By: Ryan McGuine
Over recent decades, the world has seen dramatic improvements in nearly every measure of wellbeing. The Human Development Index (HDI) is a composite statistic of standard of living that was established in the 1980s by advocates of the Human Development paradigm in response to what they saw as the over-emphasis of economic metrics by the Washington Consensus. The HDI takes into account countries’ life expectancy at birth, expected years of schooling, mean years of schooling, and gross national income (GNI) per capita. Since the United Nations Development Program (UNDP) began using the HDI in 1990, every single country has reached a higher level today, and some of the largest growth in HDI has come in countries that began at the lowest levels. It is necessary to determine the best way to ensure that the trend to rise and there is no shortage of opinions regarding how to do so. Most focus on either short-term assistance or long-term development, but what is needed most is work to integrate the two spheres.
Prior to about a decade ago, the story of foreign aid had mostly been one of smart people in New York or Washington inventing solutions that mathematically fixed observed problems in poor countries. Massive projects that could last years and cost millions were quickly ramped up in an attempt to get poor people to do what westerners determined was best for them. If the project failed to achieve the desired results, common recipients of blame included the lack of will (read: money) on the part of donors, or even the program’s existence for preventing people from seeking their own solutions. In this way, the west funded at least as many botched interventions as successful ones.
One famous failure is Jeffrey Sachs’ Millennium Villages Project (MVP), which featured injecting half a million dollars per year into each participating village based on the idea that poor countries need only an initial jolt of capital to escape the “poverty trap”—that is, people are poor because they were born poor. However, the MVP naïvely considered African community economies as systems that respond predictably to interventions, rather than complex ecosystems with emergent properties that are difficult to anticipate. Most villages looked the same before the jolt as after. Further, and perhaps most importantly, the MVP failed to institute controls to compare villages that received aid to those which did not, so even if the interventions yielded positive results, there could be no way of quantifying the comparative difference to any other community. Another aid blunder is PlayPumps International, water pumps that remove water from wells via playground merry-go-rounds and received endorsements from celebrities including Bill Clinton and Jay Z. It was assumed that children would play and thus make life easier on the women in the village, who are traditionally the ones who collect water. Once again, this project both vastly simplified local conditions with unrealistic assumptions, and quickly scaled up an intervention without proven impacts. It did not take long for children to grow tired of the equipment, and women were left walking in circles, which proved a much more tedious way of retrieving water than the original hand pumps.
Only relatively recently has there been serious work done to discern which interventions actually result in improvements to human development conditions, and which do so for the least cost. One tool that has gained significant traction is the randomized control trial. Utilized by the medical community for years to determine the effectiveness of drugs, in the context of development, they aim to quantify the impact of a particular intervention designed to reduce poverty. The method is simple: divide a given population into two groups using a randomized action like the flip of a coin, the cast of a die, or the blind draw of a name from a hat. One group receives the intervention while the other does not, and at the end of the prescribed time period, the conditions of the two groups are compared. While it is important to keep in mind that the results of each study represent one location at one point in time, the accumulation of ample empirical evidence has contributed to a relatively coherent theory of poverty—how the extremely poor, defined as those earning below the World Bank’s poverty line of $1.90/day, make decisions and what kinds of interventions make them less poor. Much of that evidence is presented in Abhijit Banerjee and Esther Duflo’s book Poor Economics, which seeks not to determine “whether aid is good or bad, but whether particular instances of aid did some good or not.”
However, there is some debate over whether determining the most effective programmatic approaches to reducing poverty is even an important question to answer. Lant Pritchett, a senior fellow at the Center for Global Development and professor at Harvard’s Kennedy School of Government, appeared as a guest for a recent episode of “EconTalk.” During the episode, he argued that investing as much time and resources into determining how to move the poorest of the poor above a discrete level of poverty is a massive academic misallocation. Determining the conditions for countries to adopt development-promoting policies has been shown to produce enormously higher returns than does determining the most effective micro-intervention. Mr. Pritchett uses China, India, and Southeast Asian countries to demonstrate that the largest poverty reductions in recent times have occurred where governments have adopted measures that increased productivity of the whole economy, including the productivity of the poor, while receiving comparatively little in the way of formal aid. These countries simultaneously achieved macroeconomic stability, as well as capital accumulation, efficient allocation, and rapid technological catch-up. This was done by pairing export-oriented industrialization strategies that focused on developing sectors where they had comparative advantages, with minimal, selective interventions to guide resource allocation in a manner that addresses existing market failures.
