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by William Easterly

  This example shows that bureaucrats are not automatically ineffective. Markets themselves use bureaucracies. Southwest Airlines, like all corporations, has a corporate bureaucracy that organizes its delivery of travel services to the customers. The difference from aid bureaucracy is that the corporate bureaucrats are accountable to those same customers—if they don’t deliver the goods, they go out of business. The market forces corporate bureaucracies to use Searchers to find out how to deliver services most cheaply for the highest degree of customer satisfaction.

  The tragedy of poverty is that the poorest people in the world have no money or political power to motivate Searchers to address their desperate needs, while the rich can use their money and power through well-developed markets and accountable bureaucracies to address theirs. The foreign aid bureaucracy has never quite gotten it—its central problem is that the poor are orphans: they have no money or political voice to communicate their needs or motivate others to meet those needs.

  To make things even worse, aid bureaucrats have incentives to satisfy the rich countries doing the funding as well as (or instead of) the poor. One oversight in the quest to help the poor was the failure to study the incentives of its appointed helpers. The bureaucratic managers have the incentive to satisfy rich-country vanity with promises of transforming the Rest rather than simply helping poor individuals. Internal bureaucratic incentives also favor grand global schemes over getting the little guy what he wants.

  This is not to say that self-serving incentives determine everything in either markets or bureaucracies. People take pride in doing good work, achieving results, and helping others in both private and public organizations. Many aid agency staffers are hardworking, caring, honest professionals dedicated to helping the poor. The question is whether the incentives work for or against the well-intentioned workers. In private markets, incentives and pride in doing good work reinforce each other. In democratic bureaucracies, political incentives are on the same side as the professional norms of good performance. In aid bureaucracies, unfortunately, the political incentives too often work against the professionals trying to get results.

  Understanding the bureaucratic obstacles to serving the interests of the poor can point the way toward more effectively helping the poor. This chapter is a modest step toward shining a light into some of the bureaucracies’ dark corners, and motivating others to do the same, in order to begin to change incentives for the helpers to deliver results rather than plans. This chapter will suggest some hypotheses as to why aid agency bureaucracy works badly, and then test these hypotheses with as many case study examples as possible. Unfortunately, in this area I have to rely more on case studies and even anecdotes than systematic data, as bureaucratic behavior is harder to quantify than other things this book covers.

  Bottom-up Feedback Again

  The beauty of the market’s focus on the individual is that customer choice gives feedback to suppliers. If flights to Los Angeles on Southwest are fully booked and you attempt to book an additional seat, that’s a signal to Southwest to schedule more flights or raise prices. The wonder of markets is that they reconcile the choices of myriad individuals. A price that clears the market is like a heating thermostat. When the house gets too cold, the thermostat automatically turns on the heat. If the house gets too warm, the thermostat turns off the heat. If you still feel too cold at the current setting of the thermostat, you change it. You decide if you are too cold, and you control the thermostat. The market works in the same way—if there is excess demand, the price goes up; if there is excess supply, the price goes down. Democracy also features feedback. If a citizen or civic lobby observes a problem and calls a public official to get it fixed, it often gets fixed. If the government does something that really pisses off the majority of the population, the voters scream loudly enough that the government changes its behavior.

  To see how unique a well-working feedback system is, consider a mix-up that once happened to me. My companion and I were going to sleep on a cold night under a dual-control blanket. Each of us could control the warmth on our own side of the blanket. We got the controls mixed up so that I was unknowingly controlling her side and she was controlling my side. I felt too warm and turned the control down, which made her side colder, so she turned her control up, which made my side even hotter, which made me turn down my control even more, which made her side even colder, which made her turn her control up…

  The difficulty of foreign aid agencies is that a bureaucrat is controlling the thermostat to the distant blanket of some poor person, who has little ability to communicate whether she is too hot or too cold. The bureaucratic Planners get little or no feedback from the poor. So the poor foreign aid recipients get some things they never wanted, and don’t get things they urgently need. Searchers can do better by getting out in the field, talking to the poor, designing feedback mechanisms such as surveys, and experimenting with what works in local conditions.

  Me Principal, You Agent

  Not that there are easy solutions in foreign aid. The aid problem is inherently difficult. Rich-country politicians control the foreign aid agencies. To make the relationship between rich-country politicians and aid bureaucracies more precise, think of principals and agents (an agent is anyone who acts on behalf of another person, the principal—there is a lot of research in economics about this setup). Think of the rich-country politician as the principal and the aid bureaucrat as the agent. The big problem already noted is that the principal is the rich-country politician and not the real customers, the poor in poor countries. Voters in the rich country and their representatives are the ones who choose the actions of the foreign aid agency. They love the Big Plans, the promises of easy solutions, the utopian dreams, the side benefits for rich-country political or economic interests, all of which hands the aid agency impossible tasks.

