Aid: wealthier countries giving money to less fortunate ones for the sake of improving people’s wellbeing. What’s not to like? Quite a lot, it turns out. Aid is the subject of academic jeremiads, stern critique from the very wealthy, and a surprising degree of public hostility.
Typically, the main objections to aid take one of three forms. Each is mistaken. Let me explain.
(I’m going to focus on Australia because I know the Australian data best, but everything I’m about to say is also relevant to New Zealand as well as most OECD countries.)
Charity begins at home
This objection runs along the lines of “we have so much need here in Australia, before we spend money overseas we should take care of Australians”. There’s an interesting philosophical debate to be had about how much countries should prioritise the wellbeing of their citizens over people overseas. Real need exists in Australia, yet Australian poverty is not as severe or nearly as widespread as it is in the developing world. (Globally, more than 60 per cent of people live off less each day than could be purchased in the US with $10 in 2011. In Australia, less than 1.5 per cent of the population is this poor. Source here.) Given the severity of global poverty, there’s a strong case help should go where it’s needed most, regardless of borders. Yet a case can also be made that proximity matters – we should help our compatriots first because we share a social contract with them.
In practice though, the philosophical debate is beside the point. The Australian government already devotes almost every penny it spends to taking care of Australians. The chart below shows Australian aid as a share of federal spending. (You can access the data on the Australian Aid Tracker.)
Australian aid as a share of federal spending (2019-20)
In any given year, less than one per cent of Australian federal spending is devoted to aid. Compared to what it spends on itself, Australia devotes barely anything to helping people overseas.
Australia can’t afford it
The next objection is related to the first. It’s usually put as follows: “Australia is deeply in debt, it can’t afford to give aid.” It’s true that Australian government debt levels are rising. But aid’s role in the rise in negligible. The chart below is illustrative. In the 2015-16 financial year, the government made the largest ever cuts to Australia’s aid budget. Over the space of two years aid fell by about 20 per cent – a massive decline, even by international standards. There were some fluctuations in following years, but the cuts weren’t reversed. In the chart below I show two sets of bars. One shows actual government debt as a percentage of GDP. In these bars, all the cumulative savings that came from Australia’s aid cuts are reflected in the measure of debt to GDP. In the other series of bars, I show what would have happened if, instead of cutting aid, Australia had kept nominal aid levels as high as they had been in 2014-15. (The effect of trivial additional interest payments is excluded.)
Peer closely and you can see a slight difference. But, at its greatest, it’s less than half a percentage point. That’s what Australia managed to trim from its debt with the biggest aid cuts ever. Aid is too small to have a material impact on Australia’s financial sustainability. (The chart, along with sources, and my calculations, can be downloaded here.)
Australian government debt, with and without aid cuts
Aid doesn’t work
Sometimes the argument that aid doesn’t work is made very simply. In other instances it is teased out through the complex toolkit of econometrics. When put simply, the argument runs as follows: “We’ve given over $3 trillion in aid since 1970, and people are still desperately poor. Aid doesn’t work.”
The logic has its appeal. After all, $3 trillion is a lot of money ($3 trillion US, is my estimate, based on OECD data, of combined aid flows from OECD donors since 1970). Yet when we take into account the population of the developing world, on average this is less than $15 US per person per year. Compared to need, aid flows have been underwhelming. What’s more, there has been considerable positive change in developing countries. Extreme poverty has fallen since the 1990s. Life expectancy has increased. Aid hasn’t been the source of all the gains, but life is improving in meaningful ways, even in poorer countries. It’s a mistake to conclude progress isn’t being made. It’s also a mistake, therefore, to conclude that aid has failed because the world is making no progress.
The econometric approach to arguing aid doesn’t work, involves – to simplify – comparing changes in the amount of aid that countries have received with changes in development indicators (usually economic growth). At times, studies in this vein have found little or no evidence of aid helping. Yet at present, the best available econometric evidence suggests aid actually helps. Econometrics aside, it’s easy to find examples of aid projects that have helped. Even if you take a pessimistic reading of the econometric evidence of the efficacy of aid as a whole, at times aid clearly helps people.
Australia’s charity already begins at home. It can afford to give. And aid can work. The three big arguments against aid are mistaken. It would be helpful if aid’s current critics acknowledged this. If they did, we could all move onto more fruitful terrain.
In particular, while aid can help, not all aid works equally well. Australia needs more debate about how to make aid as beneficial as possible. If aid’s critics got past boilerplate criticisms, they might play a useful role.
This was a very good article. I was searching for something just like this due to the facts we had to debate why aid is not good to use and more.
Hi Terence,
Your last paragraph is especially important. > In particular, while aid can help, not all aid works equally well. I think it’s important that we’re careful not to conflate “Aid is effective”, with “the aid Australia spends funds on is effective”.
The studies you cite indicate that money spent on large public health programs is money well spent, which is a conclusion that is further substantiated by organisations such as GiveWell [1]. The evidence also shows that in the right circumstances Unconditional Cash Transfers are also highly effective, though this is quite dependant on the implementing organisation.
