Market for Aid

The New Aid Environment
Thorsteinn Hjalmar Gestsson
AidMarket 2007

The concept ‘aid’ has a positive connotation and may be interpreted as any form of non-coerced assistance. The action aims to advance the status or work of those receiving assistance. The action is not entirely egocentric, but does often feel gratifying and rewarding. In addition to the instant gratification, one might assume that the assistance would be reciprocated at some time in the future so as to advance one’s own status or work. Within a small community, this assumption may arise as a strong incentive for action, but when acting to preserve or promote the global-commons it may not emerge at all. People rarely have sufficient incentives to act to preserve the global-commons because they can themselves only capture asmall part of the reward for doing so, and those rewards will accrue only if others do the same. The intrinsic difficulty of collective responsibility arises because Man is egocentric by nature and burdened by shortsighted incentives for action; this intrinsic difficulty restricts the effectiveness of our actions when addressing issues such as global warming or global poverty and is indicative of the core problems pertaining to the international aid environment.

Today, extreme poverty is the most widespread form of ‘unfreedom’ through which people are denied the dignity of basic human rights. The current aid environment, established for the purpose of securing and promoting freedom, is harshly criticized for several reasons. Aid administration is riddled with political corruption and bloated bureaucracies; the disbursement of aid is anything but altruistic and government officials are able to employ aid as a political tool to advance domestic interest—at the cost of the world’s poor.  In some cases, government aid has been the cause of economic regression and been counter-productive to the objective of democratization. Compared to national governments, the private sector utilizes funds more efficiently and works better as a mechanism for economic growth. Although the private sector provides more efficient services, it still operates in the same aid environment, facing the problems of coordination and high costs, which is limiting the sector’s growth potential.

The processes that shape the aid environment—the approaches to development—are inherently problematic. The existing incentive structure does not encourage good performance or efficiency. The system—if you can call it that—is in a desperate need of an overhauling transformation because of the contradicting incentives and objectives that are doomed to result in a coordination problem. This problem, in turn, is making the effort to improve aid effectiveness more difficult. On top of these inherent problems, the autocatalytic progression of globalization is pressing for unification and universal values; that of technology is making us more capable of doing so. The enabling technology will empower the transformation and, given a purposeful design, establish more constructive incentives. This essay will discuss particular sectors and problems in light of three themes: the intrinsic difficulty of collective responsibility, the inherently flawed incentive structure shaping the current system, and how information technology is enabling us to transform to a new, more efficient, aid environment.


Trapping the Poor

Sachs et al (2004) argues in favor of a massive increase (a big push) in foreign aid so that poor countries may escape from a supposed ‘poverty trap.’ The study claims that this can be enforced through “improved monitoring of budget processes and expenditures, perhaps with the help of local NGOs.” In short, it claims that those nations in need of assistance should be flooded with more funds, but only after improving donor practices and the ability of recipient nations to absorb aid. Giving aid is good. More money for aid is better; and since the donor merely experiences the instant gratification from the action of providing aid, few really concern themselves with how it is spent. Sachs, despite acknowledging the persisting flaws, called for doubling the amount of aid assistance.

Djankov, Montalvo and Reynal-Querol (2006) provide empirical evidence that a sudden windfall of resources—in the form of foreign aid and rents from oil—damage the political institutions of recipient nations by reducing the checks and balances in democratic governments. They claim, a nation’s dependence on aid can be as damaging to democratic rules as a dependence on natural resources, such as oil. In the absence of good institutions, resources tend to flow towards those who have more power.

William Easterly’s “White Man’s Burden” (2006) effectively concludes that there is no such thing as a ‘poverty trap.’ He finds that “when we control both for initial poverty and for bad government, it is bad government that explains the slower growth… The recent stagnation of the poorest countries appears to have more to do with awful government than with a poverty trap.” Incidentally, in 2002 the world’s 25 most undemocratic government rulers received a sum of $9 billion in foreign aid. Similarly the 25 most corrupt countries got $9.4 billion. Easterly claims that, “the evidence suggests dropping the obsession with always working through the government.”

The idea that nations are unable to experience economic growth because they are ‘trapped’ victimizes the poor and may help with fundraising, but the proposed ‘big push’ must not determine the course of action. Whatever the arbitrary total amount of aid contributions, it should not be doubled, as has been suggested, because that increase would not translate to economic growth. It would likely halt growth and democratization by enriching corrupt government officials. In fact, according to the European Community, the total value of stolen assets in individual foreign accounts is equivalent to half of Africa’s outstanding debt.

