So what has this to do with painting school classrooms? Well, painting classrooms, while fun, deprived a local worker of a much-needed job. If educated westerners displace locals from manual labor jobs, then where can those workers possibly compete given the current distribution of skills and capital? How can they earn enough money to make a living, and perhaps send their children to school to acquire greater skills that will make them more competitive when they grow up? Rather than helping out, the wealthy tourists who took up paintbrushes made some worker worse off. Repeat that exercise thousands of times and in thousands of different ways and you can see how feel-good charitable acts can benefit the donor vastly more than it actually benefits the needy.
On a much larger scale, the means of aiding needy countries can be dramatically improved by taking stock of comparative advantage. For instance, agriculture is highly protected from competition in Europe and North America through price supports and subsidies. Agriculture was deliberately excluded from the postwar trade settlement established by the General Agreement on Tariffs and Trade (GATT) and its controversial successor, the World Trade Organization (WTO). This is because rural areas are disproportionately represented in some countries and so farmers tend to be the essential backers of leaders in many European countries. Allowing farmers from developing nations to compete on the basis of comparative advantage would go much further toward promoting economic growth than providing poorly targeted and highly bureaucratized aid. Painting schools provides just one tiny example of how assistance, even when well meaning, undermines development. Bill Easterly’s work shows that rather than this being the exception, it is the norm.
Aid Shakedowns
We started this chapter with an account of Haile Selassie’s shakedown of donors. By now it should be clear that this practice is all too common, and reflects the logic of privately given aid. When private donors provide aid, governments must either strike deals with them so that the government gets its cut—that, after all, is the value of aid to a small-coalition regime—or, in the absence of such deals, they must shakedown well-intentioned private donors. Either way, the government must get its piece of the action or it will make it impossible for donors to deliver assistance. That, for instance, is what the Myanmar government did following the Nargis cyclone in 2008. They insisted on having United Nations aid delivered to the government or barred from the country. Why? Because, as we noted earlier, the military dictatorship wanted to use the aid to enrich itself by selling food on the black market rather than distributing it to those most in need. You might think this was the odd behavior of a horrible regime, atypical of the response of government leaders following natural disasters. Not so! Consider the case of Oxfam relief for Sri Lanka in the wake of the 2004 Indian Ocean tsunami.
Following a massive earthquake on December 26, 2004, a tsunami sent huge waves of water rushing inland, killing over 230,000 people across fourteen nations. Subsequent assistance totaled over $14 billion. Yet even while the goal of aid agencies might have been to relieve suffering, many recipient governments took it as an opportunity to enrich themselves.
To distribute aid, Oxfam shipped twenty-five four-wheel-drive trucks to the region. The Sri Lankan government impounded the trucks and insisted that Oxfam pay a 300 percent import duty. For over a month (the first critical month after the tsunami) the trucks sat idle and people went without food and shelter. Eventually Oxfam paid over $1 million to have its trucks released.
Before giving to a charity many people like to assess how much of their donation goes to help people versus how much is spent on overhead. Oxfam America, for instance, gets three out of four stars from Charity Navigator, an organization that rates charities. Oxfam spends 6 percent of its revenue on administrative expenses and 14 percent on fundraising. The remaining 80 percent is spent on programs, that is, helping people. Unfortunately, 80 cents on the dollar is not the effective amount of help provided. Remember those trucks and the 300 percent import duty—if such cases are the norm (and they usually are) the actual aid benefit may only equate to 20 cents on the dollar. If even as careful a charity as Oxfam is being shaken down, then it makes us wonder what is happening to the rest.
It is virtually impossible to quantify how much aid gets diverted towards the recipient government’s objectives rather than the donor’s intended goals. However, we suspect this figure is huge. The fundamental problem is that recipient governments are not appropriately incentivized to fix problems. Consider the recent case of flooding in Pakistan in 2010. No one can blame the government for the rains, but they are very much accountable for the subsequent devastation. Over 20 million people were affected, 4 million made homeless, and nearly 2,000 died.