  But even if voters and their representatives were more focused on feasible actions to help the poor, problems would remain. In the usual principal-agent setup, the principal cannot execute all of a task himself, so he delegates part of it to an agent, who will perform it on his behalf. For example, a store owner cannot man the cash register all the time, so she hires an employee. But the principal and the agent do not have the same interests. The store owner wants the employee to serve as many customers as energetically as possible to maximize store profits. The employee wants to conserve his energies for after-hours barhopping. The owner and the employee can resolve the incompatible goals by writing a contract that gives the agent the incentive to do what the principal wants. The employee gets rewarded if he serves the customers, and gets fired if he blows them off.

  However, principal-agent contracts do not work if the principal cannot observe performance by the agent. With no ability by the principal to monitor the agent, the agent has no incentive to work hard for the principal’s interests.

  These problems become a nightmare under the Planner’s mind-set, where there is some utopian objective such as ending world poverty. The rich-country politician could judge the aid agency based on the overall poverty outcome—but that assumes a known relationship between foreign aid efforts and poverty reduction. On the contrary, because the poverty outcomes in the Rest depend on many factors besides the bureaucracy, the aid agency’s contribution in the field is invisible.3

  Pity the aid agency for having an almost impossible problem. The agency must indulge the dreams of the rich-country principals of transforming the Rest. The agency must work with local government institutions and local elites who themselves may not care about poverty reduction. There is uncontrollable variability about poverty outcomes, due to such unanticipated factors as political upheavals, droughts, or export price declines. Although rational principals could control for the difficulty of the environment, conditional evaluation requires inside knowledge that only the aid agencies themselves have.

  Again, the invisibility of individual aid agency efforts and outcomes is at the core of the problem. To see how visibility
matters, suppose you are the agent and your principal is the dinner guest you have invited over to your home. Compare the cleanliness of your dining room and your attic. The dining room is observable to your dinner guest. The attic is not. Your dining room is a lot cleaner than your attic. You devote much more effort to cleaning the dining room than to cleaning the attic. In fact, you may even make the attic messier in the process of cleaning the dining room, shoving dining room junk up into the attic. If someone comes up with a utopian plan to transform your attic, nobody will ever know if it succeeded or not. When nobody can tell whether aid agency efforts make a difference, the aid agency managers have only weak incentives to exert effort. This goes back to one of the key predictions of this book: visibility gives more power to Searchers, while invisibility shifts power to Planners.

  The problem with aid is that the poor are mostly invisible. Foreign aid and other development efforts take place in the attic of the rich people’s world. Does the ineffective utopian vision survive in foreign aid because nobody is paying much attention? Let us see if we can make aid perform better by throwing open the attic to public view.

  The Kids Contribute Some Bathroom Humor

  Trying to do everything with foreign aid creates a situation with many principals and many agents. Principal-agent theory says that multiple principals (many rich-country governments and issue lobbies) weaken the incentives for the agent (the international agency). The messianic urge of the West to solve all of the Rest’s problems creates multitudinous objectives for the aid agency. Each principal (say, each issue lobby) influences the agent to pursue its objectives and neglect the other principals’ objectives; together, this weakens incentives for the agent to achieve any one objective.4 Anyone with more than one boss knows this. Whenever one boss complains about your halfhearted performance, you make the excuse that you were working for the other boss.

  The solution to this particular problem is to have fewer objectives. If the aid business were not so beguiled by utopian visions, it could address a more realistic set of problems for which it had evidence of a workable solution. A further step would be to have each aid agency specialize more in some subset of these workable solutions.

  Foreign aid is also complicated by having many agents—many different aid agencies who answer to different bosses. Operating in the Bolivian mountains are the International Monetary Fund, the World Bank, the Inter-American Development Bank, USAID, the U.S. Drug Enforcement Administration, the UK Department for International Development (DFID), just about every other rich country’s aid agency, multiple NGOs, and Bono. None of the agencies is responsible for a particular outcome, and the effects of their individual efforts are unobservable. They jointly affect what happens to economic development in Bolivia. When something goes wrong in Bolivia, such as the economic and political crisis in 1999–2005, after years of effort by these agencies, which one is to blame? We don’t know, so no one agency is accountable. This weakens the incentive of agencies to behave.

  Consider the following analogy, inspired by a discussion with my kids that drew upon their deep reserve of bathroom humor. Suppose a child is uncouth. When he is on a school elevator that contains only one other child, should he suppress flatulence? The answer is yes, to avoid extreme disapproval from the other child. But now suppose he is on a crowded elevator. The incentive to suppress, as my kids analyze this sensitive subject, is not as strong, since the other children on the elevator won’t know whom to blame.

  A dysfunctional bureaucracy is an agency or group of agencies where no one is to blame: “that’s not my department.” Principals don’t know whom to hold accountable when something goes wrong. The problem is more severe the more general the objective, and thus the more agents that could have contributed to the outcome.

  This is the flaw in exercises in international cooperation such as the Millennium Development Goals. All the rich-country governments and international aid agencies are supposed to work together to achieve the MDGs. So when the goals are not attained, no one agent can be held accountable. This weakens the incentive of any one agent to break its neck to reach the goals. Collective responsibility for goals doesn’t work for the same reason that collective ownership of farmland in China didn’t work.

  Yet going along with collective responsibility is an optimal strategy for individual aid agencies to protect themselves from the hostile political environment facing foreign aid. With success on the big goals of foreign aid so dependent on many other factors besides aid agency effort, it is understandable that aid agencies want to share the blame with as many other agencies as possible if something goes wrong.

