Foreign Aid: A Fool’s Errand?

[Yinseo Cho offers up this provocative recent talk by Stephen Krasner of Stanford at the Asan Institute for Policy Studies as it directly relates to the most recent IDC 518 class.]

• Dr. Stephen Krasner
• Distinguished Speakers Series
• The Asan Institute for Policy Studies
• October 19, 2011

Hahm: Welcome to the Asan Institute. My name is Hahm Chaibong and I’m the President of Asan. Today we have the Third Asan Distinguished Speakers Series with Professor Stephen Krasner. In case anyone doesn’t know who he is, you probably wouldn’t be here. I’m sure most of you have read his books. He served on the National Security Council and was the Director of Policy Planning at the State Department. He taught at Harvard and UCLA before joining the Stanford faculty. He was also the editor of International Organizations. He will be talking about foreign aid with a provocative title, “Foreign Aid: A Fool’s Errand?” Korea is discussing foreign aid, and we are the first country to transfer from an aid-receiving country to an aid donor. He is going to tell us that there are some things we need to consider before we embark on this.

Krasner: Thank you for that nice introduction. The one thing I can say is that it’s true that Korea is the first country that moved from being an aid recipient to being a foreign aid donor. Unfortunately it’s the only country that moved like this. People used to talk about Greece and Korea as the two countries that moved, but it looks like Greece will revert back to receiving aid. Foreign aid has been a centerpiece of the international system for 60 years or so, and if foreign aid were a business it would have been bankrupt 40 years ago.

Let me begin with some history of foreign assistance. Before WWI, there were international capital flows from rich to poor countries. But these always took place in the context of specific political development. They funded railways to get bases in Turkey. France denied Germany access to capital markets and gave Russia access n the 1890s when the French and Russians formed their alliance. States and governments had very decisive influence over who could borrow in markets. English loans to Russia increased after the Anglo-Russian treaty of 1907.

Foreign assistance as we know it today begins after WWII. The notion that there was an obligation on the part of wealthy countries to provide assistance to other countries that was not tied to specific political or economic interests. The idea that there was a substantial amount of flows not tied to political concerns develops only after WWII. We take it for granted, but this is strange. Why did this happen such that it is not tied to the donor country’s interest?

It is tied to how people interpreted what happened in Europe and the causes of the war and how they were related to economic conditions. Economic deprivation had led to conflict. The rise of Nazi Germany was tied to major inflation in the 1920s and great depression in the 1930s. The fear of the US was that they needed to rebuild Europe to keep it from becoming Communist. In 1945, you have the creation of the international financial institutions (IMF and World Bank). They assisted in rebuilding Europe. Subsequently there were also the international development banks designed to funnel foreign aid in an effective way. This made it much more difficult to donor countries to directly give foreign aid in the form of bilateral assistance. Even though it’s weighted voting and the US has a majority, they cannot dictate where aid flows.

Then if you look at levels of development assistance, there is a lot of variation. There is a general target: countries are supposed to give 0.7% of the GDP as foreign assistance. This was originally published in the Pearson Report in the 1970s. Pearson was the Prime Minister of Canada. The figure was made up out of thin air. It was based on a now discredited model of development and capital flows. If you actually made the same calculation in 2011 as opposed to 1970, the figure would actually be 0.4%, anyway. Every international meeting that involves the developing world has pressure to sign onto the 0.7% figure, but it has no basis in any real formula to use aid effectively for economic growth. There are only a few countries that have reached this figure. If you look, the ones who meet this target are all small European countries, and mostly Scandinavian countries. If you look at some of the larger countries, the US is 0.2%, Korea is 0.15, and so forth. The key thing is, there’s a lot of variation.

Why is there a lot of variation? Has Sweden discovered the secret to foreign aid? Actually, the countries that give a lot of aid are the ones that believe in government spending. You get a strong correlation if there is confidence in government spending. Small social democratic countries that have confidence in the role of the state spend a lot of money on foreign assistance. The development is a reflection of the values of donor countries than a reflection of the effectiveness of foreign aid.

