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by William Easterly

  Fig. 23. UNCTAD Explains Poverty

  What makes the UN worse than other aid bureaucracies? Conditions for bureaucratic behavior are even more unfavorable for the UN because an unwieldy General Assembly with “one nation, one vote” runs it. Answerable equally to 191 member states (many of whom are undemocratic), the UN has an especially severe problem of multiple principals and collective responsibility. The multiple principals have political goals such as making sure the UN employs a sufficient number of staff from their country. Perhaps because of this constraint, the UN has been less successful than the World Bank and IMF in attracting high-quality professionals. The voting power of the large group of undemocratic states makes the UN susceptible to coalitions of tyrants. Since the UN does not actually represent anyone in particular, nobody is paying much attention to what it does. (I may have been the first person to have voluntarily read some of the documents I have just quoted.) Except for a few high-profile things that the rich countries want the UN to do, the UN is operating in the attic.

  Making Progress

  This chapter discusses why we aid bureaucrats who are often unable to supply what the poor so desperately need. The analysis points the way to some improvements. Again, extreme humility is in order because of all the efforts to reform aid in the past. My suggestions for improvement are no doubt flawed, but they may be less flawed than those of the status quo. I aim these remarks at the Searchers out there on the ground, as well as the reformers who seek to shift power away from Planners and toward Searchers.

  A big part of the problem probably originates with the rich-country governments who set the mandates of the aid agencies. Dear rich-country funders, please give up your utopian fantasies of transforming the Rest. Don’t reward aid agencies for setting goals that are as impossible as they are politically appealing. Please just ask aid agencies to focus on narrow, solvable problems. For example, let them focus on the health, education, electrification, water problems, and piecemeal policy reforms to promote the private sector—where they have already had some success—and fix some remaining problems such as the refusal of donors to finance operations and maintenance.

  Collective responsibility for Millennium Development Goals or any other goals does not work. Hold aid agencies individually responsible for what their own programs achieve, not for global goals. Letting different agencies specialize in different areas would also lessen the coordination problem.

  To facilitate both specialization and effectiveness, consider ways that aid agencies (including NGOs) could compete to supply development services, so that those who were best at doing a particular something in a particular country would “win the contract” to do that something. Those who failed to deliver something reliably and effectively would lose the contract, and could concentrate on something that they were better at doing.

  How to tell who is doing a good job? Aid agencies need independent evaluation of the effects on the poor of their programs to motivate them to find the things that work. What aid agencies do today is mostly self-evaluation. Even the commendable steps toward independent evaluation taken by the World Bank and IMF still keep the evaluation unit within the organization. Sixty years after the founding of the World Bank and IMF, independent evaluation is long overdue. How about if aid agencies and international organizations put some of their budgets into an escrow account, which would fund independent evaluators (themselves chosen by actors who had no stake in the evaluation outcome) to look at a random sample of their projects and programs?

  Academic researchers could play more of a fruitful role even in the absence of official independent evaluation. Academics could do public service by applying their techniques to evaluate the projects, programs, and approaches taken by aid agencies. They do this already in publications in academic journals, in aid agencies’ own research departments, and in consulting assignments for aid agencies. However, none of these outlets is adequate to the task at the moment. What gets published in academic journals is selected on very good scientific criteria, but journals tend to undervalue research that is unoriginal but relevant to evaluating aid agencies.

  Aid agency research departments and consultants have incentives not to deviate too far from the party line of aid Planners, even though they manage to produce some good research anyway. More independence for aid agency researchers would help. One idea would be for all aid agencies to contribute to a research fund, which would set up an independent research outfit to study aid and development policy.

  Businessmen are also a great untapped resource for aid watching. One can imagine schemes for giving private business a stake in aid outcomes, so that they formed part of the army of watchers for good results. Think of what could happen if an army of independent aid watchers, including those from inside the country receiving the aid, were keeping tabs on the aid agencies.

  Please understand that the foreign aid problem is inherently difficult because of the complexity of development, the weak power of the poor, and the difficulty of getting feedback from beneficiaries and of learning from failure. Throw into the trash can all the comprehensive frameworks, central plans, and worldwide goals. Just respond to each local situation according to what people in that situation need and want.

  The sad part is the poor have had so little power to hold agencies accountable that the aid agencies have not had enough incentive to find out what works and what the poor actually want. The most important suggestion is to search for small improvements, then brutally scrutinize and test whether the poor got what they wanted and were better off, and then repeat the process.

  It hasn’t worked to tell the poor what to do. Just screen aid recipients to select those likely to act in their own interest, give them incentives and opportunities to better their lives, and then trust in their self-reliance, with no further strings attached. Programs like this are already working. The Food for Education program in Bangladesh lets poor families choose whether to keep their daughters in school, making this choice more possible by offering the families food and money to do so. The Progresa program in Mexico (domestically conceived and operated) similarly creates opportunities for the poor by giving cash payments to parents who keep children in school, and gets nutritional supplements to the children.

