Taking Better Risks with Foreign Aid
*This post was written by USIP Interagency Professional in Residence, Ambassador Robert Loftis
Humanitarian aid workers are well aware of the concept of risk: they constantly put their lives and safety on the line when providing food, shelter and medicine to vulnerable and conflict-affected populations. But our economic assistance programs seem to take exactly the opposite approach, asking for guaranteed results and total accountability in situations that, by definition, are not capable of providing them. Few in America argue that following the mechanistic and central planning models that failed in the 20th century will work in the 21st. Yet that is what we seem to require: an over-emphasis on planning, a government-focused strategy, a reliance on projects and programs, all of which count on direct donor supervision if not involvement, and all justified by the lack of “capacity” in the host society. All may be part of laudable efforts to bring stability to countries emerging from conflict and violence, but models that depend on top-down direction have not created dynamic, jobs-producing economies even in the best of circumstances, and there is little evidence to suggest that such policies will work in conflict-affected countries.
I would argue for a change in approach that accepts more risk in our assistance programs, but that offers the potential for far greater reward. It is an approach that says that we will help you build the institutions and mechanisms necessary for a healthy economy: clear rules, fair dispute resolution mechanisms, free movement of capital, appropriate regulation, and respect for property rights in law and practice, among other things. We will also help create and capitalize financial institutions like banks and credit unions to make loans for business creation and growth. We will help train business people and find ways to tap into under-used assets like remittances. And we will open markets to your products and will help you negotiate regional trade agreements. We expect in return a system where opportunity is open to all, effective anti-corruption efforts, and an acceptance that government is responsible for maintaining an environment friendly to the private sector but cannot control and direct every business decision nor co-opt business for its own use.
I am not naïve: those already in power are better positioned to take advantage of such an approach, and the temptations to direct investments to one’s family and friends are high. But the present system is vulnerable to the same problems, and it is not producing results. Interestingly, with little development aid or government involvement, parts of Somalia are producing a healthy informal economy, with the most cost-effective telecommunications network on the continent. This suggests that many societies have a pent up entrepreneurial spirit and capability that can provide the spark for stability-inducing economic growth.
We are all aware of the dismal probability that a country emerging from conflict or civil war will slide back within five years. A vibrant economy is among the most important factors in preventing such an outcome. Healthy societies have a private sector that is an attractive alternative to politics. Societies in conflict often do not: losing an election or government sinecure is a sentence to poverty or worse.
The international community has an impressive record of mobilizing the resources needed to provide shelter, food and medicines to vulnerable and affected populations, often at great risk and sacrifice to humanitarian aid workers. Quick impact projects designed to win the support of populations and demonstrate the capabilities of the international community and host government may dampen violence in the short term. Both are heavily dependent on donor support and thus cry out for deconfliction and coordination among donors (and hopefully the recipients), for planning, for accountability, and, most importantly, for a strong measure of control by the donors collectively and individually. They, after all, are responsible to their own taxpayers and patrons to see that aid is getting where it is needed and supporting the policies of the donors.
But this centralized approach is antithetical to sustained economic development. We need a strategy that transitions from a donor-centric model to a growth-centric model. It means accepting that some investments will fail, and that there will be winners and losers in the economy (but that losing is neither permanent nor fatal). Building a private sector that stands on its own has to be a priority in peacebuilding.