The Foreign Aid Cartel

The Foreign Aid Cartel

American foreign aid operates much like a business cartel--and that's not good.

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"The Cartel of Good Intentions" by William Easterly, in Foreign Policy (July–Aug. 2002), 1779 Massachusetts Ave., N.W., Washington, D.C. 20036.

If the goal of foreign aid organizations is to raise the living standards of the world’s poor, why do they make life so difficult for those they are supposed to be helping? Not only do aid organizations require mountains of paperwork—Niger recently spent 15 months preparing a 187-page poverty reduction plan—but they often fail to direct assistance to the areas where it’s needed most.

The problem, argues Easterly, a former World Bank official who is now at the Center for Global Development, is that aid groups such as the World Bank and U.S. Agency for International Development operate like a cartel. Because they collectively possess a monopoly on the "commodity" of aid, they avoid competition for "customers"—poor citizens in developing countries. Like the Organization of the Petroleum Exporting Countries (OPEC) and other cartels, aid organizations place a higher priority on mutual "cooperation" (which barely papers over their fierce bureaucratic rivalries) than on providing the kinds of help developing countries want.

The results defy common sense, says Easterly. Despite all the talk of coordination, bureaucratic jostling ensures that aid organizations "mindlessly duplicate services for the world’s poor. . . . The Tanzanian government churns out more than 2,400 reports annually for its various donors, who send the poor country some 1,000 missions each year." Aid groups often favor showy development projects that please the public and politicians back home but waste precious aid money: health clinics rather than medicines or building maintenance, schools rather than textbooks and paper. ("A recent study . . . estimated that the return on spending on educational instructional materials was up to 14 times higher than the return on spending on physical facilities," Easterly reports.)

Most people in the aid business are hard working and well intentioned, and foreign aid has produced some important advances. In Africa, it has helped reduce infant mortality and increase literacy since 1970. The rate of economic growth, however, has dropped virtually to zero, despite significant infusions of aid. Easterly is critical of the cartel’s perpetual arguments for more money, which are full of sloppy thinking. The World Bank trumpets the claim that a $1 billion boost in aid could lift 284,000 people in the developing world above the poverty level, which is defined as a per capita income of $365 annually. Easterly did the math: If the numbers are correct, the bank actually would be spending $3,521 per person annually.

Easterly suggests several cartel-busting reforms. Aid agencies could set aside money in a common pool, for example, allowing poor nations to draw from it to work on projects (and with aid organizations) of their choosing. Or, poor individuals and communities could be given vouchers to use as they saw fit. That would promote more competition among aid groups and give the poor nations a bigger voice in how aid dollars are spent.

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