Help That Helps
A New Business Model for Foreign Aid

Over six months into President Obama's term of office, there is still no head for the U.S. Agency for International Development (USAID), America's main foreign aid agency. Nor is there yet a CEO at the Millennium Challenge Corporation (Washington's newer, arguably more flexible foreign assistance organization). The Obama White House has not even forwarded the names of nominees for those positions to Congress, and our major aid programs are being run on autopilot by caretakers.

There is, moreover, no tangible indication of any new thinking on aid from the Obama team. Halfway through the president's first year, no position papers--much less white papers--on how to improve our foreign assistance programs have emanated from his halls of government.

But this has not kept the president from saying a few words about aid to Africa, fittingly in Ghana--one of the few African success stories. In an address televised across Africa after the G8 Summit in July, the leader of the largest aid donor to Africa acknowledged the continent's troubled colonial past. But this son of an African refuted the standard mantra that the West is still responsible for Africa's economic and social woes. In an interview with AllAfrica.com, Obama pointed out that Kenya's GDP was actually higher than South Korea's in the early 1960s and credited South Korea with putting into place successful policies that promoted foreign investment, exports, a skilled workforce, and homegrown industries.

What's needed today is more flexibility in aid programming.

Emphasizing rule of law, trade, institution building, good governance, and anticorruption, Obama's message was a breath of fresh air, especially as he underscored self-reliance, saying "wherever folks want to help themselves, we want to be there as a partner." Obama's apparent preference for a performance-based aid approach could not be more different from the traditions of the foreign aid business, which emphasizes how much (or little) we give and how poor (and getting poorer) they are. That traditional focus implies that aid is the engine of economic growth in developing countries and that it is mostly the responsibility of Western aid agencies.

Obama's comments on foreign aid make it all the more surprising that the only real change in our foreign assistance programs under his administration so far is in indicated spending. In the president's first budget (FY 2010), outlays for "international assistance programs" were ratcheted up by over half from the level of the final year of the Bush administration ($18.9 billion vs. $12.4 billion--not a trivial difference, even in Washington these days). Proposed outlays for FY 2011 are even higher. President Obama may well be on track to keep his campaign promise of doubling overall foreign assistance.

The lack of any substantive--or even superficial--effort to improve the functioning of our aid apparatus, in conjunction with the evident determination to shovel massive new amounts of money into our aid programs, can only suggest that the key thinkers in the Obama administration regard the primary shortcoming of existing aid programs as a lack of funding. Such sentiments are shared at the United Nations, where the U.N. Millennium Project has been beating the drum since 2005 for a doubling of rich nations' aid to poorer countries, under the argument that these new transfers are both necessary for and instrumental to the reduction of global poverty in the years immediately ahead.

But if the Obama administration believes it can simply scale up foreign aid and muddle through with the structures and approaches that underpin our current international assistance programs on ever higher funding levels, it is setting course for a terrible failure. The U.S. foreign aid system is broken and must be overhauled. This is not some well-concealed secret, and it is not a position particular to a limited segment of the political or ideological spectrum. In Washington today, there are few policy conclusions that elicit such bipartisan agreement. More money will not change the delivery of foreign aid on the ground. And President Obama knows this. In his interview with AllAfrica.com he warned of how "Western consultants and administrative costs end up gobbling huge percentages of our aid overall."

A new business model is manifestly required if development assistance is to avoid endlessly repeating past mistakes and if it is to capitalize upon important emerging opportunities.

Like many other bureaucratic organizations, foreign aid institutions are geared to fighting the last war. Social, economic, and demographic changes in the developing world over the past several decades have been rapid, and they have transformed the low-income landscape in obvious respects, but these realities have yet to be internalized by our international development assistance agencies and programs. There are not just new problems to be faced; there are important new opportunities to be grasped. Three major changes in particular need to be recognized immediately.

First, in much of the developing world, especially in Latin America and Asia, economic and demographic changes--including declining fertility and infant mortality and rising life expectancy--are producing a "grayer" population structure and more affluence. These trends have tilted the locus of health problems in most developing countries to such chronic illnesses as cancer, cardiovascular disease, and diabetes, and away from the traditional problems of infectious diseases and child survival. While "traditional" health problems are still predominant in sub-Saharan countries, the chronic disease burden is significant even in Africa, affecting the working-age population so vital to productivity and growth.