If you look at some of the evidence of foreign aid, and considering that Korea and Greece are the only ones that graduated (and Greece is not doing so well), you can see the failure of aid. Africa has received 568 billion dollars over 40 plus years. The average per capita growth of median African country is near zero. Of course there is variation in growth, but on average, it hasn’t done very well. If you look at individual countries, there is no correlation between foreign aid and economic growth. There is no correlation between growth and debt forgiveness, either. Paul Collier in the Bottom Billion said that there is a 1% growth correlation. Some studies have found no relationship. Basically the evidence tells us there is not a good return on investment.

Health and immunization are successes of foreign aid, such as smallpox eradication. Life expectancy has also greatly improved. That is not entirely the result of foreign assistance, but I think it did play some role. AIDS treatment in Africa—we have committed a lot of resources to treating people with AIDS, but it isn’t clear that the impact of AIDS spending has actually improved the situation. The health delivery system may actually get worse with money flowing in. Also, the Green Revolution is another success.

Why does aid succeed in some places and not others? If it doesn’t rely on national governance capacity, it can improve. If you can identify a problem area, parachute people in and give them immunizations, it can be effective. Somalia has good tuberculosis treatment centers. If you’re thinking about big ambitious tasks such as more effective rule of law or economic growth, it is not easy to do. For rule of law, you need to train lawyers and create institutions.

If we look at the task of international development, we can see some reasons in the literature why foreign aid has failed. First, there is a lack of accountability for donors. If you look at foreign aid projects, you have multiple donors. Outcomes are a result of multiple different things. Sometimes you can find places where aid is effective, but it turns out that is generally is not. It is a bad idea to make people pay for primary and secondary school. But overall, it is hard to know what’s worked and what hasn’t.

Second, conditionality has been weak. Often people put conditions on aid, but they rarely cut it off. This is because these institutions have to keep giving aid.

Finally, donors find it difficult to understand the local environment. I will give two examples from Afghanistan. I was there last November, and I had an interesting conversation with a former student of mine at a charity. He talked about a program to build schools with USAID. They had asked Catholic Relief Services if they wanted to bid on the development project. He said Catholic Relief Services didn’t want to build a school in the wrong village because it may have started a shooting war, and so they needed knowledge of the area. Of course the incentive for USAID is to build those schools, and they gave a contract, and the schools got built.

Also, aid sets up perverse incentives. It replaces taxes. People pay taxes to get services from the government. In some places, 50% of GDP comes from aid. Countries are more accountable to donors than to their citizens. It can’t be transparent when countries are getting most money from donors. There is a lot of money coming in, so this causes corruption. There are a lot of big houses in Kabul with guards. Where did this money come from? It has the same perverse incentive structure as oil. It also weakens social trust. Your ability to get funds for a local project may rely on your relationship to an NGO rather than trust in your own village.

Finally, I already mentioned the importance of local knowledge. I’m going to embed this in an approach to state-building. There are some ways to think about state development that don’t need much local knowledge, such as Modernization Theory and Institutional Capacity. But with Rational Choice Institutionalism, you need a lot of local knowledge, which is extremely difficult.

Modernization theory: If you look at social science understanding of economic development, this is the most prominent theory. It goes back to Marx and my colleague Seymour Martin Lipset.

Let me briefly tell a story about Lipset. At Harvard, students had to take an incredibly nerve-wracking oral examination. Four professors ask you somewhat random questions. The first question they asked, I had no idea what the answer was. It was about Martin Luther’s political theory. Lipset would come into the exam room and fall asleep, and then he’d wake up and ask some questions. He was the most famous political scientist of his generation. If you’re in a situation where you can nap, you should probably do it.

Anyway, the gist of modernization theory is that all good things go together. You start off with technological change, then you get economic development, then social and political development. You get a large middle class, then you get politically knowledgeable people who can support democratization. The implications of this for foreign assistance is that you need to give lots of aid. If you can get enough capital in the country, they can move up this ladder. You should go up to 0.7% of GDP giving, you should try to aim for the Millennium Development Goals, debt forgiveness, structural adjustment, infrastructure and so forth.

