{"id":16800,"date":"2014-11-07T12:15:41","date_gmt":"2014-11-07T01:15:41","guid":{"rendered":"http:\/\/www.aspistrategist.ru\/?p=16800"},"modified":"2014-11-10T08:50:53","modified_gmt":"2014-11-09T21:50:53","slug":"foreign-aid-geopolitics-and-perverse-incentives","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/foreign-aid-geopolitics-and-perverse-incentives\/","title":{"rendered":"Foreign aid, geopolitics and perverse incentives"},"content":{"rendered":"
\"Somaliland\"<\/a><\/figure>\n

It\u2019s a fair bet that the Republic of Somaliland isn\u2019t well known to most Australians. That\u2019s a pity, because it\u2019s certainly an instructive case. Born in a separatist struggle against Mogadishu, the little statelet has received nothing in the way of recognition from the international community, which means\u2014for one thing\u2014that it can\u2019t receive foreign aid. Yet, according to the World Bank<\/a>, the little Republic has \u2018made admirable progress in improving its infrastructure to foster trade\u2019 as well as almost tripling the number of primary schools and increasing five-fold the number of universities on its territory. Neighbouring Somalia, which can get aid, is still \u2018in sharp contrast, looking tense and dangerous\u2019.<\/p>\n

Is that actually a coincidence though? Some Australian charities have bemoaned stagnating aid budgets in the face of increased defence spending. They claim the Coalition is buying guns and bombs at the expense of the world\u2019s poor. I\u2019m all in favour of controlling defence spending, but that doesn\u2019t mean I think the money saved should go on foreign aid. Because the evidence says it doesn\u2019t work (see William Easterly\u2019s exhaustive review of the economic research here<\/a>), especially if donated for \u2018strategic\u2019 reasons. As with defence spending, the problem lies in the incentives.<\/p>\n

Now AusAID\u2019s past work may be light years away from the behaviour of some donor countries at some points during the Cold War (and I think we all know who they are) who may as well have saved on the handling costs by wiring their aid money straight into their favourite dictators\u2019 Swiss bank accounts. The development community today recognises the importance of tackling corruption and aid often comes with strict conditions on what it should be spent on. But here\u2019s the rub. Money doesn\u2019t come in nice little packages you can track to ensure they aren\u2019t being spent on bad things. In the jargon of economics, it\u2019s \u2018fungible\u2019.<\/p>\n

What does this mean? Well, insist that a recipient country politician spend the money on primary schools and they\u2019ll do it. But the tax revenue that he would have spent on schooling if they didn\u2019t have access to aid can\u2019t be so easily accounted for. They can deposit that money with their friends in Z\u00fcrich if they like, spend it on weapons or not even bother raising it at all.\u00a0 In some ways, the latter is the worst option\u2014leaders who can access easy money in the form of foreign aid have little incentive to develop their tax bases and hence economies. In fact, quite the opposite\u2014they have an interest in keeping their nations poor so as to keep the aid flowing, an \u2018international poverty trap\u2019 if you will.<\/p>\n

Why is it worse if you give aid for strategic (read geopolitical) reasons? Well, let\u2019s perform a crazy thought experiment. Imagine you\u2019re giving money to a foreign ruler who is corrupt, oppressive and doesn\u2019t care about their economy but is anti-communist or anti-al-Qaeda (far-fetched scenario, I know). Suppose you now say to this individual that they had better institute far reaching economic and political reforms or you\u2019ll cut off their aid. What are they going to say? \u2018Go ahead, but you\u2019ll miss me when I\u2019m gone\u2019, is my best guess. Threats to cut off aid absent liberalising reforms are utterly incredible if the aid is donated in the first place on geopolitical grounds. Thus donor countries have a choice\u2014they can try (though probably still fail) to promote poverty reduction or they can look out for their own geopolitical interests. What they can\u2019t do is promote both goals simultaneously.<\/p>\n

Reducing poverty in the developing world is a laudable goal. But there are much better ways to do it than through foreign aid as it\u2019s currently delivered. One radical approach pioneered by the charity Give Directly<\/a> involves simply giving small sums of money straight to individual people\u2014bypassing aid agencies and local political leaders altogether. Carefully crafted studies have shown this approach to bear fruit<\/a>. Similarly, remittances from overseas workers have been shown to be highly effective (they are for the Republic of Somaliland). So if Australia really wants to help reduce poverty in the developing world, one of the best ways to do it would be to institute a guest-worker program for unskilled labour from the developing world. That might also have the effect of stopping the boats, by the way. But let\u2019s just say I\u2019m not holding my breath.<\/p>\n

Charles Miller is a lecturer at ANU\u2019s Strategic and Defence Studies Centre. Image courtesy of Flickr user G.A. Hussein<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

It\u2019s a fair bet that the Republic of Somaliland isn\u2019t well known to most Australians. That\u2019s a pity, because it\u2019s certainly an instructive case. Born in a separatist struggle against Mogadishu, the little statelet has …<\/p>\n","protected":false},"author":160,"featured_media":16803,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"footnotes":""},"categories":[1],"tags":[45,17,123,1029,1033],"class_list":["post-16800","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-ausaid","tag-australia","tag-development-aid","tag-foreign-aid","tag-somaliland"],"acf":[],"yoast_head":"\nForeign aid, geopolitics and perverse incentives | The Strategist<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.aspistrategist.ru\/foreign-aid-geopolitics-and-perverse-incentives\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Foreign aid, geopolitics and perverse incentives | The Strategist\" \/>\n<meta property=\"og:description\" content=\"It\u2019s a fair bet that the Republic of Somaliland isn\u2019t well known to most Australians. 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