Forcing the Poor

In response to this squandering, donor nations have ineffectively been trying to enforce ‘good behavior’ and prevent rent-seeking—the manipulation of the economic environment as means to profit—by providing aid and loans under certain conditions. These conditions for reform or for tied purchase restraints are enforced top-down by outside donor governments. The conditionality principle is an undemocratic approach to development that often promotes the interests of donor nations. The practice of conditionality has been criticized for taking up too much of the recipient’s time and making them more responsive, and accountable, to the outside donor than their own citizens. Moreover, after donor nations began forgiving the debt of recipient nations, the threat of a punishment if the conditions are not met has lost all credibility. With a few exceptions, the practice of negative-reinforcement only works when the appropriate authority asserts it.

The fact is that there is an overwhelming need for funds in impoverished nations. The small amount of aid supplied does not come close to sufficiently satisfying the demand, let alone the need. Because of this desperate need for aid assistance, recipient governments are often giving into imposed conditions that may not serve their nation’s best interests. For example, Real Aid (2006): “Eighty-six cents in every dollar of American aid is phantom aid, largely because it is so heavily tied to the purchase of US goods and services, and because it is so badly targeted at poor countries.” In an aid environment where national powers seek their own desired ends, aid is delivered without much oversight, without genuine interest in evaluating developmental impact, and with limited disclosure—fostering rent-seeking and political corruption.


Not a Gesture of Charity, But an Act of Justice

With the words of Nelson Mandela, I insist, “overcoming poverty is not a gesture of charity. It is an act of justice. It is the protection of a fundamental Human Right, the right to dignity and a decent life. While poverty persists, there is no true freedom.” The extensive debate on ‘freedom’ has pragmatically arrived at basic principles. At the core, of course, is  the principle that one has the right to life; and to live, all of us depend on nurturing, sustenance and security; these are prescribed to us as the basic rights of Man. Henry Shue, a distinguished professor of international relations argues: “when a right is genuinely basic, any attempt to enjoy any other right by sacrificing the basic right would be quite literally self-defeating, cutting the ground from beneath itself.” Accordingly, rights are basic in the sense that acquiring them is essential to the enjoyment of all additional rights—without them there is no freedom.

The United Nations (1945) was created in the aftermath of WWII so as to promote international peace, security, economic development and social justice. These objectives emanate from the idea of freedom and, by extension, that of basic human rights. The Universal Declaration of Human Rights (1948) acknowledges that all human beings have inalienable rights and that these rights are indispensable to one’s dignity as well as to the development of one’s potentials. Man is born into a world that is free to us by choice; it is in the act of choosing that we exercise freedom. However, one does not choose the environment or the culture within which one develops; one does not choose the availability of sustenance or security. This understanding prescribes the principle objectives of the United Nations. The aid system was established with the purposeful objective to promote and secure basic human rights for those who have no choice.

The Millennium Declaration included 189 nations; they declared: “We are committed to making the right to development a reality for everyone and to freeing the entire human race from want.” However, the rhetoric and demagoguery employed by national governments does not translate as a valued incentive for action. In the 21st century, for the sake of national diplomatic strategy, the overall approach to foreign aid has been inextricably bound with a nation’s domestic policy. Representatives of individual nations do not share incentives for actions with the global-community because the aim of wealthy nations is to preserve the influential power they have over international affairs. For example, now that the State Department has gained more control over the allocation of U.S. foreign assistance, the ‘aid’ provided has become increasingly militarized and tied to the purchase of U.S products and services.

Positively Reinforcing Democratization

In attempt to unify Man and bring about global peace, it is of vital importance that we adhere to universal values and rights—that which connects us all and everyone is entitled to. The autocatalytic progression of globalization
started with the idea of universal human rights. Globalization empowers multilateral organizations and, in turn, forces individual nations to relinquish some of their control over international affairs for the sake of a global-community. Today, the decision-making power possessed by individual nations within the aid environment has given politicians the opportunity to manipulate the language of universal human rights as a means to justify their pursuit of personal or domestic gain. To improve the efficacy of the global-effort to promote and secure universal values of freedom, it is imperative to redefine the role played by national governments in the aid environment.

