6 Myths About Foreign Aid

I made this in video form for the Forum's Idea Night at the Ath, but due to logistical snafus it wasn't possible to present it. Here it is now, 8 Myths about Foreign Aid:

Myth #1. There's a magic bullet that will lift poor people out of poverty. Economists and donors have spent a lot of time searching for the one instrument that's going to lift people out of poverty. It's not likely that one exists. Here are some examples of false cures.

• In the 1960's, we thought we could get growth by filling the gap between a country's savings rate and some necessary amount of investment. That was a mistake, because countries had an incentive to save less.

• Then we thought that providing primary education for everyone would lift people out of poverty. Now, we have almost universal primary education around the globe, but it's had virtually zero effect on growth.

• Then we thought that poor people were having too many kids, dividing their nation's resources too many ways. It turns out that people everywhere are having about as many kids as they'd like to.

• Then we tried to withhold aid unless a country made certain reforms that would help growth. But Western governments weren't happy that their foreign aid budgets weren't being spent, so they often gave the money to poor countries anyway.

• Now people are saying microfinance is going to give people the loan they need to build a business and get out of poverty. There's no doubt that microfinance is helping, but it's not true that people need one BIG loan to get out of poverty. Most poor people borrow or lend small amounts throughout the year, to meet their cash flow needs.donors want low overhead, most charities do not evaluate their programs to see where money's being spent effectively and where it's being wasted. Without feedback, they'll waste far more money on their programs than on administration. Low overhead ratios also lead charities to favor high cost programs over cheaper ones that are as effective.

If you're worried about wasted money, be more wary of unhelpful programs than bureaucratic spending. Overhead is not a good way to evaluate charities.

Myth #2. Earmarking money for "sexy" projects helps.

Sexy projects are buzzwords, tangible items that get donors really excited, like building orphanages, houses, donating modern technology, or microfinance. Unfortunately money for these causes is often wasted.  After the tsunami in Thailand in 2005, everyone wanted to give money for orphanages and boats. Much more money was spent on these causes than was actually necessary. Orphanages had trouble finding enough orphans to house, and some families actually abandoned their children at orphanages because they couldn't afford to feed their children. If the money was not earmarked, it could have gone to helping those parents afford to keep their kids. NGO's also built way more boats than were actually lost in the tsunami, leading to overfishing and waste. Money is fungible, so the only result of earmarking your donation is that certain sexy projects will be over-funded. There's a whole lot of boring work that goes on in aid, like logistical support, and helping people apply for government services. Beware of giving money for projects and causes that sound innately sexy.

Myth #3. Gifts in kind are useful donations.

The only people who know what an area actually needs are the people that are on the ground in that area. Most gifts in kind may not be appropriate for the season, or culture; for example, warm clothes for Haiti, expired medicines, or shoes. Disaster areas need to import a lot of urgent equipment, as fast as possible. Sending over your old goods can clog up ports and prevent more urgent shipments from getting through. NGO's also have to pay someone to go through all the gifts and sort the useful ones from the non-useful ones. More generally, sending gifts in kind can increase aid dependency, or destroy local markets. For example, someone who made or sold shoes in Haiti would not be able to compete against free shoes from abroad. Maybe you're concerned that if you give cash, the aid agency won't spend it effectively. But if you don't trust the agency with your cash, then why are you willing to give them your donated goods? And they might simply decide to sell whatever goods you've sent along and buy more useful ones. Unless you've spoken to someone in the region and they've specifically requested gifts in kind, it's better to give cash.

Myth #4. Brain drain is a bad thing. Some people worry that poor countries waste money training workers who plan to emigrate, or that when skilled workers leave a poor country, they leave that country worse off. These assumptions are false. Wages in the West for skilled workers are often ten or twenty times as high as they are in the home country.1 These high wages give workers an incentive to invest in education, which they wouldn't have if they couldn't migrate. Earning a higher wage allows skilled workers to send more money back home than they could ever make if they hadn't left. Workers retain close ties to the nation of their birth, and many move back home later on. These workers often have leadership skills. For example, 46 current heads of national government received their education in the United States. From a human rights point of view, people everywhere have a right to freedom of movement. Allowing skilled workers to migrate to rich countries is not "stealing" labor from poor countries. More migration encourages more people in the home country to develop skills in the first place.

Myth #5. Foreign aid is the best way to help poor countries.

We've been doing development and foreign aid for fifty years, without having much effect on a poor country's level of growth. There are two things that have made poor countries better off: Free trade, and immigration. Free trade makes US consumers better off because the increased competition lowers prices. It also gives producers in poor countries access to markets around the world, and lets them compete with richer producers in the US. Free trade's effect on unemployment in the US is mostly short-term, and must be compared with the benefits to producers in poor countries and to consumers around the world. Right now the economy of Haiti is destroyed. The best way to help Haitians is to allow them to immigrate to the United States, where they could find jobs, and send money to people who choose to remain in Haiti. That will help the Haitian people much more than billions of dollars in development and foreign aid money. But our government is more interested in sending money than actually helping Haitians.

Myth #6. We know better than the locals.

A lot of Westerners assume that because we are wealthier and we have fancy educations, that we know better than the people we're trying to help, and if only we could teach them, if only they would listen to us, they could escape their desperate situations. This is a dangerous belief; if it was easy for people to escape poverty they would have done so a long time ago. It's extremely difficult to make things any better without an extensive knowledge of the local culture, the language, and the people. The people who know best what to do are those closest to the affected areas. Our job should be to help them out. So, be really careful about believing you can take a trip to India, or Africa, and change the world.

Here are some ways we can do better. The most important thing is to be aware of the difference between showing that you care and actually caring. Many people give money, or wish to go volunteer, because they're interested in showing other people that they care about the poor. It's good to want to show other people that you care, but it's important to do it in a way that helps reduce poverty.

Showing that you care:

Disaster relief Volunteer tourism $0.10 donation Sending your old clothes

Caring:

Disaster preparedness Paying a local $4 donation Giving cash

Most importantly, do some research for yourself, hold charities accountable, and spread the word about how to be smarter about foreign aid.

For more, take a look at the GiveWell project, which evaluates the effectiveness of aid organizations, and Bill Easterly's blog about foreign aid follies, aidwatchers.com.

1 Bill Easterly, The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics.

2 Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven, Portfolios of the Poor: How the World's Poor live on $2 a Day (Princeton University Press, 2009).