Second, there has been an increase in the skill-based talent pool as millions of people who have studied in developed countries have returned home to start businesses and NGOs. The rise of this pool of trained professionals and entrepreneurs in developing countries means that there are steadily increasing opportunities for aid organizations to partner with local talent. They have an enhanced opportunity to promote local ownership, self-reliance, and sustainability through their projects.

Finally, there are major streams of international financial resources available today (some of them entirely new) that were not present when foreign assistance was conceived after World War II. Some 83 percent of total financial flows from the developed to developing world are private resources, in the form of investment, remittances, and philanthropy. These private flows dwarf government aid to the developing world. Most important, they have opened up new ways of addressing problems. Increasingly, private philanthropists are taking a venture-capitalist approach to aid, viewing themselves as problem-solvers and partners rather than simply as donors. Private resources are flowing through new channels: the Internet, cell-phone transfers, cause-related marketing, remittances, and social networking sites. Economic growth in emerging economies is creating considerable wealth. Large NGOs such as the Aga Khan Foundation (which focuses on needs in South Asia, Central Asia, and East Africa) have now been joined by thousands of community foundations in the developing world that are solving local problems with local funding from wealthy individuals and companies.

What's needed today is more flexibility in aid programming. Aid can be tailored to each country's evolving conditions and development opportunities. It should also be premised on leverage--that is, linking U.S. public resources to the myriad emerging streams of private endeavor that characterize global development and encouraging the emergence of more innovative and efficient ways of delivering assistance and better evaluating the aid's ultimate impact.

Countries are much more likely to grow when they embrace policies that create open economies, and encourage trade, private investment, business creation, savings, and innovation. Good governance and the development of a sturdy institutional domestic framework, including rule of law, individual rights, and property rights, are critical to prosperity.

Since the early 1950s, scholars and students of development have debated to what extent, if any, foreign aid helps countries. Their studies have been strikingly inconclusive and have certainly failed to demonstrate that official development assistance makes a regular and predictable contribution to overall macroeconomic growth. We reviewed nine major studies, and the majority of them show no categorical relationship between aid and growth, with only one asserting an unqualified positive relationship. The two most dramatic and consequential modern cases of rapid growth and poverty reduction in the Third World--post-Mao China and India during the last two decades--are not attributable in any appreciable measure to flows of official aid. On the other hand, the ratio of aid to GDP is generally quite high in sub-Saharan countries, but more foreign aid has not resulted in increased per-capita GDP in the region.

Among the reasons adduced in the literature for the lack of identifiable macroeconomic impacts of development aid are that state-to-state transfers inhibit competitiveness, create dependency, and absorb or misallocate political resources or energies in recipient countries; that aid is motivated by nondevelopment donor and contractor interests; and that aid engenders a lack of feedback and accountability, encouraging host country graft and corruption.

Since recipient countries' policies are almost always far more important than the volume of foreign assistance in hastening the pace of material advance in recipient countries, we need to ask where and how our foreign aid can matter? This requires a shift in focus from macroeconomy to projects on the ground. We in the West have transferred nearly $2.7 trillion in official development assistance since 1960. What evidence of program-level success do we have? Why have some projects been successful? Even if the macroeconomic impact of aid transfers is debatable, aid projects could still be justified by policymakers, and perhaps even by taxpayers, if they have generated high and sustained returns of other sorts for their beneficiaries in low-income countries. Determining these characteristics of how foreign aid has positively affected the lives of individuals and communities in poor countries can inform our approach to future aid programs.

In recent years, many donors have begun to examine the effectiveness of their foreign assistance. By and large, their findings have not been encouraging. In its evaluation of Canadian foreign aid, the Canadian Senate's foreign affairs committee concluded that Canada's development agency had failed to make a difference in sub-Saharan Africa despite $12.4 billion in aid expenditures between 1968 and 2007. The failure was attributed to slow, unaccountable, and poorly designed development assistance and ineffective foreign aid institutions in Africa. Maintaining that vibrant economies and good governance are the path to prosperity and that these can only be generated from within African countries themselves, the committee recommended that Canada move to a foreign aid model similar to the U.S. Millennium Challenge Corporation, which provides assistance only to those countries that can demonstrate progress in building strong private sectors, creating jobs, and strengthening governance. Australia, Ireland, the Netherlands, and Sweden have also completed assessments of their aid programs that call for improved evaluation, more local ownership, and better institutional capacity in governments.

Other donors, particularly the World Bank, have attempted to measure programs for results such as poverty reduction. The bank's evaluation unit found that its poverty reduction record is problematic. In a 2006 evaluation of 25 World Bank-assisted countries, only 11 were said to have reduced the incidence of poverty between the mid-1990s and early 2000s, with poverty either stagnating or increasing in the remaining 14 countries.