If essentially none of Asia’s phenomenal economic growth is attributable to interventions aimed at reducing poverty, but the vast majority of the world’s recent poverty reduction has come from Asia’s economic growth, why not use every resource possible towards generating favorable conditions for growth? Chris Blattman, a professor at the University of Chicago’s Harris School of Public Policy, provided one convincing argument in another “EconTalk” episode. According to Blattman, the society we live in has collectively decided that people in rich countries are going to spend a lot of money trying to make the lives of people in poor countries better. The reasons might vary—some feel as though there is a moral imperative to “pay it forward” and help the least among us, while others prefer arguments about bolstering security in strategic regions. Whatever the reasoning though, almost without exception, poverty-reduction programs can be improved on the margins. Continuing to dump money into programs that might help the situation, but probably do not help as much as they could, is not only unfair to the taxpayers of donor countries, but represents a huge missed opportunity to maximize the positive impact of the money.
Prioritizing growth-promotion over aid-provision, or vice versa, is not particularly useful, since the lines between small-scale aid and economic growth efforts are becoming increasingly blurred out of necessity. Short-term aid directed towards the worst-off needs to be carried out in a manner that expressly considers long-term development as well. While aid agencies like the United States Agency for International Development (USAID) and the UK’s Department for International Development (DFID) have indeed become very good at supporting development in benign, stable environments, new challenges are being presented for those trying to mitigate suffering, especially when it comes to unstable and conflict regions. Today, the average refugee spends 17 years away from home, and 59% of refugees live in urban areas rather than established camps. Thus, refugee camps are not the only solution to displaced people. Ensuring that displaced children receive a quality education and that displaced adults are integrated into the labor force is often politically unpopular, but it can prevent “lost generations” of migrants, generate economic benefits for host countries, and potentially reduce the risk of extremism among migrant communities. One impressive example is Jordan’s “special economic zones,” where Jordan offers some Syrian refugees work permits in exchange for investment by European and US firms. There are plenty of issues with Jordan’s program, but it provides a model that others can learn from and improve upon. Further, while seemingly paradoxical, in countries with ongoing UN Peacekeeping missions, the best thing for the citizens might be to reduce the Peacekeeper’s dependence on the UNDP. There are a number of documented cases of UNDP staffers becoming so close with disconcerting national governments in order to advance pet projects that they blocked Peacekeeping responses to human rights violations.
Just as short-term aid needs long-term thinking, long-term development requires short-term thinking. Many of today’s poor countries are on track to achieve significant increases in living standards over the next 15-20 years. However, if the majority of citizens are lifted out of poverty by healthy economic growth, increasing inequality can brew discontent, which is especially of concern where government institutions are weak. As such, measures to ensure that growth is as inclusive as possible, coupled with state building capacity, is crucial to preventing countries from becoming difficult and costly humanitarian issues in the future. Regarding inclusive growth, many developing countries can reduce inequalities of opportunity by removing social barriers to labor participation, building out infrastructure where it limits growth, and designing effective safety nets to reduce the huge amounts of risk faced by the poor (their jobs tend to produce an uncertain income, they tend to be more susceptible to disease, and they tend to be on the wrong side of crime and corruption). Further, it is necessary to ensure that the skills of the labor force match the needs of the job market, beginning with childhood education, and including retraining for displaced workers. Regarding state capacity, recent research suggests that beginning with locally-identified problems and designing situation-specific strategies to address the problems is a better approach than what Mr. Pritchett refers to as “isomorphic mimicry”—establishing institutions that appear on the face to be similar to those established in the west, but do not actually do the same thing.
Of course, there are many external constraints that make it difficult for governments to enact positive changes. For example, while the international community has done much to shift foreign aid away from merely giving people things and more towards the promotion of the private sector, unfair trade relationships can reduce the gains available from trade. Further, private investment and finance provides an alternative to government-to-government official development assistance (ODA). Loans from development finance institutions (DFIs) like the World Bank and International Monetary Fund often come with conditional policies that countries must enact in order to receive the money. It makes sense that DFIs would impose conditions to ensure that loans are effective and are not squandered on corruption, but there is much evidence to suggest that this politically-popular measure often does not have the desired result and may even be detrimental to development outcomes.
Development efforts without a short-term poverty reduction aspect are prone to be disrupted by unrest, while poverty reduction efforts without a long-term development aspect will not be up to the challenge presented by today’s poverty dynamics. Technology and innovation have been the main drivers of prosperity throughout history. It is time to start connecting the aid and development spheres if Human Development’s goal of “enlarging people’s choices to improve the human condition” is to be achieved in a meaningful way. Fortunately, practitioners are not required to start from scratch on these issues—decades of interventions have built a wealth of experience, and knowledge sharing among agencies continues to improve. Unfortunately, donor nations are increasingly hesitant to spend money abroad with so much political discontent at home, while there is little indication that streams of refugees from oft-preventable emergencies will slow.