I was able to attend at great seminar at the University of Windsor tonight on Why Development Aid Fails. The speaker was Matt Ryan from Duquesne University in Pennsylvania.

It was sponsored jointly by Engineers Without Borders and the Institute For Liberal Studies (by “liberal” think of the old European tradition of free market classical liberalism, not the Canadian Liberal Party or Left-Wing Liberalism).

Matt spoke of the vast amounts of money being allocated, especially by prosperous Western nations to development aid. He examined the questions of whether this aid is a positive thing and whether this aid fails. He spoke of the goal of spurring economic growth in developing nations, which is at least on the surface a noble goal. We know that very many other aspects of human well-being such as public health correlate very strongly to economic prosperity.

Matt asked whether development aid has spurred on economic growth, and concluded that no, it has not. He presented two illustrative cases, Zimbabwe and Ghana. The U.S. spent $1.5 billion on Zimbabwe between 1980 and 2006. While it is difficult at times to discern the effect of aid, due to the complexity of economic systems and delayed reactions, there is clearly not a demonstrable connection between development aid and increasing GDP.

Matt concluded that aid fails for two basic reasons 1) Information and 2) Incentives.

On the topic of Information, Matt discussed how economic systems attempt to bridge the divide between Resources and People. The bridge is formed by answering the questions What to make? How to make it? Whom to make it for?

Matt then discussed Socialism and Capitalism along these lines to illustrate his point. He showed how the basic problem with socialism is that it pretends that it can manage consumption and production, even though it does not have the required information. And even if it ever did find the right information, conditions are changing all the time. Socialism fails simply because there is no way to aggregate all the knowledge necessary to centrally plan an economy and answer the “What to make? How to make it? Whom to make it for?” questions.

Capitalism on the other hand, allows the management of the economy to lie in the voluntary decisions of the various actors in the economy.  People make voluntary decisions that effectively answer the “What to make? How to make it? Whom to make it for?” questions. Capitalism achieves knowledge dispersion through a free-flowing price system.

Matt then stated that development aid is built on the basic level on the same structures as socialism, namely the presupposition that a developing countries economy can be aided by external central planners who can allegedly understand what is going on enough to make proper economic decisions. But he observed that the information problems are very difficult to get over.

On the topic of Incentives, Matt shared the maxim that “Incentives matter”. People respond to incentives, including money and price, which are big incentives.

On the donor side of incentives, there are Special Interests. Politicians who support foreign aid have motivations, like getting elected again. They are more likely to support aiding countries that are popular within their constituencies. These special interests may not align with the interests of the country being aided. Special Interests are not necessarily mutually exclusive with good intentions, but they are present.

There also are Bureaucracy Effects. The illusion is formed that spending money is the same as success. So, if you have spent X amount of money you have succeeded in helping. He compared it to a company saying “Spending 10 times as much on making our product means therefore it is 10 times as awesome”.

There are also other Political Motivations.  The UK was found to spend the most on its former colonies. The U.S. in official writings is said to spend the most in aid to the Countries that embrace democracy, but this is questionable because from Parade Magazine’s list of the World’s 20 Worst Dictators, the U.S. has given aid to 19.

On the recipient side of incentives, there’s the question that must be considered: Is a lack of growth good for those in power in developing countries? A lack of growth generally means aid will continue to be supplied, so there is an incentive for leaders of these countries to stunt growth. And generally, the aid is delivered right to the people in power.  The checks keep on coming in if growth doesn’t happen. In this environment, will growth happen? Likely not! At this point Matt quoted a person who said something along the lines of: aid transfers money from poor people in rich countries to rich people in poor countries.

There is also the Samaritan’s Dilemma, where the downside of charity can be that it causes dependance, and countries become dependent on aid.

And Special Interests are relevant to the recipient as well. How is money distributed? If it doesn’t get taken by the leaders, which special interest groups does it go to within the country?

We must not, however, ignored some of the strongest but obvious evidence. We must compare the amounts given in aid to the results. There is not a whole lot in the way of results! Also, we must observe that the most successful countries have not received aid.

There are basically no compelling economic reasons for development aid to be successful. Critical information shortcomings exist. The delivery of development aid creates poor incentives for both the donor and recipient. As such, aid’s failure, while tragic, should come as no surprise.

Thus ends my recollection of the talk.