Despite the fact that many national governments have promised to commit 0.7% of GNI to relieve suffering and secure the enjoyment of basic human rights, no one is able to hold them accountable for not living up to their word. To benefit the global-community, commitments such as the 0.7% should be in the form of a tax. This tax revenue should be collected by multilateral agencies and used to support humanitarian projects, provide oversight and secure funds for emergency relief. The International Finance Institutions should return to their role as primary risk-takers and seeders of new markets. Economic development ought to focus on promoting the private sector and opportunities for investment.

If governments of impoverished nations were to tax the recipients of aid, then the flow of funds to aid projects in their respective country would become a stream of revenue and an incentive for them to promote the work of benevolent agents. Given this approach, the government would no longer concern themselves with satisfying imposed conditions, extensive PRSPs, or how to effectively absorb and allocate a pool of fungible resources. Instead, the government officials would have more time to focus on institutional organization, strategic coordination, and incentives for investment so as to promote the work of development agents, non-profits and other socially responsible NGOs. This approach would positively reinforce democratic practices from bottom-up and within the border by supporting a myriad of benevolent agencies and empowering the private sector in international development.


The Private Sector

Recently, the Hudson Institute produced “The 2007 Index of Global Philanthropy” and presented comparative data on private giving, remittances, and government aid for the 22 donor countries of the Organisation for Economic Co-operation and Development (OECD). The index acknowledges that Americans give far more to developing countries in private donations than they do in government aid, or even in private investments. It criticizes the OECD’s measure of a nation’s generosity (The U.S. ranks third from the bottom with .22% of GNI) for being “outdated and incomplete, primarily because it excludes private giving.” By including the private sector, the U.S. ranks seventh with .98% of GNI. The U.S. government will surely push for the new approach to ‘measuring generosity’ because of the more favorable rank; also, because it would mean that the government could claim to have delivered on their commitment to give 0.7% of GNI.

In order to justify the new criteria for evaluation, the index proceeds to contend, “graduating from poverty to prosperity emanates primarily from private initiatives, not government foreign aid.” It points to new studies “demonstrating the weak results of government foreign aid projects and the high cost of government delivered aid” and claims, “the bottom line is that prosperity is not imposed or delivered by government foreign aid programs.” In exposing the high administrative costs and inefficient utilization of government aid, the index attempts to validate the inclusion of private giving in a new measurement of a nation’s ‘total economic engagement’ with developing countries. For 2005, U.S. government aid was only 14% of total economic engagement, private capital flows 36% and private assistance 50%

Moreover, “Over the last 15 years, private financial flows—philanthropy as well as investment—to poor countries have exceeded official government flows. This Phenomenon underscores the vibrancy and dominance of the private sector in the developing world.” Carol Adelman, director of the Hudson Institute’s Center for Global Prosperity, claims that, “remittances are probably the greatest poverty-reducing agent in the world today.” She insists, “there is a whole new world of philanthropy out there, and it is being lead by the United States… It is the private sector where the action is, where the future is.” This claim is further supported by the index, “changes in European taxation regimes and increased involvement of individuals in global crises, private philanthropy is being encouraged and is on the rise in all OECD countries.”

The index explores some of the first steps towards the future of aid—using new technologies to cut down on the cost of delivering assistance. It identifies these steps as ‘a striking trend’ of ‘new age donors.’ The new age donors are hands-on, “they want to participate directly in the design, operation, and measurement of their endeavors.” The trend is that of financial service firms, donor-advised funds, cause-related marketing (for-profit-philanthropy) and remittances—immigrants sending money back home through customized bank accounts, credit cards, and cell phones. Remarkably, “the mobile phone as a purse may be the developing world’s Industrial Revolution for creating prosperity.”

Private Assistance

The table above shows different sources of private funding. Of these, remittances are in a class of their own, “the impact of the $113 billion of remittances from all OECD donors to poor countries is larger than all official government aid, at $107 billion.” U.S. remittances: $61.7 billion. Whereas the universities are mostly supporting international students, the others are sending resources to impoverished nations. The ‘new age donors’ are already finding ways to reduce the cost of delivering assistance, but there is sill a need for an overarching marketplace that fosters greater coordination and efficiency. Today’s information technology enables us to build such a marketplace; the empowering technology just hasn’t been applied to, or purposefully designed for, this non-profit purpose.

