Australian aid in the Asian century: part three – the arguments against aid

Written by Stephen Howes

In two previous posts (here and here), I have presented the case for sustaining and increasing Australian aid to Asia. Some others see it differently. Hugh White, whom I recently joined in a debate on the subject (podcast here), is one. He has called for cuts in Australian aid to Indonesia. Duncan Graham is another. He asserts (in a 30 May Lowy Interpreter post also in relation to Indonesia) that “Winding back aid is an excellent suggestion and this can probably be done with relative ease and only minor political damage.”

What is the basis for these confident claims? Here, I outline and rebut eight arguments that are commonly put forward against aid to Asia.

The first, and perhaps most commonly made (for example here by Hugh White), is that giving aid inhibits a mature relationship between countries as it encourages an unequal donor-recipient relationship. It is true that the aid relationship can be a difficult one. But a big factor is the quality and attitude of the recipient government. And by and large recipient governments in Asia are half decent. This has created the space for very positive aid relationships to be built. A recent independent review of Australian aid to Indonesia commissioned as part of the Independent Review of Aid Effectiveness that I participated in last year concluded that:

The Government of Indonesia, at the most senior political and bureaucratic levels, considers Australian assistance to be excellent and AusAID to be the donor agency of choice. Unquestionably the Australian aid programme to Indonesia has had a very positive impact on the bilateral relationship between the two countries.

Aid to Asia is a bilateral positive, not a negative. (After all, why are countries such as China increasing their aid if it is so bad for diplomatic relations?) I don’t doubt that we should do more to build our relationship with Asian countries, but the argument that aid stands in the way of a strengthened relationship is contradicted rather than supported by the evidence.

A second argument is that we should spend aid funds on things which would more directly advance our national interest. Hugh White has called for aid to Indonesia to be used for language training in Indonesian for Australians. Greg Sheridan of The Australian has argued that we should use aid funds to pay for more diplomats. These are lazy arguments. Perhaps language training and diplomat hiring are good uses of tax revenue, but why pick on aid to fund them? Why not defence? Or welfare payments? Or industry support? Based on the arguments I provided in the previous two posts, aid is one of the most productive forms of government spending around. Increase it, and argue the case for more spending on other items at the expense of something else.

Another common argument against aid begins by noting that countries in Asia can afford to, and indeed do, spend on X, where X might be their own overseas aid program, or defence or education. Therefore, the argument continues, why should we help them by giving aid? This argument has political salience, but is spurious. Of course governments spend money on a range of activities, some better, some worse. But this says nothing about whether we should provide them with aid.

A fourth and related argument relates to fungibility. It is often argued that aid displaces government spending, so that the only impact of Australian aid for education in Indonesia is that the Indonesian government spends less on education. This is a risk (if the Indonesian government does indeed spend less on education and if they spend the funds on something less desirable), but it is also possible that aid will crowd-in and improve the overall quality of education spending. Overall, there is no reason to expect that in Asia the impacts of aid beyond the actual project funded will be negative rather than positive.

A fifth argument is that aid has become irrelevant in today’s globalised world, as it is now dwarfed by foreign private capital flows or  remittances.  Because other flows are larger than aid does not mean that the latter is useless or irrelevant. The effectiveness of aid needs to be judged on its own merits. And private flows cannot in general be used for the causes that aid supports, such as financing international public goods and the flow of international public sector innovations.

The same reply needs to be given to a related argument (the sixth in my list) which I addressed in my first post. People often argue against aid on the basis that what really matters for development are domestic policies. As I argued previously, this is like saying that because parental love is more important for children than the acquisition of sporting skills (or just about anything else) we shouldn’t bother teaching sport (or perhaps even sending our kids to school).

The seventh argument is that countries in Asia are middle income and therefore no longer need aid. Too many people think that once a country is middle income it has become middle class. This is nonsense. 80% of the Indian population live on $2 or less per day. Acquiring middle-income status just means that the country concerned is a little less poor than it used to be.

As Lant Pritchett has shown, the poverty lines used by rich countries are about $15 a day. By this standard (our standard), just about everyone in both low-income and middle-income countries is poor.

It is true that as countries go from low to middle income they get bigger and stronger. Hugh White likes to say that Indonesia is now richer than Australia, but this misses the point: Indonesia’s economy is bigger than Australia’s, but much poorer. Unless we distinguish between bigger and richer, we will be forced to say that tiny Liechtenstein is poorer than us even though its per capita income is in fact three times as high.

The eighth and final argument is that it is arbitrary to have an aid target (such as 0.5% of GDP). This argument concedes that perhaps we should give some aid but that there is no case for an increase. It is impossible to calculate optimal aid levels (as it is with most areas of government spending) but we can be confident — given need, track-record and opportunity — that popular targets such as 0.5% are far below whatever the optimum is. An increase in Australian aid is long overdue given the long-term neglect of aid in this country, and the current resource boom means we can more than afford it.

