Sick, but Not Dead Yet: A Prescription for Healthier Aid Dr. Franck Wiebe Chief Economist, MCC July 22, 2009

Outline of Comments  A Diagnosis of the Problem with Aid  A Quick Glance at the Wrong Medicine  Three Steps to a Happier and Healthier Development Experience with Aid

The Illness: Ineffective Aid  Symptoms: decades of foreign assistance with mixed evidence of having made local conditions better  Hard to dismiss argument that foreign assistance has contributed to a number of important improvements in welfare  Equally hard to dismiss the argument that we have not gotten what we paid for (or borrowed for)  Hence debate on aid effectiveness  But what are we looking for? “Aid effectiveness is the effectiveness of development aid in achieving economic development (or development targets).”  Thank you, Wikipedia! This lack of clarity is part of the problem.

The Wrong Medicine: Beware of Doctors who say You’re Dead  The most extreme aid critics have an easy time with bad aid  They also do a much better job of describing:  The role of government (needs to be more focused, better not bigger)  The role of markets in growth (private investment needs to drive growth)  How aid, at times, has perpetuated big government and undermined markets  But burial is such a harsh treatment!  (Also the easiest – especially for those with such big shovels)

The Wrong Medicine: Beware of Doctors who say You’re Not Sick  Very difficult for donors to admit and document failure  Even as they tweak processes, programs look and feel familiar  Focus on amounts (0.7 of GDP!) and budget support sounds like more of the same  Does anyone expect that the history of the next twenty years of aid will be different from the past twenty?

The Wrong Medicine: Beware of Doctors prescribing Holistic Medicine  Unscientific ideas about development abound, even within the aid industry  Some tried and tested and (mostly) failed  Such as: Industrial Policy and Import Substitution  Sorry, but most LICs in Africa are not Korea, Japan, or Singapore  Some so grand that they are untestable and unimplementable  What does “development” mean?  Aid going to activities with no clear and tangible outcome accounts for too much foreign assistance and is part of the problem

The Wrong Medicine: Rating Aid Agencies  A number of initiatives underway to rate and rank foreign assistance agencies according to their practices  The idea of public review and accountability is great, but …  We still haven’t agreed on what effective aid is!  OECD Aid Effectiveness Principles focus on process (MFR?)  Easterly and Pfutze (2008) system suffers from similar problem and  Critics still don’t identify healthy aid, even when institutions score well

The Cold Chain of Aid Effectiveness “Three Steps to Healthier Aid”  Pre-Investment Benefit-Cost Analysis  Requires a measurable and meaningful indicator of impact (MCC uses local incomes)  Represents a pre-investment estimate of impact  Incorporates promised institutional and policy reforms  Enables a comparison within sectors and possibly across sectors, as well  Monitoring and Assessment in Implementation  Appropriate baseline surveys are essential  Insist upon performance according to BCA targets  Rigorous Impact Evaluations, as appropriate  Expensive and sometimes difficult, but often essential  Establish expectation of experimentation under uncertainty

Making Aid More Effective  Connect it to what we know:  Increasing economic growth is a powerful driver of poverty alleviation  Higher household incomes bring higher household welfare  Social safety nets are important and can be held to the same standard  Connect it to what we can measure:  Focus on tangible impacts  Worry about what is left out (if you must)  Insist upon transparency and accountability  Quantitative metrics are essential for transparency  Failure needs to be documented to contribute to better aid in the future

Thank You for the Invitation Questions and Comments are Welcome Contact me at: