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What Difference Does Private vs. Public Foreign Aid Make? Thinking About Knowledge and Incentives

What Difference Does Private vs. Public Foreign Aid Make? Thinking About Knowledge and Incentives. 2009 Rubin Symposium: Privatization of Development Assistance NYU School of Law December 4-5, 2009 William Easterly NYU Economics and NBER. The knowledge and incentive problems in foreign aid.

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What Difference Does Private vs. Public Foreign Aid Make? Thinking About Knowledge and Incentives

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  1. What Difference Does Private vs. Public Foreign Aid Make? Thinking About Knowledge and Incentives 2009 Rubin Symposium: Privatization of Development Assistance NYU School of Law December 4-5, 2009 William Easterly NYU Economics and NBER

  2. The knowledge and incentive problems in foreign aid • Foreign aid is like buying a Christmas present for someone you have never met, in which you will never hear back whether they liked it (Knowledge Problem) • Missing feedback also creates weak accountability for giving them what they want, compared to other motivations (Incentive Problem) • Plus you must convince someone to finance this present-giving program, who may be aware of knowledge and incentive problems (More Incentive Problems)

  3. The Knowledge Problem • Not enough to know technical solution to a problem (like Vitamin A for malnutrition) or to have a Randomized Trial verifying that “something works”… • …technical solutions do not implement themselves… • …they are implemented by intermediaries with their own knowledge and incentives, and must be accepted by beneficiaries with THEIR own existing technology, knowledge, and incentives.

  4. Classic Lesotho example (James Ferguson) • World Bank report: region of Lesotho had subsistence farmers pursuing techniques unchanged for millennia, so recommends roads so that the farmers could get cash crops to market. • “subsistence farmers” got their income from providing migrant labor to South African mines, integrated with markets since the early 19th century, but the soil in their region was too poor to produce cash crops. • The roads the aid project built, far from having lorries hauling cash crops out of the region for export, turned out to be full of South African lorries bringing cash crops into the district (driving the few cash crop producers out of business).

  5. Incentive problems interact with knowledge problems • With little feedback from project outcomes, and NO political voice for intended beneficiaries, main incentive in an aid organization is just to keep spending money, which is the main indicator monitored by funders and observers. • Example: Congress threatened MCC with budget cuts because of slow disbursements, even though MCC approach required slow disbursements • Incentive to avoid evaluation, because negative results could threaten funding, but then have even less knowledge • Embrace IDEAS on development that suggest LARGE payoff to aid to increase funding, skew evidence accordingly, but then these IDEAS may suggest the WRONG actions

  6. So do private actors have better incentives and knowledge than public actors? • Incentives related to Fund-raising can obviously be different between public and private, as well as between different types of private. • Private agencies are also often judged by amount spent, rather than by outcomes. • With one big exception discussed below, no reason that private actors should have better knowledge than public actors

  7. Advocacy incentives could be quite similar, again depending on type of private actor.Pick which one is private and which public? USAID Gates Foundation

  8. Example of private not being so different than public – the Gates Foundation • Used discredited malaria numbers on several different occasions to claim malaria successes (see our blog Aid Watch) • Appears enamored of discredited development model, in which technical knowledge fixes poverty.

  9. Fund-raising incentives • Could avoid toxic political economy of official aid, which causes both sides to manipulate or suppress useful feedback and evidence. • On the other hand, PR incentives for raising funds from private donors may not be that different from raising funds from taxpayers • Even if private donor uses their own personal funds, most care about their public image, so they may suppress negative feedback in a similar way to public donors. • Corporate-funded philanthropy also has strong PR incentive to promote good images for corporation, which may be a lot cheaper than achieving actual results.

  10. Example of better private knowledge and incentives: migrant remittances • Spending personal funds, and have personal incentive to see family members do well • Personal knowledge of family members • Migration and remittances: “best anti-poverty program ever” (Lant Pritchett)

  11. What Difference Does Private vs. Public Foreign Aid Make? • Not much, by itself; • May matter much less than other distinctions like large vs. small, HQ-based vs. field-based, local vs. foreign • Every public or private actor needs to be analyzed for its own incentives, ideas, and actions.

  12. Effective aid is not about who gives the money, it’s about who, if anyone, has the power to hold the donor accountable for results for the poor.

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