As a Kiwi I am honour-bound never to admit to envy of Australia. And yet, over the past year, it’s been hard not to feel just a bit envious of your aid programme. While New Zealand ODA continues to struggle through haphazard political decisions, AusAID is the focus of a serious review and considered engagement from politicians.
Andrew Leigh’s speech to the Lowy Institute (reposted on his website) is a case in point. Leigh clearly not only cares about development outcomes, but he’s also aware of the fact that aid is difficult, and that evidence matters. Good aid is cautious and involves ongoing systematic learning. Which might seem obvious, but too often this hasn’t been the case in the past. Ideology and certainty have persistently hampered aid efforts. For this reason, engagement from people such as Dr Leigh has got to be good for Australian aid.
Given all this, it feels churlish to disagree with Dr Leigh. But, the more I think about it, the more one aspect of his Lowy Speech seems mistaken to me. This is his call for Australia to focus its aid on areas where it has ‘comparative advantage’.
The comes from trade theory and, broadly put, is the idea that individuals, states and firms, should focus on what they do best and trade to obtain other items. Leigh uses it in his speech to suggest that Australian aid should either focus on things that the aid programme already does well (his example is work in post conflict societies) or in areas where Australia as a country has particular experience (as examples he gives dry-land agriculture and managing mineral wealth).
At a first glance the argument appeals — why not focus where you think your agency or country has skills? — but it has three major flaws. The first two to do with context, the third with politics.
Context, above all else, ought to guide aid work. The constraints faced by different developing countries vary. Potential solutions vary too – even where the technical problem is similar, domestic political economy and community norms may require different approaches. And as external agents of change, aid agencies inevitably face additional hurdles, needing to work through interlocutors and with limited information. Given this, to be effective, aid needs to focus first and foremost on what’s needed and on what may realistically be achieved in the particular country or region it is being given. Anything else is a distraction.
And this is the first problem with the concept of aid agency comparative advantage: if you let yourself get caught up in thinking about what your country is naturally good at, you’re distracting yourself from what really matters. There’s a risk that, like the proverbial hammer, everywhere you look you’ll start to see nails.
The next problem is that, institutionally and socially, developing countries are distinctly different from their developed world counterparts, so even when their problems appear familiar, it doesn’t follow that developed country experience will necessarily have much to offer by the way of solutions. Take for example the case of mineral wealth, mentioned by Leigh. It’s one thing to set up a mechanism for managing this in a way that maximises social benefits in Australia. But it’s probably going to be another thing altogether in Papua New Guinea, where the political economy is different, the reach of the state less, the importance of informal institutions far greater, and relevant property rights less clearly delineated.
The third problem with focusing aid on donor countries’ comparative advantages is a political one. Once you start to pump a lot of aid through firms and similar entities in your own country (for example in this case, Australian agricultural institutes) you create a domestic lobby, with the risk that this lobby, through its advocacy and influence, may start shaping aid policy in a way that is of primarily benefit to itself. This may sound far-fetched but it is exactly what has happened with US food aid, where the benefits to US farmers from the government buying their surplus crops to distribute as aid are so significant that the farmers have lobbied successfully to keep the programme, despite it being shown to actually be harmful in some ways to recipient countries. ‘Boomerang Aid’ – aid where the primary benefits accrue to donor countries, has been a perennial problem in development, for obvious reasons. Recipients of aid in developing countries have no political clout in donor countries, yet domestic interest groups do. Which means its often much easier for such interest groups to influence aid decisions than it is for the people who really matter. Best, I think, not to inadvertently aid in creating such a problem by getting caught up in thoughts of comparative advantage.
Fortunately, there is another way of giving aid — and an alternative to comparative advantage — which will help maximise the benefits of scarce aid resources. And it’s an approach that that will make sense to an economist au fait with trade theory. This is simply: find out what is needed, and what aid can realistically achieve, and then source the solution from wherever in the world it can be obtained reliably at the best price. Do this, and use the tools of evidence gathering that Dr Leigh rightfully supports, and you’ve maximised the chance of your aid helping the poor.
“Supposing what is needed happens to be something we are no good at providing?”
Then either give our money to a donor who can provide it and let them provide it or, if what’s needed is something aid simply can’t achieve, then do nothing (i.e. don’t give aid to that country) or do something that is less acutely needed but which still helps.
For example: in country X the central issue is governance, yet donors have little traction in improving this so, instead, they provide vaccines, which are still needed, even if they’re not the fundamental development issue.
Hi Sam,
I’s pretty sure I am explaining a shift away — at least from the concept as it is used in Leigh’s speech and in New Zealand aid documents. To re-cap — I have suggested that choosing what type of aid to give to a country based on what we believe our own countries to be good at is not a good idea and that, rather, we should choose based on what is needed and what is likely to actually work. Context, not comparative advantage should drive aid.
What you suggest — letting countries themselves decide, already takes place to a degree through aid partnerships. But, issues of power imbalances remain, and – also, as you rightly note – the issue of representation (who ought actually speak for the poor of country X) is a major one.
“we should choose based on what is needed and what is likely to actually work.”