We reviewed projects by USAID, the World Bank, foundations, and corporations that have been identified as having measurable impact and analyzed them for their shared characteristics. Our examination identified nine principles of foreign aid projects that work:

Local Ownership and Initiative. Successful programs and projects reflect the actual needs of the recipient countries as expressed by local actors, rather than simply reflecting what projects and programs may be available for local recipients from USAID. Local "ownership" increases the prospects of long-term success and can, indeed, lead to the continuation of institutional relationships between American and partner leaders long after the end of USAID funding. The Rotary Club campaign to eliminate polio succeeded because of the ownership and financial commitment of local Rotary Clubs throughout the developing world.

Partnership. Successful projects and programs are a collaboration between American and developing-country institutions, especially private institutions. Indeed, such collaboration seems virtually essential for a sustained engagement that brings benefits valued by all. The U.S. government should always attempt to ensure partners are committed to a program before it makes an investment. As a general rule, the U.S. contribution should be the second or third dollar on the table, not the first. When everyone is committed to common priorities and has made an investment, then everyone will be accountable for the results. With mutual accountability comes sustainability. The Consultative Group for International Agricultural Research, which spawned the Green Revolution, was a partnership among governments, foundations, and the private agribusiness sector.

Leverage. The U.S. government can take advantage of the myriad new sources and techniques of global support for developing countries, including foundations, private voluntary organizations, corporations, universities, and remittances. USAID alliances with new American philanthropic activities overseas can help leverage resources that far exceed those contained in federal budgets. Such partnerships can recognize the priorities and expertise of philanthropic leaders and their institutions. Similar strategies can be used to link U.S. programs to emerging local business leadership in developing countries. Within this framework, USAID would become not a controlling taskmaster of U.S. development programs, but a facilitator, the creator of syndicates of resources targeted at self-reliance. USAID's Global Development Alliance, for example, has successfully leveraged government funds with contributions from private companies, foundations, charities, and universities. This type of partnership should constitute the model for virtually all U.S. foreign assistance in the future.

Flexibility. Efforts by today's aid projects to tackle new problems are often hampered by decades-old legislative mandates. USAID's popular child-survival program began with a legislative earmark in 1986 and has spent over $15 billion providing education and preventive services for childhood communicable diseases. Today, however, non-communicable diseases in adults such as cardiovascular, cancer, and diabetes have overtaken infectious diseases as the leading causes of death in most of the developing world. Child-survival funding dominates USAID's health budget, leaving little to help with diseases that are sapping adult productivity and economic growth. Where the nature of the problems and opportunities for change are evolving, aid must be able to anticipate and respond to such changes.

Peer-to-Peer Approaches. Long after USAID's financial role has ended, U.S. foreign assistance can help America's professionals and institutions to build relationships with their developing country counterparts on the basis of perceived professional self-interest. Such opportunities are exemplified in USAID's Hospital Partnerships Program, through which U.S. physicians volunteered their time to work directly with physicians in Eastern Europe and the former Soviet Union. This peer-to-peer approach is patently superior to the contractor model that currently dominates USAID programming and which, as President Obama noted, takes up inordinate percentages of our overall foreign aid.

Technology Adaptation and Adoption. Some of the most widely acknowledged foreign assistance successes, like the Green Revolution, have at their core the application of technology to improving the human condition. As the scientific and technological capacity of developing countries expands, so does the potential for technology partnerships. Local ownership is also important in this context, as integration of technology such as bed nets and oral rehydration salts is vital to ensuring their effective use within the communities where they are introduced. Local foundations' growth and social entrepreneurship's successes in developing countries have shown how technology can work for poor people throughout the world.

Self-Reliance. The most important steps taken to improve the long-term success of developing nations will come from within those countries. In successful and self-sustaining projects, local leaders are the engines of change. Conversely, encouraging leadership and good policies may mean ending or reducing aid to a country. We must not be afraid to withdraw funds to ensure that assistance does not result in dependency in recipient countries.

Continuous Information Feedback. The best evaluation systems are not simply signposts that demand reports. They are continuous loops that give information to managers in real time so programs can be constantly adjusted to improve performance. Success comes from a sustainable process, not a single event, and it requires flexibility to adjust programs to changing situations.

