Aid in Fragile States

There are many reasons to be optimistic about global poverty rates. As The Economist reported, “between 1990 and 2010, [the number of people in poverty] fell by half as a share of the total population in developing countries, from 43% to 21%—a reduction of almost 1 billion people.” As part of its Global Goals, The United Nations is hoping to continue this auspicious trend, announcing its intent to “eradicate extreme poverty for all people, everywhere” (measured as those living on less than $1.25 a day) by 2030.

Despite the UN’s abounding optimism and the laudable courage and initiative of humanitarian workers, there are serious challenges facing the future of foreign aid. In the past, the ideal recipients of foreign aid have been poor countries with stable governments. For example, aid for countries like Bangladesh and Senegal is generally successful because they are governed well enough to reduce fears of mismanagement and waste. But the number of countries like Bangladesh and Senegal is decreasing.

Aid today is most badly needed in fragile states, where governments are dysfunctional and often oppressive. The Economist reported that these countries comprised about a third of the world’s poorest people in 2010. Today, that number has reached about a half. Fragile states are not only a problem because of their greater poverty rates; they are often geo-political rogues that pose serious threats to the stability and security of their regions.

Given these high stakes, many international organizations are shifting their attention towards fragile states. The United Kingdom’s Department for International Development is planning to spend half of its budget on fragile states, while exhorting others to do the same. Perhaps more significantly, the World Bank is planning to double the amount of money it sends to fragile states over the next three years to $14 billion.

Aid today is most badly needed in fragile states, where governments are dysfunctional and often oppressive.

Though this global initiative is needed, it is also highly risky and costly. Donors can harm the already unstable governments of fragile states by setting up competing welfare systems that undermine domestic bureaucrats. This can rupture the social contract between citizens and their government.

Of course, there are good reasons to want to bypass the government of a fragile state. Donors and investors understandably worry that their altruism will be redirected for nefarious reasons if their money is left to a corrupt and brutal government that uses the donations to boost military spending and consolidate power.

And yet, in bypassing the corrupt governments of fragile states, aid efforts can further estrange people from their government, creating a new, perverse dependency on a foreign source. This can rupture the social contract by disincentivizing citizens to pay taxes, further weakening the government. Although, as researcher Robert Blair said in an interview, it is ambiguous if this actually happens, the long-term effects of bypassing the government entirely is something aid workers worry about.

These pernicious effects are particularly true of food aid and goods transfers. Although it may look good in NGO photo albums, direct transfers of goods are costly, wasteful, and likely to crowd out domestic producers, undermining the local economy. Despite the rough consensus that providing aid in “goods in kind” is ultimately harmful because of the “crowding out” effect, Blair points out that context matters: it depends on whether or not there are actually people looking to sell the goods that would be sent as transfers. That is, aid in the form of donated clothing will not crowd out the local economy if there are no domestic businesses looking to sell clothing.  

Most importantly, however, direct transfers are often simply resold to pay for what people actually need. It’s far better just to give people money. There is an emerging consensus that simply providing cash transfers can help reduce poverty and allow people to use the money for what they really need.

But leaders in the fight against poverty in fragile states are looking to go far beyond this. Former UK Prime Minister David Cameron, who recently came to Brown, described his new job as the chair of the LSE-Oxford fragility commission in a Q&A. The commission’s goals include generating “private sector development”, “effective state capacity”, and legitimate government.  

In pursuing the former goal of private sector development, the commission has considered the role of investments in promoting incentives for long lasting engagement from both the supply side and demand side. The rationale behind it is simple: people are likely to stick with their investment until they get some return on it or otherwise realize there’s no hope of getting the investment back.

But there is a dark side to this free market approach. Since investors are more likely to put money in places where they are expecting some return, these investments can often come in the form of concessions in natural resources—for instance through an investment in a rubber tapping company. Though some may argue this still may boost the economies of fragile states, investors are often more self-interested than altruistic.

It’s true that investors will often put their money in a fragile state’s most important sectors to help ensure their investment. Moreover, their work may often accompany additional investments in roads and ports that are necessary to, say, mining ore. Unfortunately, this infrastructure is often entirely unhelpful for the local population and does little to address their real needs. These extortionary practices eliminate any benefit of investment aid.

To safeguard against these issues, the UN will often encourage fragile states to include clauses that force investors to invest in local public goods. As Blair explained, this was true in the case of Liberia, which historically would sign very generous concessions with multinational firms so that they could tap rubber. When China Union came to mine iron, Liberia included a clause forcing the firm to also rehabilitate the schools, build highways, and institute electricity. This seemed like an auspicious and mutually beneficial agreement.

But China Union never fulfilled any of these promises. Although it’s true that the Ebola Crisis and the mine’s poor returns gave China Union reservations, Liberia simply did not have the governmental strength to enforce the agreement. This is a widespread challenge that fragile states will continue to face.

The issues facing investments-based solutions to eliminating poverty in fragile states goes far beyond this. Even NGO’s and the altruistic investors they help cultivate are wary of pouring money into fragile countries. Although the potentials for growth and system of incentives are seemingly good, corruption, mismanagement, and oppressive governance endanger these positive prospects. A series of debilitatingly difficult questions arise from this: What happens if the investor doesn’t get their money back? If productivity benchmarks are set, how would they remain consistent when the economy is in flux? And how would an investment agreement even be enforced?

A small business receiving money from foreign investors could agree to an investment plan contingent on hitting, say, monthly goals and agree to intense supervision. But this would potentially limit the ability of the company to make any radical changes to its business that might be necessary. Moreover, the high risk of investing in businesses in fragile countries implies a higher interest rate, which may deter people from actually looking to investment altogether. For these reasons, the challenges facing investments to fragile states—as an alternative to cash transfers—are great.

Even if cash transfers were increased and used exclusively, it would not solve the structural, institutional failures of fragile states. Aid efforts consequently ought to work both to reduce poverty and empower people while simultaneously strengthening institutions. Investing in governmental agencies themselves can be a helpful approach. By pouring money into public health ministries, donors can ensure that the most basic logistical needs are met. Although it’s uncommon to see foreign donors do this, the UN has attempted these practices with some success.

But such forms of aid can also pose a moral conundrum. After all, many fragile states are run by oppressive, brutal governments that we could not possibly support in good faith. Despite this, global aid efforts would likely benefit from engaging with these regimes more than they do. Simply bypassing them can pose long-term consequences far direr than fears of short-run support.

It’s hard to find a good solution to foreign aid in fragile states without changing the very institutions and means of government. The weak and corrupt regimes that lead these countries pose a tantalizingly hard limit on the ability of international aid to reduce poverty. But it is important to remain optimistic about the effort to reduce poverty in fragile states. International aid efforts often have unfortunate, unintended consequences; however, they are often preferable to more austere alternatives.

And although no solution to combating poverty in fragile states is perfect, new solutions may soon emerge. With such dire consequences of leaving poverty in fragile nations unaddressed, there is no reason not to try.

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