Private Capital Flows

According to the index, U.S. private capital flows equal $69.2 billion. Tax incentives for the private sector to productively invest in new facilities and equipment within impoverished communities provide a sustainable approach to creating new jobs and integrating support within the border. For the domestic market, this incentive is so effective that merely a quarter of those who applied for tax credits in 2006 received it. For the international market, tax incentives for investment are becoming more important; but there is still a need for a purposefully designed marketplace so as to foster constructive cooperation between investors, other NGOs and local stakeholders.  In addition, this sort of marketplace could reduce the cost of administration and help to select the most beneficial opportunities for investment.


The Effectiveness

The Cato Institute produced “Does Foreign Aid Help?” in 2006. The study found that funds flowing from private donors to private recipients, private donors to public recipients, and remittances have a significant and positive effect on investment, without having any effect on government consumption (investment, much more so than consumption, positively effects the economic growth). Resources flowing to the private sector, together with monies that go directly to families, provide the best incentive mechanism for development. The study claims, “the empirical evidence on the effectiveness of foreign aid is discouraging” and suggests, as a means to improve the effectiveness of aid, “increasing the responsibility of recipient countries (by providing loans instead of grants in a credible policy environment), reducing the cost of remittance to developing countries, and improving the coordination of donors.”

The study promotes the use of loans over grants as a means to positively affect economic growth. As opposed to grants, loans have to be paid back in part or in full. The recipients of loans are more likely to invest the received funds with hope of yielding return in profit; and, in return, effect the variable used to measure aid effectiveness—a nation’s economic growth over total aid received. However, not all aid should have the objective to promote investment. If so, it may raise the income of the top tier, but fail to address the need of most of those living in poverty. There must be a form of benevolent aid that will support and provide services that do not yield any financial profit. George Soros, a world-known philanthropist, would agree, “disparity between our international financial and trade institutions and our international institutions serving social goals has made the development of global society lopsided. Trade and financial markets are good at generating wealth, but cannot address other social needs… Better ways must be found to finance and deliver international assistance in order to redress some of globalization’s inequities (Global Public Goods: The Missing Component).”

The authors of the Cato study, Djankov, Montalvo and Reynal-Querol, recognize the importance of remittances, both in volume and as an effective form of aid; they sensibly recommend reducing transaction costs so as to increase the realized value of person-to-person aid. Their study also found that the higher the level of fragmentation of donors to the results of their donation the lower the positive impact of aid on economic performance. For example, 100 million from two donors would be more effective than the same amount would be if it came from fifty-two donors. Although higher levels of donor fragmentation lowers the positive impact of aid on economic performance, the flow of resources from private donors has proven most effective. Clearly, to improve aid effectiveness, they recommend improving donor coordination.

Collective responsibility in a poorly documented, monitored, and evaluated aid environment gives rise to this particular coordination problem. “The coordination problems among donors, generated by the well-known problems of collective action, are significant. The fragmentation of the donors turns out to be an important obstacle for aid effectiveness, even when the way in which aid is disbursed and the institutional environment of recipient countries are considered.” In part, the failure to coordinate is rooted in the unavoidable contradiction between aid for the sake of basic human rights and aid for the sake of domestic gain. Contradicting incentives and objectives are doomed to result in a coordination problem; bringing us back to the overhauling transformation of the aid environment.

The Evaluation

The disbursement and utilization of aid has been poorly documented. The knowledge that exists regarding how to best provide aid assistance is very limited. Today, the taken approach is to evaluate what effect the total sum of aid, as a variable of the entire national budget, may have had on a nation’s overall economic growth (or performance). The approach fails to distinguish between the affects of aid and other interdependent factors influencing the economy, rendering almost all microeconomic studies on aid effectiveness inconclusive. The little that can be determined is the macroeconomic conclusion that the private sector is more effective as a mechanism for economic growth.

There are still many problems that need to be addressed. The fact that there exists such limited information on the utilization and effectiveness of aid is the cause, as well as a symptom, of the flawed system. Because of the desire to make the most impact, implementers are unwilling to draw from limited project funds so as to pay for impact evaluations. People wish to optimize the instant gratification one experiences when providing assistance at the cost of gathering information. The new aid environment must develop processes for financing that will generate basic information and help to improve any independent evaluation of projects. Therefore, the transformation will include the new role played by national governments, further empowerment of the private sector and processes for financing that automatically generate basic information without drawing from already limited funds.