The next big theory of political development is quite different. This is the theory of institutional capacity, which traces back to Hobbes. The leading exponent is Huntington. He said that economic development and social mobilization without greater institutionalization would lead to political decay. We can look at Egypt now, where things can easily break down without institutions. Huntington was writing against modernization theory and saying that things could still fall apart. The implications are that you need to build state capacity through training and technical assistance. The way in which military officials talk about Afghanistan, it is all about developing capacity, especially for security services.

The third theory—rational choice institutionalism—is also very different. The idea is that political development is the result of deals among elites. Some enhance the benefits of society as a whole. The state is a stationary bandit. People are interested in pillaging the society for their own good. But some people may make decisions that benefit the whole society. It’s kind of accidental, where things can be good, like the Roman Empire, and then completely fall apart. If you look at Chinese history, you’ve had periods of extensive warfare and conflict. Since the Communist Revolution in 1949, you had incredibly wretched government—Mao killed millions of Chinese. Deals among leaders create a situation in which a society improves. The institutional capacity argument says you need a strong state. But if you accept this theory, it has different implications. If you just give money to elites, that is a bad idea. If you train the military, you will get a military government.

You need to change incentives for elites externally. In one program, aid is based on good governance in the country. It is measured by seventeen indicators such as levels of corruption and amount being spent on health and education. Trade agreements are another thing to look at. The Mo Ibrahim Prize is for African leaders who leave government. You may also try to give foreign assistance to develop civil society organizations, lawyers and private companies that can provide accountability for the state. If things are really problematic, you might want to try running parts of the government with external actors. This is the Charter Cities idea, which is very innovative. Paul Romer came up with this idea. He resigned his position at Stanford Business School to pursue this idea. You take a piece of a poor underdeveloped country, and you rent it to Denmark and let them run it. If you look at the problem of development, everything is connected. It is hard to change everything at once, but you need to change everything to make it work. The Honduran government has agreed to set up a separate independent legal zone in which they have a large foreign presence running it.

If you look at how foreign aid actually works, we can look at these three marquee scholars who discuss it. Jeffrey Sachs basic rationale has been modernization theory and he advocates giving more money. William Easterly was a World Bank official and criticizes Sachs. He says foreign aid has failed, and we need searchers instead of planners. This is a rational choice argument. The idea here is that external governments cannot know enough to know if it works. Will building a school improve education for girls or lead to a war? You can only have enough local knowledge if you are local. So you search for local initiatives that have been successful. Finally Paul Collier’s argument—which is a rational choice argument—says that in some cases, the security situation is so bad that you need external actors to intervene, and you can think ambitiously with a relatively small investment in security.

Sachs is wrong, according to the evidence. I think Collier is right in some cases, but it’s really difficult. Putting in an external military force is really difficult. Even with grotesque abuses of human rights, external actors have difficulty solving these problems. Millions of people have died in the Congo, but it would be hard to send in a thousand Marines. The relationship to our security is very weak. And there are not many countries that would be willing to do so. I think that Easterly is basically right in his view. It is really hard to implement what he said, though. We can give money and give training, but it’s really hard to know the local environment in detail.

If I could give a prescription to Korea, I would say first that Korea should follow the pattern that Japan has followed. Japan doesn’t give a lot of aid, and it ties it to its economic interest. Korea is not going to stand up and say that aid has failed and just not do it, obviously. Korea will give some aid. I think Korea should tie it to places where Korea has national interest. You can’t guarantee that it will help the recipient country, but at least it might help Korea. Secondly, it would be great to get some signature initiatives. Norway has done this effectively and been associated with certain initiatives. Norway has invested in countries that try to develop better governance in oil-exporting countries. The Norwegians have sponsored international initiatives to make oil revenues more transparent. Norway is noted and admired for this. Could Korea find a signature initiative? Korea has been interested in Green innovation, and this might work. If I were thinking of a strategy for foreign aid, I would try to find some signature initiatives. What’s notable about Korea is that it started poor and has become genuinely rich. Except for maybe Singapore, Korea is the only one. If Korea could find a piece of its own experience to use for aid, this would be tremendous. It would make Korea’s foreign assistance program unique.