Why is there such skepticism about aid? The aid industry itself is partly to blame. For too long aid agencies and advocates have promised more than they can deliver by claiming (implicitly or explicitly) that aid can lift countries out of poverty traps, protect them from communism, restore them from fragile-state status, achieve the MDGs, and make poverty history. It can’t. Giving aid is not like fighting a war where you either win or lose. Rather, like most areas of government intervention, it involves expenditures of varying degrees of effectiveness which try to make a difference.

Not all aid works. On the pages of this blog and elsewhere, I have been critical of particular aspects of the Australian aid program and have argued for reforms to make our aid more effective. But it is a mistake to dismiss aid out of hand. The humanitarian and national interest cases for aid, outlined in the first two posts in this series, provide a powerful basis for increasing aid. By contrast, the arguments used against aid and to call for its reduction are weak.

Stephen Howes is Director of the Development Policy Centre.

image_pdfDownload pdf

Stephen Howes

Stephen Howes is the Director of the Development Policy Centre and a Professor of Economics at the Crawford School.

5 Comments

  • Stephen,

    I enjoyed reading these three posts which provide a clear case for aid. I particularly enjoyed the example of the Indonesian tax payers’ unit. After working for 3 years (2009-2011) in the Asian Development Bank Institute’s capacity building team, I am convinced of the need for capacity building in many Asian countries — even if it is just policy dialogue which helps Asian policy makers be better informed of policy trends in their area. All countries have pro- and anti-reform groups, and it is important to foster the reform process.

    In his comment, Dr DG Blight refers to the loss of cooperative partnerships when Korea transitioned out of aid. This confirms my belief that Asia needs a serious policy analysis and policy dialogue organisation like the OECD.

    Robert Cannon makes some useful points in his comments above. There is a genuine problem in emerging Asia in that gaps between rich and poor are increasing, and corruption and capital flight are enormous, and Asia’s elites seem not to care for their own poor.

  • Hi Robert,

    That’s a very good argument. But the comparison to the US doesn’t really work (why don’t we give aid to the US). Doesn’t work because, as Stephen noted in his post, most of the most acute poverty in most developing countries is an order of magnitude more severe than poverty in the US.

    cheers

    Terence

  • Bob,

    Every country has the capacity to do more to reduce poverty. Because others should do more does nothing to reduce our own obligation. It seems odd to me to say “I’m not going to help you because someone else could or should.” Isn’t that called washing your hands?

    You might want to move away from questions such as how much aid we should give to Asia, but, as you concede, it is not a question the government can avoid. And there are several who think we should give less aid. It’s a valid and important subject to engage in.

    We spend a lot of time arguing about specific aid themes and projects, but it is useful sometimes to step back and address the bigger questions, however difficult they are and however imperfect our answers.

  • To be able to help people in need is nothing wrong. Actually, it is part of our human natures However, when it comes to politics, it is a different story. Unlike churches, politics something puts its selfish thoughts above the justified folks need.

  • Thank you for this illuminating discussion, Stephen.

    I suggest that we might look at the case for aid in different ways. The arguments to assist the poor are compelling but not sufficient. If poverty reduction is a major impetus for aid then we can ask why we aren’t continuing to support the poor in Thailand or Singapore or, for that matter, the poor in the US? One answer is that these nations seem have the capacity to address poverty themselves. The question can also be asked in the case of Indonesia. Here there are large numbers of poor but also a large and growing affluent class of people. In your first blog you noted the success of Australian aid in tax reform that “… resulted in huge increases of revenue to the Indonesian government, much larger than our aid, collected in a relatively clean, non-corrupt way.” Given the large population in Indonesia and presumably a very large number of people with incomes comparable to those in Australia, it seems reasonable to ask if this group is paying its share through taxation for poverty reduction and other public goods? Is it possible that this affluent group is numerically larger than the comparable group in Australia? Are they sharing an equitable responsibility for the financing of the development of their own country?

    The second way in which we need to look at aid is with a sharper focus. I think it is time to move away from big, complex questions such as ‘should we be giving aid to Asia’ towards more manageable and focused questions such as ‘should we be giving aid to Cambodia for education or to PNG for health’? This avoids mixing very different aid needs in the huge and diverse Asian continent.

    It may be more useful to focus more on the need for aid in identified areas such your excellent example of Indonesian taxation, or education, health, or security, and so on. Policy makers do have to deal with the bigger questions of the overall aid program. What I am suggesting is a bottom-up approach that aggregates more specific need in context, the evidence for supporting these needs and lessons learned about meeting such needs in those contexts. These are not arguments against aid, but arguments for aid where it is demonstrably needed, where it can be most effective, and where responsibilities for funding it are shared fairly.

Leave a Comment