  There should be much further exploration of mechanisms that give control of aid resources directly to the poor and let them choose what they most want and need. Participation should mean more buying and voting power in the hands of the poor in aid, not strategies or frameworks. This is not easy, but I suspect this is the future of foreign aid.

  The aid agencies need tough love from the critics—who must not abolish them but must pressure them so that aid reaches the poor. This may in itself seem utopian—haven’t we already tried for fifty years to make aid work?

  But progress happens in public policy. The good news about the noisy anti-globalization protesters, the hardworking NGOs, the rock bands and the movie stars, and the rich-country governments’ increased interest in the Rest coming after 9/11 is that the constituency for the poor is growing. It’s time for the rich-country public to insist that aid money actually reach the poor. Isn’t it past time that donors got held accountable for actually fixing the impassable roads that keep Tanzanians from saving the lives of sick children and pregnant women?

  SNAPSHOT: PRIVATE FIRMS HELP THE POOR IN INDIA

  DIARRHEA IS ANOTHER deadly disease often overlooked by foreign well-wishers for the poor. A baby suffering from diarrhea and the dehydration it induces suffers from rapid heartbeat, sunken eye sockets, indentations in the skull, and reduced nutrient supply to tissues and vital organs. If the baby survives, the diarrhea contributes to her malnutrition—the child will be stunted and abnormally thin. Commonly, a baby suffering from diarrhea-induced dehydration goes into shock and dies. Preparing food with unwashed hands spreads the bacteria and viruses that cause diarrhea.

  In 2005, C. K. Prahalad, a University of Michigan Business School professor, wrote a fascinating book, The
Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. He shows how private firms can sometimes find it in their own interest to help solve some of the problems of the poor that are traditionally addressed by aid agencies. The Searchers in a free market do much better than aid agencies in solving specific problems of the poor, although having a profit incentive to do so is not the typical case. Still, Prahalad’s book is a good reminder of what we know from free markets—self-interested behavior can do good things for others.

  Prahalad gives the example of Hindustan Lever Limited (HLL), a subsidiary of the giant multinational Unilever. HLL sold a very simple product, soap, which it realized could find a larger market if it was tied to preventing diarrheal diseases of the poor. Hand washing with soap is critical to preventing the spread of the viruses and bacteria that cause diarrhea. HLL realized that if it could promote increased awareness among the poor of the benefits of antibacterial soap, a product with which HLL dominated the Indian market, it could significantly increase sales.

  Getting people to use soap is not as easy as it sounds. Poor people are not well informed about the science of disease transmission. Most poor people wash their hands only if they are visibly dirty, not when their hands are covered with invisible germs after using the latrine or changing a baby’s diaper. Invisible germs on hands are the main transmission mechanism for diarrhea. HLL had to change behavior.

  To realize this market potential, HLL also had to find ways of gaining the poor’s trust in its health-promoting product. Working with the government, aid agencies, and NGOs, it started educational programs, including a program called Lifebuoy Swasthya Chetna, (Lifebuoy Glowing Health), which sent out two-person teams to show schoolchildren how they could avoid stomach, eye, and wound infections by washing with Lifebuoy soap. The teams enlisted the village doctors to speak to the children’s parents about how hand washing with soap could prevent diarrhea and other health complications. Lifebuoy Swasthya Chetna formed health clubs in the village.

  Sales of HLL’s antibiotic soap did indeed increase, and on its way to profits it also succeeded in persuading villagers to use a product that protected them against disease.

  CHAPTER SIX

  BAILING OUT THE POOR

  The secret isn’t counting the beans; it’s growing more beans.

  ROBERTO GOIZUETA (1931–1997)

  I AM WALKING THROUGH one of the many slums in Addis Ababa. I pass residences made of mud walls and thatched roofs, some with holes in the roofs and walls, set off against more prosperous residences made from concrete blocks. Some residences feature neat flower gardens in front, as if defying demeaning poverty stereotypes that would rule out such touches. A smiling grandmother invites me into her modest dwelling of sticks and mud, offering coffee to the surprise guest, to the delight of a crowd of curious children. Poverty is here, as children in rags are playing in the red dirt beside a stream containing raw sewage. These slum dwellers are not among the 12 percent of Ethiopians with access to healthy sanitation facilities.1 The children seem unusually thin and short for their age, as is to be expected in a country in which about half of all children are malnourished.2 Food production in Ethiopia suffers from soil erosion and periodic drought. Some of the children could be AIDS orphans, as the AIDS crisis in Ethiopia is severe. Only 14 percent of children are immunized against childhood diseases, which no doubt has something to do with why 17 percent of them don’t live to see their fifth birthday.3

  Across town, the minister of finance and economic development of Ethiopia, Sufian Ahmed, is meeting with six men (and one female secretary) from the IMF to plan the future of Ethiopia’s economy. They discuss the government’s revenue and spending. The meeting is part of the IMF’s “Fifth Review Under the Three Year Arrangement with the Poverty Reduction and Growth Facility.” The economy is recovering from a major drought. Tax revenue has been lower than expected, as have external loans. To stay within the limits agreed with the IMF, Ahmed has cut government spending. The IMF staff approve of the spending cuts, although they urge Ahmed to protect “poverty-targeted expenditure.” (It is unclear how they decided what was “poverty-targeted,” since almost any spending that brings any results would lower poverty in such a poor society.) In reaction to the drought, the government is developing a “food security program.” The IMF staff suggests that the government be careful that food security spending doesn’t endanger “macroeconomic stability,.4 although the report encouragingly indicates that otherwise “the staff welcomes the food security program.”