Question 1: Thank you for your presentation. When you mentioned this institutionalist theory, you set apart what has been done, but you didn’t talk about the Paris Declaration. Korea is going to the Busan meeting at the end of November. This has to do with building institutions and dealing with the problems of foreign aid in the past. Were you distinguishing multilateral and bilateral aid? Because this differs based on the political interest of countries. Also, aid was very much tied aid. But this is now changing, and I think this initiative is new and developing.

Krasner: The distinction between multilateral and bilateral aid—sometimes bilateral aid was specifically directed for security purposes, but sometimes it wasn’t. The Paris Declaration and the idea of country ownership is total nonsense generated by donor countries. I had an undergraduate student who did a thesis on the question of country ownership. She was in Mali and there was a Western donor country with an idea for aid. The aid agent in Bamako writes up the project and sends it to the relevant Ministry in Mali. They put in in their letterhead and send it to their home country and says that it was developed by Mali, but it really wasn’t. Secondly, the Canadian foreign assistance program for Afghanistan from 2010 makes the number one priority the improvement of the situation of women. It is not the number one priority of Afghanis.

A number of these countries do not have the capacity to develop these projects on their own. Also, inescapably they promote projects that reflect their own interests, such as the AIDS foreign assistance promoted by evangelicals. I am skeptical about this idea. I think people on the OECD develop these declarations that cannot even be implemented. Aid organizations have money and they need to spend it, and they won’t find enough institutions, and they will continue to write their own proposals.

Question 2: My question is about the Korean experience. The Korean government is running training programs for bureaucrats from third world countries. You want us to think about the secret ingredient of the Korean experience. But what do you think is the most determinant factor in Korean growth?

Krasner: If you look at the Korean experience, it conforms to the institutional capacity argument. You can a commitment to the developmental state, which worked in Asia but has not worked elsewhere. My colleague Francis Fukuyama makes this argument. Part of it is a cultural argument about the development of a separate an independent bureaucracy, which is basically the Chinese model. It is a strange thing to do, to make a bureaucracy based on an exam. You usually want to give jobs to your family or friends. So this exam is really an amazing thing, and it develops in Asia first. So you do have high state capacity in Asia, more than in other places. One problem is that it doesn’t work if you have a “bad emperor.” So Mao really imposed incredible suffering on China. But if you have Deng Xiaoping, it might work. So what can you take from the Korean experience? Well this Green innovation is okay, but everyone is doing it. I know you can’t take the Korean experience and plop it down in Ghana. But is there some particular aspect that might work somewhere else? You might want to find something that will give a unique aspect to the Korean aid program.

Question 3: Jonathan Chow from Asan. I’m intrigued about this concept of Charter Cities. I wanted to ask about Charter Cities in the context of the article you wrote about shared sovereignty in 2005. The domestic actor must have legal sovereignty, it must be a voluntary agreement, and the external partner must not provide large amounts of resources. Charter cities sound like the opposite of what you are describing. How do you reconcile what you said in 2005 with this concept, and what kind of constraints can the domestic actor impose on the external actor?

Krasner: Believe me, I contradict myself many times. But the funding would come from investors that would set up companies in the Charter City. In Honduras you have a reasonably educated population but they aren’t very economically productive, and you can try to set up this charter cities concept. But it is not a conventional foreign aid project.

Question 4: I am a documentary director. You said that the previous humanitarian aid for North Koreans was abused or converting into sustaining the military power of the North Korea regime. So what are our alternatives to this very bad situation in North Korea in the terms of humanitarian aid?

Krasner: I cannot really talk about North Korea that well, but if I had to think about what is possible—well, I don’t have a good answer to this question. The foreign assistance does not get to the people who need it most in North Korea. But I’m not sure that external actors have much leverage over the North Korean regime. The Chinese have some, but South Korea really doesn’t have much. If you look at the Six Party Talks, everyone’s ideal outcome would be a denuclearized but stable North Korea. But everyone differs on their second best outcome. The Chinese would prefer a nuclearized North Korea that does not fall apart. A collapse would be unmanageable for South Korea as well.

