Tuesday, January 01, 2008

Inadequate Arguments Against Aid - 1

Over at Crooked Timber John Quiggin deals with a common aid fallacy: 'we've given them billions of dollars in aid and they're still poor - therefore aid doesn't work'.

It’s commonly observed that despite receiving over $500 billion in aid in the 50 years since the shift to independence, Africa is still poor and, on the whole getting poorer. The implication is that the aid must have been wasted or stolen, and of course, quite a bit of it has been. But an aggregate number over 50 years isn’t very helpful.

Much more useful in thinking about the likely impact of aid is the amount per person per week. With (very roughly) a billion people in Africa and a billion in the developed world, the aid that’s been given amounts to about $10 per person per year, or 20 cents per person per week on each side of the transfer. So, the implied complaint of the average Northerner to the average African can be translated “I’ve been giving you 20 cents a week for years now, and you’re still poor – you must have squandered my generous help”.

This doesn’t answer the question of why Africa has remained poor while so many in Asia have grown rich, or at least much better off. But unless you impute truly magical rates of return to aid, the question “why hasn’t aid made Africans rich” can be answered very simply “there’s never been enough to make a difference”.

The "but we've given them billions" argument is a common one and it's nice to see it neatly dismantled.

There is a counter-argument though; William Easterly Makes it in response to Steve Radelet here in a Council for Foreign Relations skirmish.
Radelet: ...First, aid amounts have not been that big. Bill cites $2.3 trillion over fifty years, which sounds huge, but it translates to $46 billion a year, a modest amount for any global capital flow. Only about $26 billion per year went to low-income countries (as opposed to middle-income ones). This works out to be fourteen dollars per person per year in low-income countries—not exactly winning the lottery...

Easterly:...As for Big Pushes, the aid flows were certainly large to many of their recipients. The quarter of countries with the highest aid got on average 16 percent of their Gross National Income for the past forty-two years, year in and year out. Their average growth rate of income per head over that period: 0.4 percent per year...
16% of GNI per year! All of a sudden the numbers start sounding large again. At least for some countries.

Except that the countries that Easterly is talking about all have very low GNI per capita. (Heck that's why we give them ODA right?).

Take, for example, Ethiopia which has ODA levels slightly above the 16% figure that Easterly cites (17.39% to be exact). It's GNI per capita is $156*.

$156 * 0.17 = $26.52

$26 a person a year. Less than 10c per day. Once again the number shrinks.

Actual debates about aid effectiveness can and ought to be more nuanced than comparisons of how much money per person (I've give some links to - flawed in my view - econometric work on the matter here and my own thoughts are here) but the point for tonight remains: the reason why "all that aid hasn't worked" is that there was never all that much in the first place.

*Note that Nationmaster gives two, quite different, figures for GNI per capital for Ethopia. I don't know which is more correct.

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