Supposing what is needed happens to be something we are no good at providing?
This is where the ‘comparative advantage’ argument seems to have some merit. Developed countries should be willing to sometimes admit that they can’t do everything well, offer what they can do well, and let developing country people decide if they want to take up the offer, or go elsewhere if what is on offer doesn’t fit with their needs.
Hi Terence,
You don’t seem to be proposing to move away from the concept of comparative advantage in aid, it’s just (as usual) a matter of who has the power.
If ‘aid recipients’ come to Australia for its expertise in mineral extraction, that’s fine. If donor governments decide developing countries must have Australia’s expertise in mineral extraction, or New Zealand’s ovine veterinary skills, whether they want them or not, then that’s a problem.
The political difficulties lie in persuading donor countries to give up their power in the relationship (which is unlikely) and in finding representatives of ‘aid recipients’ who genuinely represent their interests.
Cheers.
Hi Peter,
Thank you for an excellent, albeit dispiriting comment. Unfortunately, I think your experiences will start to seem all too familiar to New Zealanders over the next few years. Witness the NZ Minister of Foreign Affairs’ current tour of the New Zealand countryside in search of farm based solutions to the problem of Afghanistan (in this instance completely bypassing his aid officials, apparently).
Terence
Another thought-provoking post. The issues you raise are all too familiar to me as a former AusAID official.
“Comparative advantage” was part of the defence used to justify Australia’s tied aid policy. Claims that aid tying led to inefficiency were countered by the argument that Australia always worked in areas where it had a comparative advantage. In my early days in AusAID and then still naïve about the political realities that distorted any efforts to improve the effectiveness of the aid program, I invoked my Economics training to suggest that this argument made no sense – if we were sure that we had a comparative advantage, we could untie the aid program in the sure knowledge that Australian firms would always win contracts. As Matt has already said, let the market show where comparative advantage lies. I was told to shut up – the claim sounded good and helped to avoid too much scrutiny of the case for aid untying.
The issue of relevance of developed country experience was highlighted by Francis Fukuyama in his book “State Building”, in which he drew on the analysis by Pritchett and Woolcott. They described the process of assuming that developing countries could overcome their problems by becoming more like developed countries as “skipping straight to Weber”. AusAID was repeatedly being told this was the answer – for example, by Treasury, who wanted to send experts to sort out the budget and corruption issues in recipient countries by making their systems more like Australia.
A particularly difficult example for me was the genesis of the Centre for Democratic Institutions. This concept emerged from Alexander Downer, who thought that Australia had a comparative advantage in strengthening political governance and should use that to help recipient countries strengthen their democracies by making them more like Australia. As ADG for Policy, I had the task of trying to sound like I was agreeing with the Minister while at the same time ensuring the CDI’s mandate allowed it more flexibility to provide support that reflected the social, cultural, historical and other factors that would make a Westminster-style political system irrelevant to most if not all partner countries.
Finally, the issue of doing what we think we are good at rather than what is actually needed. For “what we think we are good at”, read “what we have plenty of and need to offload”. A case in point is the Nomad, the Australian aircraft developed in the early 70s to try to keep the Government-owned Aircraft Factory afloat. In lieu of genuine commercial orders, Nomads were offloaded on aid recipients whether they needed them or not. Their rusting remains probably still litter the airstrips of Pacific island countries.
Then there was the suggestion perennially cropping up in Ministerial correspondence. How to provide aid and at the same time help the battling Aussie farmers? Easy! Give food aid, or (even more imaginatively), give large numbers of blankets, woven from Aussie wool, to all our poor friends. Just what is needed for Pacific Islanders to keep them warm on those long cold winter nights.
Thanks Matt.
Mea Culpa on the definition.
My only defence is that I’m a PolSci student 🙂
Terence,
Thanks for sharing a thoughtful post on ‘comparative advantage’ in aid. I must admit that the use of the term is a pet hate of mine, but not for the reasons in your blog–it’s because it gets used incorrectly.
Having a comparative advantage is not the same as being the best at something. In fact, a country can be absurdly inefficient at doing something, but so long as it is relatively more efficient at doing that than something else, then it has comparative advantage. This is quite a tricky concept, and one which Samuelson described as one of the few in economics that is both surprising and true. (A much better explanation of comparative advantage can be found here.)
Given that comparative advantage is about opportunity costs rather than ‘best’, identify specific examples is fraught with difficulties when we move from theory to practice. (I’d argue that planners should avoid trying to do this altogether). In Andrew’s examples, it might be possible to assess whether Australia is good at mining and agriculture in aid, but virtually impossible to assess the opportunity cost of that focus.
However while I think that identifying ex ante where a country’s comparative advantage lies is problematic, you’re conclusion ‘find out what is needed, and what aid can realistically achieve, and then source the solution from wherever in the world it can be obtained reliably at the best price’ is much closer how trade theory predicts that comparative advantage arises in practice.
In this regard, I’d agree with Andrew that there does ‘need’ to be more attention on managing mineral booms, for example by considering the Natural Resource Charter.
Conclusion: comparative advantage is important for aid, but if a country wants to find it, then let the market lead it there.