Following severe floods in the 1970s, Pakistan set up a Federal Flood Commission. On paper this agency has completed about $900 million worth of dike construction. Of course the reality is very different. Irrigation and flood control are a source of graft, not public policy. And when the dikes are built, they serve the interests of the wealthy; that is, coalition members, not the people. As the floods swept downstream and threatened huge segments of the population, President Zardari, who is nicknamed “Mister 10 percent” for his alleged penchant to take that portion as his cut, acted as a good autocrat should. He ignored the problem, headed off to Europe for a highprofile tour and left his government to sacrifice the many to save the few. The government reinforced dikes to protect essential supporters while allowing flooding to continue in poor areas. Areas with ethnic minorities and large numbers of opposition supporters were particularly likely to flood.21
Richard Holbrooke, the late US Special Representative for Pakistan, described the flood as “an equal opportunity disaster,” but this is far from the truth. Beholden to a few, Pakistani leaders sacrificed the many. They reinforced barrages and dikes to protect the homes and farms of their supporters and ignored the plight of towns and villages. A local official acknowledges,local government figures in the Sindh province conspired with prominent landowners to bolster the riverbank running through their property and others deemed important, at the expense of other regions, which were left vulnerable to flood waters.... It was not just incompetence on the part of the authorities to protect the poorest of the poor from potential floods; it was their deliberate intention that they should suffer if floods were to take place.22
Obviously, from a good governance stance, this behavior makes no sense. But in terms of ruling for one’s own survival, it is an ingenious move. Supporters were reminded of the consequences of being outside the coalition of essential backers. That is good for loyalty. And aid agencies rushed to give money. The UN Secretary General, Ban Ki-Moon described the flooding as the worst he had ever seen and called for massive foreign assistance. Many Pakistanis preferred to directly assist those affected, noting “we don’t donate to the government because we know it’s mainly a way for government officials to make money.”23 The international community was less careful. They gave Pakistan $1.7 billion in the first three months. That equates to about $83 per affected person. Presumably much of the money was siphoned off. It certainly was not used for efficient disaster management.
Pakistan was not the only nation affected by severe floods in 2010. Benin also faced historic floods that covered two thirds of the country. Although the absolute numbers were smaller because Benin is a much smaller country, in proportion to its size the scale of the disaster was very similar to that in Pakistan. Benin received much less assistance, only about one twentieth of the aid per affected person. Yet despite this, its response has been widely praised. But then of course Benin is much more democratic than Pakistan. With a disastrous earthquake and tsunami having struck Japan in 2011 we are confident much the same pattern as in Benin will be repeated. Japan, a democratic country, will receive massive assistance as it should. It will use the money much more wisely than the nations affected by the 2004 tsunami.
It is easy to understand why Zardari did so little to minimize the impact of the flood on
the masses, and, as some have suggested, he may have deliberately made things worse. He had strong financial incentives. As the magnitude of the disaster increased so did the amount of aid. His survival depends upon paying off the few rather than protecting the many. Aid incentivizes autocratic leaders to fail to fix problems. Had Pakistan implemented an effective flood-management program instead of just saying they had, then the people would have been much better off, but Zardari would have had no pretext to further fleece donors.
Similar incentives plague Pakistani assistance with the war on terror. Following the terrorist attacks of 2001, the United States repeatedly sought their assistance in fighting the Taliban and Al Qaeda and in capturing international terrorists—foremost of which has been Osama bin Laden, the leader of Al Qaeda who was believed to be hiding in the tribal regions of Northwestern Pakistan. Through 2008 the United States has paid Pakistan $6.5 billion in economic and military aid for its assistance. If Pakistan had captured bin Laden and prevented the Taliban from operating in northern Pakistan, then the United States would have been very grateful. But it would also no longer have needed to pay Pakistan. As with effective disaster management that limits the number of disaster victims, capturing bin Laden would have ended aid to Pakistan’s leaders, as his death may do now.
