2013). Deaton has documented in this book how that breakthrough is now proliferating around the globe giving rise to longer, wealthier and healthier lives compared to any other time in history. Even low-income countries have made massive strides as a consequence of knowledge dissemination in scientific, medical and other fields, he asserts in the book.
ARGUMENTS AGAINST FOREIGN AID: Deaton has also vented his concern in the book about inequality across the world. He acknowledges that inequality is often a consequence of growth, but differentiated between inequality that aids mankind and the type that is harmful, such as economic inequality leading to 'political inequality'.
As his career unfolded over the years, Deaton joined an expanding band of development economists who were sceptical about the role of foreign aid in helping the poorer countries. The following words of Deaton summ up his views on the subject: "When the conditions for development are present, aid is not required. When local conditions are hostile to development, aid is not useful; and it will do harm if it perpetuates those conditions".
Deaton has cited multifarious practical problems with regard to foreign aid in The Great Escape, including corruption, the failure of conditional loans on inducing policy changes, institutional incentives for lending, the divergence between donor-country interests and recipient-country needs, etc. He opines, "The negative forces are always present; even in good environments, aid compromises institutions, it contaminates local politics, and it undermines democracy. If poverty and underdevelopment are primarily consequences of poor institutions, then by weakening those institutions or stunting their development, large aid flows do exactly the opposite of what they are intended to do. It is hardly surprising that, in spite of the direct effects of aid that are often positive, the record of aid shows no evidence of any overall beneficial effect".
Deaton observes, "We often have such a poor understanding of what they need or want, or of how their societies work, that our clumsy attempts to help on our terms do more harm than good…And when we fail, we continue on because our interests are now at stake…". He therefore prescribes programmes that are in line with what happened in the rich world of the present era, where countries developed in their own way, in their own time, under their own political and economic structures. He reminds us about the West, "No one gave them aid or tried to bribe them to adopt policies for their own good. What we need to do now is to make sure that we are not standing in the way of the now-poor countries, doing what we have already done. We need to let poor people help themselves and get out of the way - or, more positively, stop doing things that are obstructing them". He clarifies: "It's powerlessness, that's the problem, not really the lack of money. If people are powerless, then giving them money isn't going to solve that problem". He argues that by offering aid to developing countries, the donors may actually be corrupting those nations' governments and slowing their progress. Much of the 135 billion US Dollars that the world's developed countries spent on official aid during 2014 may not have ended up helping the poor, he laments.
GENESIS OF DEVELOPMENT AID: Since the middle of the 20th century, there has been a strong economic and political argument for helping developing countries. There was a widely held view by the economists that pumping money into roads, factories and other infrastructure in a country acted as triggers to growth. The USA and Western European powers therefore encouraged foreign aid to small and poor countries in the hope of spreading the Western model of democratic societies and market-based economies, so that they did not fall under the influence of the communists - Soviet Union or China. Looking back, it is observed that the level of foreign aid soared from the 1960s, peaked at the end of the Cold War, then dipped before rising again. The advocates of development aid, including the World Bank and the United Nations, capitalised on research findings that claimed the beneficial effects of foreign aid on economic development. But later data suggested that the claims of the aid community often belied reality on the ground. For example, although the level of foreign aid to Africa soared through the 1980s and 1990s, African economies were doing worse than ever before.
The effect was not confined to Africa alone. An influx of development aid did not appear to produce economic growth in countries all over the world; rather, foreign aid tended to be correlated to lower economic growth in many countries. There were many examples of countries getting higher growth with lesser foreign aid, while there were many who had lower growth despite getting higher aid. Why did that happen? The answer was not clear or straightforward, but Deaton and other economists argue that it was related to the handling of foreign aid by a government, its attributes and relationships with its citizens. Governments that received multibillion dollar aid could often lack the capacity to implement sound policies; worse, they might use the aid to deepen entrenched cronyism and corruption, the economists point out.
A THEORETICAL FRAMEWORK: A government needs to collect taxes from its people in order to have funds for running the country. As the people ultimately hold the money-bags, they have certain control over their governments. If the government leaders fail to deliver basic services they pledge, the citizens have the power to cut their wings. Deaton argues that this relationship is weakened by foreign aid, making a government less accountable to its people, parliament and the courts. In his words, "Most governments depend on their people for taxes in order to run themselves and provide services to their people. Governments that get all their money from aid don't have that at all, and I think of that as very corrosive". Similar to revenue from oil or diamonds, money from foreign aid can be a corrupting influence on weak governments, "turning what should be beneficial political institutions into toxic ones", Deaton observes in The Great Escape. This can make governments more despotic, he thinks.
