Undercover Economist

Want to help? Then make life harder for the aid agencies

A club sandwich, a pair of trousers, a ticket to the movies – in a typical market transaction, I choose and pay for my own desires.

Sometimes, however, I might buy something for someone else, and here trouble begins. If I am buying something – a goat, an HIV prevention course, a bit of paved road – for a complete stranger in a far-off land, the risks that something will go awry are far higher. How am I to know what is needed, where to send it, even whether it has been stolen en route?

This may be why we have aid agencies. Aid agencies are popular symbols of national generosity – witness the Tory commitment to ring-fence the Department for International Development’s budget, even as they speak of inevitable spending cuts elsewhere – and in principle should make better-informed decisions because they are in a position to put expert decision-makers on the ground.

In practice, things are not quite so simple. Aid agencies are government bureaucracies, of course. They are funded by governments and governments are also their typical beneficiaries. Even sympathetic critics tend to agree that aid agencies often spread themselves thinly across countries and sectors. Civil servants in poor countries are constantly tied up in meetings with aid agencies, while the agencies themselves fail to focus on what they do well.

Only a wild optimist would expect a market-style focus on innovation and value for money. So, in a new policy paper for the Center for Global Development, Owen Barder argues that it might be easier to change the rules of the game to encourage real competition than to change behaviour. He may be right.

There is hidden potential in the aid industry’s troubling fragmentation. The only reason industry watchers talk of “fragmentation” rather than “competition” is because different agencies don’t compete with each other in any useful way. High-level officials instead make high-level declarations about how the industry will “harmonise”. These declarations have little apparent effect – and if you imagine a Howard Schultz of Starbucks attempting to “harmonise” the world coffee-bar industry, you can see how idiosyncratic the harmonisation agenda actually is.

Could aid agencies be made to compete? India has already been streamlining aid, telling smaller donors to donate through multilateral agencies or not at all. But India is an unusually large and confident aid recipient. In most cases, countries will take all the aid they can get, regardless of its quality.

It might be more promising to apply competitive pressure from the donor end. Donors should start to ask whether their pet agency is actually well qualified to deliver a particular type of aid to a particular country – or whether the job could be contracted out to a charity, a rival aid agency, or indeed a private company. Aid agencies already hand out cash to charities, but a market mentality would demand more ruthless assessments of results and value for money. More radically, aid recipients could even be given aid “vouchers” redeemable for services provided by a range of charities and aid agencies. (Why give an unwanted present when you could give a voucher?)

All this may seem far-fetched. Perhaps, then, we could start by asking simple questions about where aid comes from, where it goes, how effective it is and how much is lost to administration – or worse. A few people – including Barder, and William Easterly and Tobias Pfutze of New York University – are tackling such questions. The aid industry needs to do a better job of providing the answers.

Also published at ft.com.