An alternative view of foreign aid

The downsizing of the United States Agency for International Development or USAID by President Donald Trump has prompted The Economist to publish several articles on foreign aid. One such article had this headline, “Aid cannot make poor countries rich. For decades, officials have promised to raise economic growth. For decades, they have failed.”

Despite this, the articles still argued that aid to critical areas such as food, health, and education are still justified. This raises the question, “if such aid is so crucial to the people of a recipient country, why does the local government not fund them? Why does it take a foreign government to provide what is so vital to the people of that country?”

We suggest that the answer is in the “fungibility of money.” Investopedia technically defines fungibility as “the ability of a good or asset to be readily interchanged for another of like kind.”

To illustrate. When my son was still studying, he would frequently ask for money to buy books.

As this was a worthy endeavor, I readily complied. Sometimes though my son already had the money to buy the book but had no money to buy a desired toy. Instead of asking for money to buy the toy, which I would most likely deny, he’d ask for money to buy the book which I would most likely grant. He’d use the money I gave him to buy the book to instead buy his desired toy. In effect, I funded the purchase of the toy rather than the book.

Using this principle, cynics have argued that USAID funded the acquisition of an aircraft carrier by the government of India. No, the government did not directly ask USAID to fund the carrier but in a way, USAID did fund the carrier.

There was a time when the American farmer was so productive they produced bumper crop after bumper crop. This caused the price of these commodities to plummet. The US Department of Agriculture stepped in to save the farmers by buying their surplus production. They could, of course, not dispose of these commodities in the open market. Instead under an aid program called the “Food for Peace Program” or PL 480, they donated the commodities — mainly wheat, corn and other agricultural products — to needy countries.

One such needy country at that time was India (now India exports wheat and rice while the Philippines still has to import rice). The Indian government already had the money to buy food for the poor people of India. (They had upcoming elections). With the donated food from USAID, they could now use the money originally intended to buy the food (my son’s book) to buy an aircraft carrier (my son’s toy).

In sum, governments do not submit projects they like (aircraft carriers) to USAID, they submit projects (food, health and education) which USAID likes. Though in the end, through the alchemy of fungibility, what are really funded are the projects the governments like. The result, as reported by The Economist:

“Research has found little link between primary-education aid and output. In 2015 Axel Dreher of Heidelberg University and Steffen Lohmann, then at the University of Göttingen, looked at local economic activity after the building of schools, social housing, and other projects in a range of locations, and found no increase in the amount of electric light, their proxy for economic growth.”

One indication that the aid is fungible is what the government does when aid to a sector is removed. If the government funds the project from other sources, then the aid was fungible.

Thus, this press release from our Department of Education:

“Echoing the position of President Ferdinand R. Marcos, Jr., the Department of Education (DepEd) has reaffirmed its commitment to sustaining key education initiatives despite the temporary suspension of United States Agency for International Development (USAID)-funded projects, totaling $94 million (approximately P4 billion). To mitigate the impact of the suspension, DepEd is implementing a multi-pronged strategy, which includes requesting USAID the proper turnover of project materials to efficiently use project resources, exploring alternative funding sources, and strengthening the capacity of the Curriculum and Teaching Strand to integrate key project interventions into the Department’s existing systems.”

In addition to aid, foreign agencies also offer advice, especially on economic development. Unfortunately, The Economist also had bad news on this front:

“The World Bank produced a postmortem on two decades of development aid, poring over the history of its recipients. The researchers concluded that its grants and loans did not move the needle on growth. In 2019 the IMF reached a similar conclusion. As Charles Kenny of the Center for Global Development, a think-tank, notes: ‘There is no country that has really grown from aid’.”

The Economist further explained, “What lies behind this failure? Aid organizations are often criticized for wasting money on bureaucracy. In reality, they face a more fundamental problem: they have no idea how to encourage economic growth.” And so, with no clear idea of what works, aid agencies usually prescribe a litany of reforms, vainly hoping that some reforms will do the trick. The World Bank and IMF concluded they have not been so lucky.

Another reason was advanced by The Economist: “In 2005 David Dollar and Jakob Svensson, both then of the World Bank, and Dani Rodrik of Harvard University, looked at disbursals tied to political reforms — and could not find a country where they had produced better policy. National leaders were concerned with staying in power; a desire strong enough to warp whatever advice, and however much money, aid bureaucrats provided.”

We suggest a stronger reason, the elite in most countries see reforms as upsetting the status quo where they never had it so good. Thus, they will most likely not adopt the advice of the aid agencies.

To illustrate. A high-ranking Filipino government official and his wife decided to visit their son who was residing and working in the United States of America.

When they arrived at Los Angeles Airport, there was no one to fetch them. Their son was too busy pursuing the American Dream. They had to take a taxi or, even worst, public transportation. In the Philippines, this official never took public transport as his agency generously provided him with several cars with drivers.

Upon arrival at the house of their son, they found there were no kasambahays (house servants) around. And so, they had to help in the preparation of the food, the washing of the dishes, and the making of the beds. They also found that in America, weekends were not days of rest but merely a transition from office work to housework. Again, they had to help doing the laundry, take out the garbage, wash the car, and mow the lawn. In addition to this, they also acted as babysitters to their grandchildren, thus giving their son and daughter-in-law something rare in America, more free time together.

By the way, outside the house, the official and the wife had to strictly follow the rules. In the Philippines, where the official is a prominent citizen, following the rules is merely good manners.

Their “apostolic” (grandparent) work done, they wearily returned to the Philippines.

Upon arrival at the Manila International Airport, they were greeted at the gate and whisked to the VIP Lounge. There, functionaries handled their immigration papers, retrieved their luggage and placed them in the trunk of their car parked outside the VIP Lounge. Formalities over, they were escorted to their car. As they got into the car, their driver informed them that, as is customary, he called the cook to prepare the food and the maid to turn on the air conditioner. Thus, when they arrived home, the food would be warm and the room cool.

They drove to their house in an exclusive subdivision. An enclave with its own security, back-up generators and deep well pumps, it shields them from the infrastructure failures that plague the ordinary Filipino. Upon arriving at the house, they were warmly welcomed by a devoted chorus of kasambahays eager to satisfy their every want and whim.

The next morning, he took a leisurely breakfast on the veranda overlooking the garden carefully tended by his gardener. He finished his breakfast with a cup of coffee to calm himself for the coming meeting with a USAID delegation.

At his office, the USAID Chief of Mission and his delegation arrived. A member of the delegation is an Economics professor from Harvard. His advice is free, courtesy of USAID. To add local color are several eminent Filipino economics professors.

After a blizzard of power point presentations and sage advice from the wise economists, the Chief of Mission gave the closing remarks. He talked directly to this high-ranking Government Official and then delivered the clincher; if the Philippine government followed the advice of USAID, then the Philippines will become a developed country just like the United States of America.

Dr. Victor S. Limlingan is a retired professor of AIM and a fellow of the Foundation for Economic Freedom. He is presently chairman of Cristina Research Foundation, a public policy adviser and Regina Capital Development Corp., a member of the Philippine Stock Exchange.