To understand how aid works, it is essential to take into account the incentives from the perspective of the leaders who enact policy. Unless aid is restructured to change these incentives, Pakistan has little reason to end insurgency and terrorism. Instead both will be allowed to rumble on and encouraged to expand if the West tries to cut aid. Fortunately, in addition to identifying problematic incentives, our perspective offers the tools to restructure aid to create the incentives to fix problems.
Fixing Aid Policy
The modus operandi of the international community is to give recipient nations money to fix problems. A common argument is that the locals know much better how to address their problems than do far-away donors. That’s probably true, but knowing how to fix local problems and having the will or interest to do so is quite another matter. This policy of giving money to recipients in anticipation of their fixing problems should stop. Instead the United States should escrow money, paying it out only when objectives are achieved.
Consider the problem of capturing Al Qaeda’s former number two, Ayman al-Zawahiri. Suppose the United States thinks $4 billion is a reasonable reward for his capture. Remember: to date the US government has paid $6.5 billion without success. This money could be escrowed, say at a Swiss bank. Upon Zawahiri’s capture, Pakistan could receive a payment of $2 billion, with, say, an additional $1 billion in each of the two subsequent years. The deal could perhaps be done more cheaply if we dispensed with the fiction that the money is for the Pakistani people and paid it directly to Pakistani leaders.
If aid took the form of a reward-in-escrow scheme, then Zardari would need to hand over Zawahiri to receive money. However, unlike the existing incentives, he could deliver without fearing that the money will dry up once his assistance is no longer needed. Zardari might prove unwilling or unable to capture Zawahiri for $4 billion. However, if this is the case then the United States has lost nothing. He would certainly not be more likely to hand him over if all he has to do is pretend to look for Zawahiri to keep the money flowing. That, of course, is the way the current system works.
Undoubtedly there are many operational and procedural problems with implementing an aid-in-escrow scheme. And these problems would be even more difficult in terms of designing escrowed aid relief for disaster management. Yet, it is better to tackle these tricky technical issues within a framework that incentivizes leaders to solve the donor’s problem than to carry on with failed policies.
Nation Building
What, then, are the fundamental incentives for one institution to interfere with the institutions of another? Democracies often claim that they want to democratize other nations. They frequently justify both aid and military intervention on this basis, but the evidence that they actually promote democracy is scant. Those who defend such policies tend to cite Germany and Japan after World War II, but that was sixty or so years ago, and on close examination it took many years before these nations developed (or were permitted to develop) independent foreign policies. The reality is that in most cases democracies don’t want to create democracies.
In 1939, US president Franklin Delano Roosevelt famously remarked about Anastasio Somoza García, a brutal Nicaraguan dictator, that, “He’s a son of a bitch, but at least he’s our son of a bitch.” And herein lies the rub. Dictators are cheap to buy. They deliver policies that democratic leaders and their constituents want, and being beholden to relatively few essential backers, autocrats can be bought cheaply. They can be induced to trade policies the democrat wants for money the autocrat needs. Buying democrats is much more expensive. Almost every US president has argued that he wants to foster democracy in the world. However, the same US presidents have had no problem undermining democratic, or democratizing, regimes when the people of those nations elect leaders to implement policies US voters don’t like.