The Accountability

Leif Wenar, the author of “Accountability in International Development Aid” writes, “Accountability is second-order responsibility“—an accountable agent is someone who is responsible for showing that she has fulfilled her responsibility for something. Those to whom one must give account possess the powers of setting standards, measuring performance, and sanctioning in accordance with the measured evidence. The use of these powers determines, more or less, the agent’s behavior as well as the organization’s incentive structure; and, in turn, both performance and efficiency.

Wenar gives an example of today’s perverse incentive structure, “USAID accountability mechanisms work primarily to assist the domestic political and economic interests… The result of the USAID budgeting process is a system of heavy accountability that hinders poverty relief. The funds that USAID disburses are at best contingently related to long-term pro-poor goals, and the accounting requirements on recipient aid agencies take resources away from their efforts to help the poor. It should be noted that the lack of pro-poor accountability in USAID is not attributable to an idiosyncratic American meanness or ineptitude, but rather to the fact that funds are disbursed by a bureaucracy on which any pressures to help the foreign poor are almost entirely overwhelmed by pressures arising from domestic political and economic interests.” This underscores the need to redefine the role played by national governments in the aid environment.

NGOs are often holding others to account, but are themselves not accountable for benefiting the poor in the long term.  Wenar contends, “If an aid NGO fails effectively to help the poor, there are virtually no mechanisms in place to sanction it. NGOs do not release (and, as we will see, often do not even collect) the information about project effectiveness that would enable private donors to hold them accountable for their success and failures.” Before the donors are able to hold NGOs accountable, their performance must be measured. However, it may be quite expensive to make the implementers of aid projects accountable. “For instance, making an aid NGO accountable may mean that it has to divert funds away from running programs in order to show that its programs are effective…The demands of accountability may focus the accountable agent’s activities on satisfying certain bureaucratic requirements instead of pursuing its underlying mission…Increasing accountability can increase efficiency, and assurance, and honesty, but it can also waste resources, divert attention toward irrelevant targets, and foster distrust.”

In today’s aid environment the poor may have the power to set standards and measure performance, but “they always lack the crucial power to sanction.” And, although donors may be able to set certain standards, they are unable to reinforce those standards by sanctioning the agent because they haven’t measured performance. The way in which aid agencies advertise their effort is indicative of the lack of impact evaluation and basic information, agencies emphasize input—the pool of money allocated—not the output—the outcome of particular interventions and projects.

Wenar writes, “The evaluation of a development project is the primary mechanism by which the success of the project is judged. Evaluation is therefore the major mechanism through which it could be known which development agencies are being effective in alleviating poverty, and which types of projects work in different settings.” However, the evaluation must be as independent as possible so as to avoid the positive biases of self-evaluation. Today, those who fund projects are often those who employ evaluators to measure the success or failure of that particular project. All parties, except the poor, have an interest in projects being evaluated positively. The effect of this positive bias is widespread and amplifies the difficulties in obtaining reliable information about the effectiveness of aid.

“The benefits of enhancing the quality of evaluations are straightforward. The effectiveness of development assistance depends on the capacity of its practitioners to allocate resources in such a way as to maximize development impacts.” To enhance the quality, Wenar recommends the establishment of a professional association of project evaluators analogous to that of accountants and auditors. “It would have a guide book, criteria for membership, a stamp, a standards committee, and a repository database.” To become viable, “it would need a critical mass of members (evaluators), and these members would need a market for their services… Both evaluators and donors may recognize that an evaluation association is in the interests of the development community; yet they face a collective action problem in getting it off the ground.” The association would be a new layer of bureaucracy to a flawed system, requiring funds both for startup costs as well as funding for continuing costs of a new professional organization. Wenar believes that the costs of this mechanism of horizontal accountability—making evaluators accountable to their peers—are comparatively minor were the association to become effective in improving the evaluation of development projects.


Generating The Evidence

“Making Aid Work” (2007)—is a compilation of essays authored by professionals in the field of international development. The publication is centered on the work of Dr. Abhijit Vinayak Banerjee, MIT professor of economics and a director of the Poverty Action Lab. “Making Aid Work” implies that aid does not work and reflects a general consensus on the inefficiency of the current aid system as well as the desire to ‘make aid work’ and ‘get it right.’ Banerjee exposes the lack of evidence-based decision-making and how “the community of aid giving (and using) has shown no great empathy for evidence.” He believes that we are now in a position to base a lot of our decisions on hard evidence—evidence from high-quality randomized experiments and quasi-experiments.

