Aid Effectiveness: Being Clear about Objectives
It seems extraordinary that after 50 years of international aid, there is still no consensus on whether it works. Zambian economist Dambisa Moyo (Dead Aid) has argued that aid is not only ineffective, but is actually detrimental to development. Bill Easterly (The Elusive Quest for Growth) says that ‘trillions of dollars’ of aid have had little effect. Others, notably Jeff Sachs (The End of Poverty) and Roger Riddel (Does Foreign Aid Work?), have argued that there is plenty of evidence of the success of individual aid projects, and that it has brought about substantial improvements in people’s lives. If we cannot even agree on whether aid works at all, how can we address the more important and nuanced questions such as how to make that aid more effective?
At the heart of this disagreement is not a dispute about the impact of aid but about what we mean when we ask whether ‘aid works.’
Microfinance is an example which mirrors the issues in the wider aid industry. Microfinance has often been touted as a bottom up solution to poverty. The Nobel Peace Prize 2006 was awarded jointly to Muhammad Yunus and Grameen Bank “for their efforts to create economic and social development from below.” Give people access to credit, the story went, and they will be able to invest in businesses of their own. Instead of needing long-term support, the poor will be able to stand on their own two feet. The Acumen Fund promises “Dignity not Dependence. Choice not charity.” This attractive prospect is one reason that microfinance has been so successful in raising donor funding, especially from foundations and private giving.
Following dozens of studies of microcredit and microfinance, there is little credible evidence that microcredit itself lifts people out of poverty. The two good randomized controlled trials find no impact of microcredit on poverty (though to be fair they have not yet been running for very long). As the evidence has challenged these grandiose claims, some in the microfinance industry have chosen to defend aspirations which are both more humble and more plausible. First, there is growing recognition that much else besides access to credit is needed to enable poor people to run a successful business, and so microfinance can at best make a contribution to a wider set of circumstances needed for development. Second, there is recognition that, even if microfinance is often used for consumption rather than investment, it is still a significant improvement in people’s lives if they have more control over their finances and are better able to deal with uncertainty and volatility in their incomes. Third, microfinance may lubricate the process of experimentation and failure which may help successful firms and enterprises to emerge.
The rest of the aid industry would also benefit from a more nuanced account of its objectives. We often talk about aid as if it falls into two categories: humanitarian aid and development aid. But in reality this is a false dichotomy: most aid falls into neither category. More than 60 percent of aid is a long-term contribution to the provision of key services such as education, health, water and sanitation, and an investment in the institutions needed to provide them in the future. Improving people’s lives is a realistic and laudable goal. Measured against this more humble (but still very important) objective, there is plenty of evidence of the success of aid. Aid has helped to abolish smallpox, to increase the number of children in primary school, and to give families access to clean water and improved sanitation. Charles Kenny (‘Getting Better’) has convincingly argued that when measured by almost every standard other than income, the quality of life has improved substantially in developing countries. Foreign aid has made a significant contribution to these improvements.
It is tempting to make the bolder claim that investments in education and health also improve growth and development in the long run. Perhaps they do – but, as with microcredit, the evidence for this relationship is weak. Why is it not sufficient to say that people everywhere should have access to these services – including financial services – whether or not this leads to long-term transformation of their economy and society?
Everyone wants developing countries to escape aid dependency, and most people recognized that this requires sustainable growth and jobs. Because this is such a compelling objective, the development industry has been tempted to justify aid on these grounds. But the evidence from opinion polls and focus groups suggests that the public is willing to support aid which demonstrably meets immediate human needs irrespective of whether this contributes to long-run growth. By setting excessively ambitious objectives for aid, the industry risks alienating the public from their emotional connection with what aid can achieve, and asks to be measured by standards that it is unlikely ever to be able to show that it meets.
There are many flows of finance to developing countries which will contribute to investment and growth, including direct investment, portfolio capital flows and remittances. The main drivers of growth will come from the country itself through private and public investment. Aid is a small proportion of the finance for developing countries. But it is a precious resource because, unlike other sources of finance, it can help meet the needs of the most marginalized communities, women and girls, and people living in long-term chronic poverty. If we want to see aid used effectively, we should demand that it is used for these purposes for which it has a unique contribution to make. Just because growth is a priority does not mean it is a priority for aid.
Measured against reasonable claims about what aid can achieve, it is demonstrably effective. As we have seen with microfinance, the industry damages rather than enhances its case by overstating what aid can achieve. By setting realistic objectives, we can both make aid more effective, and demonstrate the difference it makes.
This post is the next in a special series that will help us reflect on the broader aid effectiveness initiatives, CGAP’s own work on effectiveness, and what this all means for access to finance today. Watch this space for a new post every week by an expert on this topic. What are your ideas for improving aid effectiveness? Share your comments.
Also in this Series
Why Can’t We Answer the Question: Does Aid Work?
Whether you find it extraordinary or trivial, we still cannot answer the simple question of whether aid works or not.
Can SmartAid Improve Accountability within Funders?
Interesting lessons came out of the recent CGAP Aid Effectiveness conference where the SmartAid Index for Microfinance was featured.