Risk. A partnership and venture-funding culture implies a tolerance for risk and a willingness to recognize failure. Such a tolerance is, unfortunately, widely lacking in our aid programming (for all-too-understandable political reasons). But USAID must be willing to experiment with new approaches to development assistance. If it hopes to increase the likelihood of project level successes, USAID will need to develop a mechanism for rewarding the willingness to take calculated risks within its own personnel and programs.

The pervasive lack of convincing evidence of significant benefit from past foreign aid efforts, the changing nature and capabilities of the developing world, and the emergence of new sources and approaches to resource transfers for development all point to the need for a fundamental rethinking of the objectives, strategies, and instruments of U.S. foreign aid.

Project earmarks, directions, and limitations in foreign aid legislation are a "design for failure" and should be removed--with the exception of those deemed essential to U.S. national security. U.S. foreign assistance programs should be able to respond fully and flexibly to demand-driven opportunities emerging within developing countries.

With again the exception of expenditures deemed essential to U.S. national security, the United States should avoid distributing foreign aid without monetary or monetized resources co-invested in and by the developing country itself. Appropriate partners include local affiliates of NGOs and corporations, indigenous foundations, local businesses, and public agencies. Allocations of U.S. development aid should favor sustainable public-private partnerships in the host country.

The main competition for U.S. foreign assistance dollars should involve not contractors but rather ideas--more specifically, ideas coming from the multiple actors now involved in foreign aid and philanthropy, particularly on the demand side of the equation in developing countries.Those who wish to attract U.S. resources should bring to USAID their best ideas and their own resource contributions from the private sector, explaining their goals in terms of economic and social impact, local ownership, partnership with local institutions, and achievement of community self-reliance. USAID should operate more like a foundation (and less like a disbursement agency), articulating areas or problems of interest and inviting competition for new approaches.

One fruitful avenue for USAID might be to create a venture fund through which any individual or organization with a new idea about how to solve a problem in development in an innovative way can apply for a seed grant. In this scheme, the grants would be for limited duration and limited amounts of money and risk would be welcomed. Grantees would report directly to a panel consisting of all government agencies contributing to official development assistance.

America's private charitable donations to low-income areas of $36.9 billion are over one and one-half times greater than government aid of $21.8 billion for the same year. Thus, USAID should provide for regular, substantive consultations with private-sector players involved in global development, including foundations, charities, corporations, religious organizations, universities and colleges, and individuals. (Beyond the philanthropic sector, millions of migrants throughout the world sent $281 billion in remittances back to their lower-income home countries--a sum two and one-half times greater than all donors' official development assistance in 2007, the latest year for which comparative data are available.) USAID must not only be aware of but also work with the vast array of new players in global development who are transforming the ways in which resources are reaching low-income regions.

The new model for foreign aid proposed here departs from the past in at least three important ways.

First, it is based on flexibility. The programs pursued, the opportunities seized, the partners aligned, and the ways in which funding creates self-reliance are driven not by earmarked legislation, not by the capacities of contractors, not by the world of 1970, but by the nature of the problems and the presence of opportunities from the promises of a changing world.

Second, it reduces centralized control. USAID becomes not the taskmaster of U.S. development programs but an aggregator or facilitator of efforts and a creator of syndicates of resources targeted at self-reliance.

Third, it emphasizes innovation. USAID should seek fresh faces, new approaches, new technologies, and new mechanisms for allocating its resources. It should seek out and link its activities to new streams of resources, looking for leverage for every dollar it dispenses--or, better, invests--and constantly searching for emerging cofinancing partners. This business model transforms USAID from a passive funder of projects to an investor in innovation.

Too often, the talk of "fixing" foreign aid is dominated by discussions of organizational structure, the volume of resource commitments, and the configuration or harmonization of objectives and players in the U.S. government. Such preoccupations are easy to understand: They reflect the force of habit. Such thinking, however, is conceptually trapped within a world that existed 30 or 40 years ago, when the public sector was the leading player in financial flows to poor countries. Today, the U.S. government's official development assistance constitutes just 9 percent of total U.S. financial flows to developing countries.

It is time to give serious thought to making our foreign aid expenditures work more effectively. What matters is less a redrawing of organization charts than a serious consideration of how these dollars are delivered and whether they are responding to local ideas and actually reaching partners with stakes in the outcome of the investments. A new business model for foreign aid is the main hope--perhaps the only hope--for fixing a broken system.

Nicholas Eberstadt is the Henry Wendt Scholar in Political Economy at AEI. Carol C. Adelman is the director of the Center for Global Prosperity at the Hudson Institute.

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