  The free market in rich countries solves the problem of many principals and many agents. There are many firms (agents) supplying goods to many consumers (principals). A decentralized search by both firms and consumers through the free market creates a number of matches. Each match creates a temporary principal-agent relationship between the consumer and the firm. If the firm’s product is defective, the consumer knows whom to blame and can ask for his money back. The firm thus will have an incentive not to make a bad product. With nothing analogous to the marketplace in foreign aid, the many principals don’t know from which of the many agents to demand their money back.

  As the previous chapter notes, bureaucracy works better—though, God knows, far from perfectly—in countries with governments democratically accountable to their citizens. The analogue to market feedback in democracy is voter feedback. If the citizens don’t get results from government bureaucracy, they complain to politicians who depend on the citizens’ votes. The politicians (principals) try to design bureaucracies (agents) with incentives to deliver results to the voters. In rich-country democracies, bureaucracies are more likely to be assigned a simple, doable task (Takoma Park Public Works, U.S. Government Veterans Affairs, the State Highway Department, Social Security) rather than visionary ambitions. Politicians will blame bureaucracies (and voters will blame politicians) if they fail to deliver results (potholes fixed, veterans’ benefits delivered, new roads built, retirement checks issued).

  To Repair a Pothole

  Now consider a poor person in the countryside of Tanzania who wants to get a pothole repaired in front of his house. As we saw in the beginning of this chapter, Tanzanians have not enjoyed good roads. In contrast to the ease with which I got my pothole fixed in Takoma Park, the poor Tanzanian has no way of getting anyone to act in his behalf. The Tanzanian government looks to foreign aid for financing of public services. This poor person somehow communicates his desires to “civil society representatives” and/or nongovernmental organizations (NGOs), who articulate his needs through the government of Tanzania to the international donors. The national government solicits a “poverty reduction support credit” (PRSC) from the World Bank (also known as the International Bank for Reconstruction and Development, or IBRD) and a Poverty Reduction and Growth Facility (PRGF) from the International Monetary Fund (IMF).

  To get loans from the IMF and the World Bank, the government must complete a satisfactory Poverty Reduction Strategy Paper (PRSP), in consultation with civil society, NGOs, and other donors and creditors. Although they do advocate free markets, the IMF and World Bank show a curious affinity for the national Planners who will create a Poverty Reduction Strategy Paper.

  The World Bank then follows a series of internal steps to approve a PRSC, including preparation of a Country Assistance Strategy (CAS), a pre-appraisal mission, an appraisal mission, negotiations, and board approval, all in accordance with the Comprehensive Development Framework (CDF), Operational Directive (OD) 8.60, Operational Policy (OP) 4.01, and Interim PRSC Guidelines. The government also seeks qualification for the Enhanced Heavily Indebted Poor Country (Enhanced HIPC) Debt Initiative so that the new loan doesn’t simply go to service old loans. The creditors and the government conduct a debt-sustainability analysis (DSA). The HIPC, PRSC, and PRGF require numerous reform conditions, such as participation of the poor in designing projects, pov
erty-reducing government expenditure monitored through annual “public expenditure reviews” (PERs), fiscal deficit targets, revenue-mobilization targets, and structural reforms such as implementation of a Financial Information Management System (FIMS) in the government, financial sector reform in line with the Basel standards and the eleven areas of International Standards and Codes recommended by the IMF and World Bank, control of money laundering, and privatization, lowering trade barriers in ways governed by the World Trade Organization (WTO), perhaps by applying the Integrated Framework for Trade-Related Technical Assistance to Least Developed Countries. The PRSP plan may or may not include money that could finance road repair for this poor person. The amount of money for road maintenance will depend on a prioritization of various needs for expenditure in a multi-year “medium-term expenditure framework” (MTEF).

  Meanwhile, if beleaguered Tanzanian government officials have any time left, the PRSP Sourcebook also suggests that they cost out all the various ways the government is making progress toward the Millennium Development Goals for poverty, hunger, infant and maternal mortality, primary education, clean water, contraceptive use, AIDS, gender equality, and the environment. Meanwhile, other international bodies will review the Tanzanian PRSP, such as the United Nations Development Program (UNDP), the African Development Bank (AfDB), the United Nations Conference on Trade and Development (UNCTAD), the Food and Agriculture Organization (FAO), the World Trade Organization (WTO), the World Health Organization (WHO), the International Labour Organization (ILO), the European Union (EU), the United Nations Children’s Fund (UNICEF), as well as NGOs and the national aid agencies such as those from Austria, Belgium, Canada, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, Norway, Spain, Sweden, Switzerland, United Kingdom (DFID), and the United States (USAID). If IBRD, IMF, UNDP, FAO, WTO, EU, WHO, AfDB, DFID, and USAID approve the PRSP and release new funds to the national government, then the government will allocate the money in accordance with the MTEF, PER, CDF, PRGF, PRSC, and PRSP, after which the money will pass through the provincial governments and the district governments, and the district government may or may not repair the pothole in front of the poor person’s house.