Deaton also provides many examples where countries like the United States sanction aid to support their strategic allies (e.g. Israel, Korea), commercial interests, moral or political beliefs instead of serving the interests of the targeted population. The USA provided aid to Ethiopia for decades during the regime of President Meles Zenawi Asres because he opposed Islamic fundamentalism and the country was very poor. This was despite the fact that the Asres regime was one of the most repressive and autocratic dictatorship in Africa, Deaton points out. President Maaouya Ould Sid'Ahmed Taya of Mauritania was another example who continued to receive aid from Western powers after becoming one of the few Arab countries to recognise Israel.
An old justification of foreign aid was that the poor countries suffered from a lack of money. But economists like Deaton question this assumption by saying that money is a necessary condition for development, but not a sufficient condition for growth. They argue that progress has more to do with the strength of a country's institutions and systems, which are developed through the interplay of a country's government and its citizens. Deaton explains that aid damages the key legal and political infrastructure - property rights, proper legal system and a non-corrupt system of government - that is a must for the take-off of any developing economy. Foreign aid undermines the development of local state capacity and makes failing governments even less accountable, he says.
Deaton believes that the Western attitude towards foreign aid, which encourages the developed nations to swoop-in and attempt to save others in the poorer habitats, is alarmingly similar to the concept of colonialism. The rhetoric of colonialism was also about, "Helping people, albeit about bringing civilisation and enlightenment to people whose humanity was far from fully recognised", Deaton remarks. But in reality, nations whose governments are effective in expediting economic growth do not need aid, while nations run by incompetent governments mostly seek such aid, he points out.
Deaton cites the examples of China and India, who have made huge strides in reducing poverty during recent decades; but these countries received relatively little in foreign aid compared to many other developing countries who received much higher per capita foreign aid but have made much less progress. The highest aid India received was US$ 3.10 per capita in 1991, while the maximum China got was US$ 2.90 per capita in 1995. In contrast, Zimbabwe received aid totalling over 10 per cent of its national income (about US$ 60 per capita) in 2010 alone.
DEATON'S PRESCRIPTIONS: Deaton does not speak against all types of foreign aid. He believes that certain categories of healthcare aid like offering vaccinations or developing cheap and effective drugs to treat diseases have been hugely beneficial in poorer countries. But he cautions the rich world that they should consider what they can do to make lives better for millions of poor people around the globe without intruding into their economies by giving huge sums of money to governments. They should also focus on doing less harm in the developing world, for example, by selling fewer weapons to despots, by ensuring that less developed countries get a fair deal in trade agreements, and by not harming them through foreign policy decisions.
Deaton believes that those born in the 'right' countries have a moral obligation to help reduce poverty and ill-health in the world. Often unpopular among his Western peers for his unbiased and forthright opinions, he supports tearing up the trade barriers, adoption of a liberal migration policy and making it easier for developing countries to share new inventions and management techniques.
As a means of exercising the West's moral obligation, Deaton suggests airlifting cash directly to those who need it. He argues that it would be more effective than massive aid packages handled by lumbering NGOs (non-governmental organisations) and bureaucratic governments. In fact, two studies co-authored by Deaton and his wife Anna Case during the 1990s found favourable effects of large cash transfers to elderly individuals in South Africa. Encouraged by Deaton's writings on cash transfers, a new American charity 'GiveDirectly' was launched in 2011 that raised more than 50 million US Dollar for recipients in Kenya and Uganda who lived on less than one dollar a day. But such aid is insufficient unless governments in poor countries can reliably build roads, staff schools, enforce environmental regulations and maintain working health systems, Deaton argues.
HOME-GROWN DEVELOPMENT: Deaton points out that many positive changes that are taking place in Africa, like huge proliferation of cell-phones over the past decade, are fully home-grown. He asserts that while the world has made huge strides in reducing poverty in recent decades, almost none of these have been due to external aid. Most of these transformations have taken place due to growth in countries like China, who received very little foreign aid as a percentage of GDP (gross domestic product) and who, by and large, had to work it out for themselves.
Dr. Helal Uddin Ahmed is a senior civil servant and former editor of Bangladesh Quarterly.
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