However, the reality is that the vast majority of DFAT Aid funding does not go towards organisations efficiently implementing public health programs or cash transfers. Rather, it’s spent on UN agencies and development funds such as the ADB, as well as private consultancies and iNGOs. As far as I’m aware, all of these have higher overheads than the top ranked GiveWell charities, and on top of that, less independent evidence of their efficacy, especially on a cost-to-impact basis.
[1] https://www.givewell.org/charities/top-charities
Hi Lucille,
Thank you for a great comment. I agree completely: the last paragraph is the most important. My hope is that, if the noise of the worn-out aid critiques is toned down a little, we (including the public and politicians) might have more productive conversations about aid effectiveness.
On the subject of aid effectiveness, once again you make some interesting points. Although here I disagree with you slightly.
I think that aid effectiveness is a more complex topic than is sometimes understood.
I’ve explained why overheads are a mistaken preoccupation previously.
Also, cash transfers are very popular with some economists, and Give Well has a very heavy tilt towards medical interventions, for a simple reason: these types of work can be assessed with Randomised Control Trials (RCTs). When circumstances are right, I’m a fan of RCTs as a form of evaluation. They can deliver clear cut evidence of efficacy. However, not everything that matters can be studied this way.
For example, DFAT spends a lot of money on governance in Papua New Guinea. Is this a good idea? Possibly not. It may simply be the case that governance almost entirely determined by PNG’s domestic political economy, and that aid really cannot change its quality. However, it’s possible well-given aid can help, at least over the medium term. If aid does manage to help, given how crucial a well-functioning nation state is to human wellbeing and development, it will be aid very well spent. Unfortunately, it’s hard to know aid’s efficacy in this area for certain, because the type of work is not easily evaluated, at least with an RCT. I think governance evaluations can and should be improved, but they will never deliver the clear cut evidence you get from an RCT. So, governance work in PNG is something of a gamble. But given the potential development benefits, I think it’s a gamble worth taking — at least if the work is being undertaken as carefully and intelligently as possible.
Similarly, some NGOs conduct advocacy trying to get the governments of wealthy countries to do more to tackle climate change. It’s the type of work that cannot be evaluated in a manner that will get these NGOs onto Give Well’s ‘top charity’ list. It’s also work that may never payoff. But given the risks of climate change, it’s well worth trying in my view.
Thanks again for a great comment.
Terence
Hi Lucille and Terence,
A recent piece on overheads you might both be interested in:
https://www.latimes.com/opinion/op-ed/la-oe-karlan-charitable-giving-20141218-story.html
I agree with most of your points, as well as Terence’s below. But while it is quite clear that not every single use of aid can be subject to experimental or at least quasi-experimental evaluations, at the same time it is clear that much more Australian aid can and should be, crucially including governance aid, labour mobility, and infrastructure. You would be surprised by the list of things that people have found clever ways to experimentally evaluate over the last 20 years, and some of the surprising results they’ve delivered.
Best,
Ryan
Hi Ryan,
Good comment, as always.
I agree there is considerable scope for greater use of quantitative experimental and quasi experimental methods in evaluating components of governance work (with governance just being one of many examples). My main point of difference would be that — even when there such methods aren’t feasible — the work may well still be worth doing. All significant work should be evaluated independently and rigourously of course, but at times qualitative approaches may be more helpful. And, at times, even with the full tool kit of quant and qual approaches there will still be some uncertainty.
Still – “more and better evaluations” is a slogan I could happily march to.
Terence
Hi Terence, thank you so much for your clear arguments. It strikes directly to the logic and their assumptions with very convincing data and arguments. What do you think about this argument: Such question like “we have so much need here in Australia, before we spend money overseas we should take care of Australians” contains a fundamental misconception that aid is for the interest of the beneficiaries at the expense of the donor/aid provider. This might be wrong, since under “foreign affairs and trade” platform, international aid sometimes benefits the provider more and at the expense of the benficiriaries instead.
Hi Kharisma,
Thank you, that is an excellent point.
I agree with you. Lamentably, not all aid is given with the primary intent of helping recipient countries.
Sometimes the motive is enlightened national interest (if we stop the disease from spreading in recipient A, it will not affect us in the donor country). This type of aid isn’t so bad, as it still has to deliver benefits to the recipient to help the donor.
But there’s also aid given in near-sighted national interest. Aid given simply to advance a donor’s commercial or geostrategic interests.
Sometimes you hear politicians – and the government more generally – justify aid in terms of its benefits to the donor. In my experience, typically these arguments focus on the enlightened national interest. This makes sense as, although enlightened national interest seems to be quite popular with people in donor publics, near-sighted national interest is not (see page 7 here).
As far as I’m concerned, aid given in the near-sighted national interest isn’t aid. It’s frustrating to know some “aid” is given with this motivation. I’m not defending it. I’d rather the money was spent domestically.
Thanks again for a great, thought-provoking, comment.
Terence