Comments
Agree totally with your
Agree totally with your critique of over-reaching claims. But:
“It seems extraordinary that after 50 years of international aid, there is still no consensus on whether it works.” Not extraordinary at all. Aid is political, and there will never be a consensus on it, because there will never be a consensus on helping the poor. For the compassionate left, it’s social justice. For the disciplinary right, it’s moral hazard. To call Dambisa Moyo “Zambian” is to imply she somehow represents an “African” perspective. She’s a member of a highly privileged, Westernised elite. And her writings place her firmly on the right.
Attempting to build a consensus as to whether aid “works” is like trying to build a consensus as to whether universal health care “works”… or as to whether freedom from poverty, or basic health, or a good education are human rights, or things you have to earn. Max Weber in his time, and more recently George Lakoff, have written about the history of these differing cultural attitudes towards the meaning and causes of wealth and poverty. To trace these movements to their historical roots: one would be left with trying to decide whether Catholic or Protestant social teachings are “right”.
Though one can determine at the small scale — of the intervention, or the project — whether a particular intervention produces an intended effect, someone can always counter-argue that at some larger scale, it creates some moral hazard, some kind of dependency, some lessing of personal responsibility or entrepreneurial pro-activeness.
No amount of study, research, experimentation or rigour will still this debate.
This article summarized
This article summarized perfectly the difficulties met by the aid industry. Wrong or unrealistic objectives can be as detrimental as unjustified claims. The intentions for most may be noble but, let’s face it, to provide good aid and do that well is hard and only achieved by few.
Dear Owen Barder
Dear Owen Barder
While compared to the growth and development claims of investment in education and health, the evidence of such claim with micro credit is weak as pointed out in the post. . I agree to this reasonable query and share my thoughts on the status position in this regard
1.AID to education and health helps growth and development since they are direct development input readily absorbable for bringing expected welfare and desired growth where as with the investment in micro credit, it is not a direct input and it represents only financial inputs in terms of legally accepted notes and currencies facilitating as medium of transaction of any kind of welfare goods and services.. Transformation or conversion of these legal papers /dollars in to desired good and services need to be performed . Here also lot of assumption is to be made on the availability of such welfare goods at the time of requirement . Particularly in the context of investment made in micro finance sector with the ultimate goal of poverty reduction , the functioning of micro credit alone is very weak and cannot work in vacuum unless needed goods and services for transaction through medium of micro credit are available in the given market condition adequately and timely . Besides availability factor, ‘Capability’ (Amartya Sen) of the poor client for such conversion and utilization of the good for gaining desired level of welfare assumes significant in this regard. Evidently in many occasions and in many regions the availability of goods and services and capability factor of the poor do not coalesce each other and consequentially a mere ‘access to credit services’ becomes a futile one showing a putative success in growth and pseudo development. Further in the functioning of investment in poverty sector, it is assumed that there is no misutilization of the micro credit or candid utilization taken for granted at poor household level. . These ground level realities in MF-poverty sector make micro credit less potential and weak for effecting any long term transformation in poverty sector and thereby contribute for AID ineffectiveness
2. Regarding effectiveness of AID in MF arena, there is a need to appreciate the concept MF more clearly . MF is by and large wrongly represented as micro credit only where as conceptually MF is a package of pro poor financial services such as micro savings, micro insurance , micro pension, transfer services besides micro credit. All these micro financial services holistically facilitate effective poverty reduction. Earlier, Muhammad Yunus has had succeeded in his pilot project with micro credit only since his clients were all micro entrepreneurs mostly engaged in bamboo based cottage industry having ‘capabilities’ on the activities with some wherewithal except micro credit. . When credit is accessed it all worked. But it may be noted that the category of such poor are in the top layer in poverty pyramid. Then what about other poorer and the poorest having weak or no capability factor for productively using the micro credit found in the bottom layers of the pyramid .Poverty reduction or alleviation cannot take place unless the process starts from the bottom of them pyramid.. The great mistake in many aided project, the capability factor is assumed equal for all the layers of the pyramid resulting poor impact and ineffectiveness of the investment thereby producing little evidence for either short term or long term transformation in terms of making a dent in global poverty reduction
3.Waht is way forward towards AID effectiveness effectively ? a) Direction for prudent Investment need to focus more for ‘Diversification’ of micro financial products without confining to micro credit services only
b) Micro credit is to be utilized for income generation purpose and not for consumption at poor house hold level for impacting candid development
c) Sequencing MF services for enhancing capability of the bottom layer in the poverty pyramid for graduated development ( as being experimented in CGAP pilot projects in different countries )
d) Effectiveness of AID can also be ensured in this MF sector if the investment is directed more for creating a conducive environ in terms of needed physical infrastructure for supporting productive functioning of micro credit in the project area/region and capacity building of the poor client and the institution at grass root level
e) The ‘AID help’ need to be directed to extend short term support to MF sector in the process of poverty reduction in terms of nurturing and creating social capital like ‘Self Help Group (SHG)’ so that these SHGs (Federations)would take care of their needs with indigenous resources ( human and financial)on a long term basis independently . In such case AID need to move other demanding area for replicating similar action.
g) Qualitative assessment of AID impact in terms of outreach of the poor in all the layers in poverty pyramid
h)Last, one way of measuring the effectiveness of AID effectively is to encourage ‘ participatory social audit’ by the poor clients themselves to reveal their perception on the impact of micro finance investment.
Thanks for sharing my views
Dr. Rengarajan
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