So what is a possible path? I feel like I should shut up, but the possible path would be if the North Korean leadership decides to follow the Chinese model. I don’t know how this would happen, but if the North Korean leadership aimed to become wealthier with the Chinese model. I don’t think external actors could provide North Korean leadership to make that choice. It seems like a reasonable choice to allow them to stay in power and adopt those policies. It’s not at all satisfactory, but there may not be one, since South Korea hasn’t found one.

Question 5: I’d like to go back to Collier’s argument about providing stability and security. I was thinking about contrasting cases between Korea with the US and the Philippines, which ended up rather differently. If a positive push from an external actor is supposed to help, are we exaggerating this in terms of security and foreign aid?

Krasner: Let me refine this argument. He’s only talking about post-conflict situations, not military occupations and interventions. If you look at the US military interventions, the results are not good. It is limited to interventions in post-conflict situations. By no means is he advocating use of external forces in general, but he is discussing places like Sierra Leone where you can get a lot of mileage from a small intervention.

Question 6: My name is Gerard and I’m a master’s student at the Catholic University of Korea. I would like to ask about your prescription for Korea with regards to foreign development. If you say that Korea should continue the Japanese model. Are you saying that this is one of the better strategies? Japan is using the aid mainly for its own economic interests and not focusing on aid for countries in Africa. Should we align economic interests or should we avoid invoking moral interests?

Krasner: What’s the basis for criticizing Japan for doing something that isn’t helping, and may actually be doing harm? What’s the point? The moral high ground is all with Jeffrey Sachs, but I don’t see what the point is. It would be one thing if aid were actually effective. But if it isn’t effective for economic growth, there are no grounds for criticism. That is different for certain interventions such as health, or humanitarian interventions such as saving lives. That is a different situation, and you should criticize countries for not stepping in and doing that. But this is about actually trying to change the economic situation in these countries. We can see the rhetoric, but the evidence is not there. So this is why you might use aid for your own economic interest, or for prestige and standing in the international community.

Question 7: I am a German journalist. I would like to know how your analysis of aid changes if you are not looking at long-term aid but aid after a disaster such as an earthquake.

I would support that. You might be able to save lives, but there’s no evidence that it will have a transformative effect. The criteria should be having enough food to deal with famine situations, or support for emergency relief situations. But you shouldn’t worry about this 0.7% threshold. The international community knows that you need tents and latrines and these mechanical things for refugee camps. You have to be supportive of humanitarian aid. But just getting to the 0.7% figure will not make other

James Tang: Singapore Management University. I have one question for clarification about the way you define foreign aid successes as only Korea and Greece. You are using the OECD framework. There are other examples, such as China. China did receive money from the Soviet Union and from Japan. But that’s a complex issue. So my question is what you think of the China model. While you’ve been positive about the Japan model and the Charter cities, you have not addressed things that can be associated with the China model such as Chinese activities in Africa for their own self-interest and from no moral standpoint. How to define Chinese aid is a big problem. As you said, the export zones are not really examples, but there are some cases of special economic zones in China that became successful over the long-term. Might those elements also be positive, if you want to ignore the moral issues such as human rights?

Krasner: So one is about internal development and one is about external aid. What is the China model? We know they have been successful, but I don't know that it is exportable, and I don’t know enough about the Chinese economic zones to answer that. With the Charter cities, if governance is problematic, you don’t know where to put money to make it better. What’s attractive about this idea is that you can deal with all of the issues at once. I will admit that I’m not entranced with the Chinese model. If you compare China to the Japanese model, they put money into where they are trading and investing. The Chinese are putting money into raw materials exporting countries. It is inherently a problem to have a great deal of money, and the Chinese are putting money into the pockets of dictators. There are no real successes of oil countries except for maybe Norway. It is always difficult for oil wealth to be in a country with good governance. I am critical of China for putting all of this money into these bad regimes, but it is hard to argue that it would come out differently if they didn’t give that money to the corrupt people in these countries.