Banerjee contends, “Indeed, one thing that must encourage corruption and misuse of funds is the fact that the donors are unclear about what they should be pushing for. Given that, it is easy to lead them to grandiose and unfocused project designs where none of the details are spelled out clearly and diverting money is a cinch. From this point of view, the current fashion of channeling aid into broad budgetary support (rather than specific projects) in the name of national autonomy seems particularly disastrous. We need to go back to financing projects and insist that the results be measured.”

Banerjee invokes the idea that donors are often unclear about what to push for, that donors do not show great empathy for evidence nor care how their donated funds are utilized. He unjustly characterizes these attitudes and behaviors as ‘lazy giving’ and urges donors to be more selective—encouraging more evidence-based decision-making. Mick Moore, the director of the Center for the Future State, sees them rather ‘as rational responses to the organizational environment.’ Similarly, I see them rather as egocentric behavior in a flawed aid environment.

Banerjee’s suggested approach—to “get ‘inside the machine’ and simply try things out and see what works”—is wasteful because the benefits do not outweigh the costs. It is hardly efficient to draw from already limited funds so as to evaluate experimental shots in the dark. We must find a way to generate preliminary data, basic information and statistical indicators, to help determine the parameters and application of proposed experiments. Once the basic context information is available, the administration of randomized evaluation becomes much more efficient. Banerjee’s suggested approach biases aid-providers in favor of easily measured outcomes and does not increase local ownership of aid projects. It contradicts his earlier conviction, “getting it right will require that analysts have closer, more discerning knowledge of circumstances, more respect for the ideas and sensibilities of particular people in particular places.”

Much of the criticism of, and provided solutions for, the various interdependent problems plaguing the aid environment has come from people who are already ‘inside the machine,’ working within the confines of an outdated and inherently problematic system. Experience will bring knowledge; the obtained knowledge is fitted into a conceptual framework and framed by particular ideas and theories. The framework consequently shapes the way professionals perceive the aid environment and any solutions they propose.

Banerjee’s proposed approach is very limited in its scope and merely grazes the surface of the aid environment’s deep-rooted problems. Jagdish Bhagwati, professor of economic and law at Columbia University, would agree, “the ‘big’ problems of development, and hence of improved efficacy of aid, go well beyond what the ‘small’ Banerjee-Duflo approach, brilliant as it certainly is, can do for you.” The publication’s corresponding essays make the complexity of the issue apparent and leave Banerjee to omit, “a deep change in intellectual
style is needed if we are to ‘get it right.’”

Ruth Levine, director at the Center for Global Development, writes in her response to Banerjee, “offering pat methods to generate the required evidence doesn’t solve the problem.” She explains, “The rewards for institutions and for individual professionals within [the aid environment] come from doing, not from building evidence and learning…Time and again we see resources for impact evaluation cannibalized for project implementation…There are, frankly, disincentives to finding out the truth. If program managers or leaders of development institutions or ministers of social development believe that future funding depends directly on achieving a high level of success rather than learning from every experience, the temptation to avoid impact evaluation and concentrate instead on producing and disseminating anecdotal success stories is high.” Today’s aid environment makes rigorous project evaluation difficult. The transformation will restructure the institutional setting and provide new possibilities for making progress on evaluation. The new aid environment must develop processes for financing that will automatically generate basic information and help to improve any independent evaluation of projects without drawing from donated funds.


The Transformation

Today, the aid environment is ill conceived to effectively accomplish the principles of freedom—to reduce inequality by securing and promoting basic human rights. The system is inefficient and lacks transparency, it is allowing for corrupt behavior to go unnoticed and, thereby, unsanctioned. It is important that the UN and other international agencies funded with public money operate transparently, both in their finances and their hiring and promotion practices. The illegitimate use of public money cannot be tolerated. Transparency is valuable as a means to accountability and democracy is valuable as a mechanism of accountability. In the absence of good institutions, funds tend to flow towards those in power. The objective of the new aid environment should be reflected in the rules that structure and define the behavior of those who operate within it. The incentives and pride in doing good work ought to reinforce each other. Today, they do not.