Undermining democracy was the story behind US opposition to the Congo’s first democratically elected prime minister, Patrice Lumumba. He was elected in June 1960 and he was murdered on January 17, 1961, just half a year later. Lumumba ran into difficulty with Western democracies because of the policies he adopted; not because he usurped power. He spoke out vehemently against the years of Belgian rule over the Congo. In a speech during Congo’s independence celebration less than a week after his election as prime minister, Lumumba announced, “Nous ne sommes plus vos singes [We are no longer your monkeys].”24 In an effort to remove Belgian troops and diplomats from the Congo and to defeat the secessionist movement in Katanga Province led by Moise Tchombe, Lumumba sought Soviet military assistance. That was a big political error. The massive bulk of evidence today points to US and Belgian complicity in Lumumba’s murder. Later the United States would become closely associated with the Congo’s (that is, Zaire’s) Mobutu Sese Seko who, unlike Lumumba, was neither democratic nor pro-Soviet. For a price (totalling billions by the time he fell out of power thirty-two years after his ascent) Mobutu was willing to back US policy. Democratically elected Lumumba was not and that meant he had to go.
Lumumba was not exceptional in his downfall at the hands of democratic leaders. Hawaii’s Queen Liliuokalani was overthrown in 1893. Her sin? She wanted Hawaii and Hawaiians (no doubt including herself) to profit from the exploitation of farming and export opportunities pursued by large American and European firms operating in Hawaii. As these business interests organized to depose her, the United States sent marines ostensibly to maintain peace from a neutral stance, but in fact making it impossible for the Hawaiian monarch to defend herself. And then we ought not to forget the overthrow of democratically elected Juan Bosch in the Dominican Republic at the hands of the American military in 1965. His offense: he liked Fidel Castro. Or Salvador Allende in Chile, Mohammed Mosaddeq in Iran, or US opposition to the democratically elected Hamas government in the Palestinian Authority, and the list goes on. As we write these words, we see this policy of reluctance to promote democracy at work for the US in the Gulf. The United States has a long history of supporting useful autocrats. Indeed, US policy in that part of the world stands as a perfect example of the perils of democratization. The incipient democracies in the Gulf are unlikely to be positively inclined toward US interests, in part because of deep policy differences and in part because we’ve been funding for decades the oppression under which they were governed.
In case after case, the story is the same. Democrats prefer compliant foreign regimes to democratic ones. Democratic interventionists, while proclaiming to be using military force to pursue democratization, have a profound tendency to reduce the degree of democracy in their targets, while increasing policy compliance by easily purchased autocrats.25
Before this chapter you might have been under the impr
ession that democrats were angels compared to their autocratic counterparts. This chapter has tarnished that image and there will be more tarnishing to come. But rather than deplore European and Japanese prime ministers and US presidents on principle, we need to pause for a moment and consider what they are doing and why.
Democrats deliver what the people want. Because they have to stand for election and reelection, democrats are impatient. They have a short time horizon. For them, the long run is the next election, not their country’s performance over the next twenty years. However, as long as we the people want cheap gasoline and an abundance of markets in which to dump agricultural products, and we want that more than we want to see genuine development in poor countries, then our leaders are going to carry out our wishes. If they don’t, why they’ll be replaced with someone who will. That’s what democracy is all about—government of, by, and for the people at home.
As a classroom experience, Bruce likes to ask his students how many of them want to help remove poverty in Nigeria or Mali. This idea produces universal support. And virtually everyone wants the government to provide aid to make it happen. Yet when push comes to shove, enthusiasm fades. For instance, he asks how many students are willing to give up their mobile phone service and have the funds sent to help Nigeria. Hardly a hand goes up. And when he asks about reducing their low-interest government loans that help pay tuition if the money goes to the world’s poor, even fewer hands go up even though he reminds them that they are the world’s incredibly rich “poor” and that they profess to want to help the world’s truly poor. Not at their own expense!
Aid is a tool for buying influence and policy. Unless we the people really value development and are willing to make meaningful sacrifices towards those ends then aid will continue to fail in its stated goals. Democrats are not thuggish brutes. They just want to keep their jobs, and to do so they need to deliver the policies their people want. Despite the idealistic expressions of some, all too many of us prefer cheap oil to real change in West Africa or the Middle East. So we really should not complain too much when our leaders try to deliver what we want. That, after all, is what democracy is about.
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