'The Donors’ Dilemma' - Aid as Disruption

This column by Shanta Devarajan is part of Global Policy’s e-book, ‘The Donors’ Dilemma: Emergence, Convergence and the Future of Aid’, edited by Andy Sumner. Contributions from academics and practitioners will be serialised on Global Policy until the e-book’s release in the first quarter of 2014. Find out more here or join the debate on Twitter #GPfutureofaid.

The problem that aid is supposed to solve—development—is turning out to be much more complicated and difficult than we originally thought. Despite a decade and a half of 5 percent GDP growth, Sub-Saharan Africa (hereafter “Africa”) has still to achieve structural transformation: manufacturing’s share of GDP has hardly changed. South Asia in general and India in particular has enjoyed rapid economic growth for two decades, but the subcontinent has some of the worst social indicators, such as child under-nutrition, in the world. Critical to lifting people out of poverty, agricultural productivity in both regions has been growing slowly. Finally, the countries of North Africa had been experiencing comparable growth rates, and in some cases low and declining levels of inequality. Yet Egypt, Tunisia and Libya saw major, popular revolutions in 2011 whose aftermath has created political turmoil and economic decline.

The proximate causes of these difficulties are a lack of resources or misguided policies (or both). Africa’s slow manufacturing growth is linked to the continent’s massive infrastructure deficit. The revolutions in North Africa were at least partly due to the lack of private-sector jobs which, in turn, is attributed to industrial policies that stifled dynamic growth. The paucity of public resources going to agriculture is often blamed for that sector’s anemic productivity growth. Although most children in Africa and South Asia attend primary school, their learning is shockingly poor. Less than half the fifth graders in public schools in India, Tanzania, Kenya or Uganda can read at the third-grade level. One reason could be that teachers are absent 20-30 percent of the time.

If these problems could be solved by resources and policy reforms, then today’s aid—which is a combination of financial transfers and policy advice—would be ideally suited to address them. Unfortunately, the underlying cause of the difficulties is politics. And the reason they persist is that they are in a political equilibrium:

• High transport costs in Africa are due not to poor-quality roads (vehicle operating costs are comparable to those in France) but to high prices charged by trucking companies, who enjoy monopoly power thanks to regulations that prohibit entry into the trucking industry. In one country, the President’s brother owns the trucking company, so prospects for deregulation there are grim.

• Invoking the experience of East Asian countries, governments selectively protect certain industries to achieve “structural transformation”. But instead of picking winners, they pick family and friends. The 122 firms associated with former President Ben Ali’s family in Tunisia, while producing 3.2 percent of output, earned 21.3 percent of net profits in the economy. The sectors in which these firms operated received the most favorable regulatory treatment. Worse still, some of these sectors produced non-tradable inputs (such as transport and telecommunications), whose inflated prices undermined competitiveness (and job creation) in Tunisia’s tradable sector.

• To promote agriculture, several countries subsidize fertilizer, sometimes to the tune of several percentage points of GDP, only to find that it fails to reach poor farmers. Some governments have tried to use the market to allocate fertilizer, by giving farmers vouchers that they can redeem with private sellers. A scheme in Tanzania found that 60 percent of the vouchers went to households of elected officials.

• In many countries, teachers run the political campaigns of local politicians, in return for which they are given jobs from which they can be absent. The candidate gets elected and re-elected, and teachers continue to be absent. The equilibrium has no intrinsic force for change, especially if, as in Uttar Pradesh, India, 17 percent of the legislature are teachers.

If aid is to help solve the problems of development, then it must help disrupt these equilibria.

Money alone is unlikely to dislodge the equilibrium. In fact, it may increase the rents (building roads enhances trucking profits without lowering prices). Even money conditioned on policy reforms may not do the trick. For if there is a political benefit to the distortion—be it a fertilizer subsidy or protective tariff—why would a politician agree to remove it, even for some financial assistance? As one politician said to me, “If you have a choice between a $100 million loan and winning the next election, which would you choose?”

Perhaps undertaking a study of the costs of resource misallocation from industrial policy, or the beneficiaries of fertilizer subsidies, or the extent of teacher absenteeism, will convince the government to reform. But if the distortion is a political equilibrium, with people in government, including politicians, benefiting from it, what is the incentive for government to follow the recommendations of the study and upset the equilibrium?

The only way these equilibria will shift is if the incentives facing politicians change. That will happen only if politicians perceive that there is a shift in public opinion, which could be reflected in future elections or protests in the street. Public opinion may shift if the public is better informed about how much they are gaining and losing from current policies. So there is a role for aid as knowledge transfer, but it should be knowledge to inform the public—not just the government—about the evidence, so that they can bring pressure to bear on politicians and, possibly, move to a new equilibrium.

This approach to knowledge transfer is not innocent. It may involve undertaking studies that the government opposes. But a case can be (and has been) made that if the purpose of the study is to collect evidence on an important policy problem, it should be undertaken despite a government’s objection. This approach is also not easy. Disseminating the study to a group of scholars in the capital city is not enough. There should be ways of getting the message and the findings to poor people in rural areas. After all, the study is about their lives.

If aid is to help solve the problem of development, it must be disruptive. If it isn’t, we risk leaving poor people stuck in the low-level political equilibrium they have been caught in for decades.

Shanta Devarajan is the Chief Economist, Middle East and North Africa Region, World Bank. The views expressed are his own and not necessarily those of the World Bank.