  The IMF specifies mandatory targets for Ethiopia for international foreign exchange reserves, for the net domestic credit of the central bank, for domestic financing of the government deficit, for government arrears on paying its bills, and for government external borrowing. Other agreements of Ahmed with the IMF include reforming the tax system (including computerization of the taxpayer identification number and introduction of the value-added tax); limiting defense spending; limiting the government wage bill; consolidating regional and federal budgets and extrabudgetary accounts; reconciling fiscal and monetary account statistics; letting the market determine the exchange rate; provisioning by commercial banks for overdue loan repayments; privatizing the Commercial and Business Bank (CBB); restructuring the Development Bank of Ethiopia (DBE); restructuring the National Bank of Ethiopia (NBE); increasing the autonomy of the NBE; reforming the Commercial Bank of Ethiopia (CBE) based on an audit by the international firm KPMG and a detailed plan agreed upon with the IMF that specifies numerical performance targets, limits any delinquent loan from CBE to two renewals, and transfers co-financed loans from the CBE to the DBE; liberalizing trade as a preliminary step in the Integrated Framework for Trade Development in the least-developed countries; rewriting the investment code to limit the role of government to electricity transmission, the postal service, and the national airline; tracking debt-relief resources so that they are used for poverty reduction; and improving the compilation of statistics on the balance of payments, monetary indicators, international reserves, and agricultural and industrial production. The government should do all this while consulting with the poor, civil society, nongovernmental organizations, private individuals, and the foreign donors on what it should do to reduce poverty, in the context of the Annual Progress Report (APR) on the PRSP. From January 2001 to November 2003, the minister of finance has benefited from twenty-one separate background papers prepared by the IMF to give him technical advice, on topics ranging from income tax legislation to the interbank foreign exchange market.

  Has the International Monetary Fund been an effective agency to serve the poor in far-flung corners of the globe? The IMF is an interesting case study for testing the following hypotheses: (1) agencies work better with few goals rather than many goals; (2) unaccountable agencies are worse than accountable agencies; (3) top-down Planners suffer from information shortages about reality on the ground. And, indeed, as we will see, the IMF’s effectiveness has benefited from its having fewer goals than other agencies of Western assistance (1), but its effectiveness has suffered a lot from lack of accountability (2) and from the lousy information available to top-down Planners (3).

  The West first set up the IMF to prevent large trade imbalances and unstable currencies in the West. In this initial phase of the IMF’s work, it was very successful. It then shifted toward bailing out countries in the rest of the world. On balance, the IMF has done useful short-term bailouts of poor countries experiencing financial crises, but it has done worse at promoting long-term development. Moreover, things have gotten worse over the past two decades, as the IMF’s mission statement has grown more and more bloated, its conditions more and more numerous, and its interventions more and more intrusive. The IMF has no mechanism that holds it accountable to the poor for acting in their long-term interest or improving their welfare. It places excessive confidence in very shaky statistics on the countries’ problems it seeks to correct. Although it has accomplished many good things, its perf
ormance today resembles more and more the coercive Planners’ dreams of the White Man’s Burden.

  The World’s Most Powerful Creditor

  The International Monetary Fund, headquartered in Washington, D.C., is the West’s most powerful agency for dealing with many poor countries. The IMF supervises poor-country finances. When the governments of poor countries can’t pay their import bills or service their debts to Western creditors, the IMF arrives to straighten things out. The Fund arranges a new schedule of debt repayments that the country can manage. It lends the government short-term money (to be repaid within two to four years) to tide it over its cash squeeze.5 The Fund also negotiates with the government a series of spending cuts or tax increases to enable the government to make the necessary repayments (including of its own loans).

  The IMF has a lot of money. It has $157 billion in resources available to lend, of which $96 billion was actually out on loan in August 2004.6 It gets its money from subscriptions by all of its members (most countries of the world) and then keeps the money rotating among borrowers.

  The IMF’s description of its function stresses the benefits of its activities to poor countries: “A main function of the IMF is to provide loans to countries experiencing balance-of-payments problems so that they can restore conditions for sustainable economic growth. The financial assistance provided by the IMF enables countries to rebuild their international reserves, stabilize their currencies, and continue paying for imports.7