The Aid Trap: A reply

The following post was written by Glenn Hubbard and William Duggan, authors of The Aid Trap, which we reviewed last week. We are delighted that the blog site that Bill Easterly oversees, Aid Watch, has reviewed our book, The Aid Trap. And we are further delighted that on balance the reviewer agrees with what we say in the book. But the reviewer also makes one major objection that we have heard many, many times in the months since the book came out. We have not replied to this objection yet:  Aid Watch is perhaps the best venue for such a reply. So here it is.

First, here is the objection.

The Aid Trap proposes a ‘new Marshall Plan’ for the world’s poorest countries, along the lines of the original Marshall Plan’s support for the local business sector in Europe after World War II.  The Aid Watch reviewer – and many others – point out that poor countries today, especially in Africa, never had the business infrastructure that Europe had before the war.  Rebuilding Europe’s business infrastructure is very different from building a business infrastructure from scratch in poor countries today.  So our proposal for a ‘new Marshall Plan’ won’t work.

Now, here is our reply.

We begin by invoking Bill Easterly’s key distinction between ‘searchers’ (good) and ‘planners’ (bad). Aid planners design and fund projects based on what they want to happen, while aid searchers find something that works and do more of that. But of course, when your search yields something that works, you never apply it wholesale to another situation.  Easterly, correctly, makes that very clear. In this he echoes T.S. Eliot: “Immature poets imitate, mature poets steal.”

In the Aid Trap, we do not propose to ‘imitate’ the Marshall Plan. We propose to ‘steal’ from it. If you see nothing to ‘steal’ from the Marshall Plan for poor countries today, then you have no imagination. If you see a little to steal, then you have a little imagination. If you see a lot to steal, then you have a lot of imagination. That’s why the most creative aid pioneer in modern history, Muhammad Yunus, says this about our book:

The Aid Trap is not about the failure of conventional aid but provides the outline of a solution that can work if taken seriously. It is that rare prescriptive book, and the world must pay attention.

And Bill Easterly says we:

persuasively argue that thriving private businesses are the best hope for the world’s poor and have taken a practical and pragmatic approach to allow business to thrive.

Do you think that Yunus and Easterly do not realize that post-war Europe is different from poor countries today?  Of course they know that.  We have a whole chapter in the book giving some preliminary details on how to adapt the successes of the Marshall Plan to the very different situation today.  It really calls for a whole book devoted just to that.  But these details will fall on deaf ears unless you recognize that development calls for ‘searching’ and then creatively applying what you find to different situations.

We also cite more recent programs that support local business, also worth stealing from.  The ANDE and DCED networks alone provide plenty of worthy examples. But these programs amount to perhaps 5 percent of current aid – scaling them up to 50 percent, which is what poor countries need, calls for some larger coordinating mechanism that operates very differently from the core practices of the major aid agencies. That’s what the Marshall Plan offers.

We would also like to reply to a somewhat less common objection to our book, that the Aid Watch reviewer also makes: institutional reform in poor countries to help their local business sectors will make aid unnecessary, because private loans will supply the necessary capital. So you don’t need a Marshall Plan to channel the aid. Well, here’s the problem: you will never get lasting institutional reform without a middle class that comes from the local business sector. For better or worse, aid is not going away anytime soon:  the best you can do is channel more of it to the right thing – local business – as the original Marshall Plan did. Otherwise, it goes to the wrong things, as Aid Watch correctly and relentlessly reminds us.

--

Related post: Could aid revive business instead of stamping it out?

Could aid revive business instead of stamping it out?

This post is by Claudia Williamson, a post-doctoral fellow at DRI. This is a central question of The Aid Trap, by Columbia professors R. Glen Hubbard and William Duggan. Instead of supporting development, the authors argue, aid creates additional hurdles. While aid ‘crowds out or corrupts the business sector,’ we remain caught in an aid trap because business doesn’t pull at the heartstrings the way charity does.

The first half of the book documents the historical roots of prosperity and poverty. While people in today’s rich countries rose out of poverty as it became easier to do business, bad institutions and policies in poor countries have created perverse business incentives (for example: it takes 361 days and costs seven times the average per capita income to go through the seventeen procedures required for a firm in Mozambique to get the government licenses it needs to operate).  Not only does aid support bad policies and the government that created them, but by decreasing the reliance on taxes for funding aid removes incentives for reform.  Why become a less corrupt, more business-friendly government when aid makes it unnecessary?

Aid stifles the private sector by hindering local entrepreneurship, decreasing reliance on market transactions and trade.  It is often more profitable to work for an aid agency or a NGO than to start a business. Locals get squeezed out of business when an aid agency shows up, so instead of competing with aid agencies most try and join them. Why buy grain from the local farmer when a NGO is giving it away for free?

The second half of the book describes Hubbard and Duggan’s proposed alternative, a modern “Marshall Plan” that would support business directly without channeling money to governments or through NGOs. An independent agency would loan money to local businesses, and these loans would be repaid not to the agency but to those local governments that have agreed to reform the business sector and spend the money on public infrastructure.

The Aid Trap’s focus on private markets and the need for change in the business environment is a laudatory move in the right direction for helping the world’s poor. But the authors’ new Marshall Plan raises some obvious questions

As the authors acknowledge, post-war Europe is very different than most poor countries today. Reconstruction is completely different than building from scratch. Most European countries had a healthy private sector before the war, implying that many of the barriers to business in today’s poor countries were absent. Removing these barriers is part of the new Marshall Plan, but transforming bad institutions into good ones remains elusive. And if such barriers were removed, wouldn’t private financing find it profitable to provide loans as we see in India or China, possibly making the new Marshall Plan unnecessary?

Despite this, the book as a whole is a great description of the current gridlock in the aid debate, and a creative attempt to get out of it.