After exploring the various issues that face the current system, we see that there are a few changes that the transformation must entail if it is to reach the objective of greater effectiveness. To build on universal values and constructive incentives, the role of national government must be redefined. Contradicting incentives are bound to end in an irresolvable coordination problem. If the negative effect of government aid does not compel, then perhaps the positive effect of the private sector will. The private sector is a better mechanism for economic growth and utilizes funds more efficiently. The new role of national governments will help to empower the private sector, but the sector still requires a marketplace so as to foster coordination and reduce the costs of delivering assistance.

Such a marketplace would be used for the financing of aid projects and its funding processes could easily generate much of the data needed for cost-benefit analysis. It would both help to advance independent evaluation and donors to make good choices. Also, as a means to increase the effectiveness of aid, it is important to transform both the generation and flow of information. As a means to generate preliminary data, basic information and statistical indicators, and help to help determine the parameters and application of proposed experiments. After the market starts generating basic contextual information, the administration of randomized evaluation becomes much more efficient. With the market in place and the availability of basic information, evaluators could establish a professional association, as recommended by Wenar.

The market must be transparent; donations should be tracked and their utilization evaluated: an online platform where donors and agents connect with one another, creating a global network of direct involvement between philanthropists and projects. Agents propose and attract funding for piecemeal aid projects. Donors allocate funds to particular projects and are able to visually monitor both the productivity as well as end results. The incorporation of an appraisal system will improve (arguably establish) basic evaluation of development projects and install incentives that promote better performance. It will improve monitoring and make the most beneficial aid projects more visible and, thereby, ensure that the particular problem is more likely to be addressed.

To exemplify a broad consensus on the necessity to transform the aid environment: Act!onAid, a large global anti-poverty agency, in their report on Real Aid, concluded: “For aid to become truly effective in the fight against poverty there needs to be far-reaching reform of how it is planned and delivered.” Esther Duflo, professor of Poverty Alleviation and Development Economics at MIT, “The solution is an essential reform of how we allocate foreign aid.” Abhijit Vinayak Banerjee, director of the Poverty Action Lab and professor of Economics at MIT, “Indeed, the time seems ripe to launch an effort to change the way aid is given.” George Soros, philanthropist, “Even more important than finding a source of finance is to improve the delivery of international assistance. I propose creating a kind of market where programs compete for donors’ funds. This is how it would work.”

William Easterly, professor of economics and co-director of the Development Research Institute at NYU, “Part of the solution is changing the rich-country political marketplace that aid agencies face. If Western governments and NGOs really want to make poor people’s lives better, it will take some political courage to admit that doing everything is a fantasy. The rich-country public has to live with making poor people’s lives better in a few concrete ways that aid agencies can actually achieve.” Easterly’s idea of service credits or ‘development vouchers’ will encourage entry by infrastructure providers, consultants, and many other private agents. The scheme suggests an alternative approach to the disbursement of funds. It will make it harder for recipient countries to spend donated funds unwisely or corruptly because the vouchers are redeemable only with recognized agencies and firms. The approach requires a better monitoring and evaluation system—it requires the improvement of other facets in the aid environment before helping to improve the efficacy of utilization.


The Enabling Technology

Information technology is readily available to a large portion of the global population. Today, cell phones are capable of providing a global position, recording pictures and videos for visual evidence, as well as of serving as a person’s bank account and purse. The cell phone could be a catalyst for change in impoverished nations, similar to the effects of the Industrial Revolution in rich nations. The cell phone, in combination with the use of satellites and internet social networking platforms, will make the proposed marketplace capable of incorporating the beneficial impact of person-to-person aid and by facilitating donor-agent partnerships; cutting red tape for agents and offering donors a new way to help achieve the objectives prescribe by a global-community of free people in a transparent market.

The market is essentially the transparent bookkeeping of work orders and project proposals. The data generated will encourage better management by improving oversight and comparative analysis; it will also help to weed out lackluster organizations by comparing the costs of administration and project implementation relative to total expenditures. The market should require photographic evidence of the before, during, and after status of projects as a means to measure concrete evidence of productivity. With such a venue, putting forth any evidence of inefficiency or corruption could be as simple as taking a picture with one’s phone. People register to participate in the market; the registration gives them the right to rate any project in which they do not participate by funding or implementing.

By incorporating a simple appraisal system, the market will install incentives for better performance. A simple and intuitive cost-benefit analysis, considering the costs of implementing relevant to the intended benefits, will help to identify cost-efficient and benevolent projects. The rating of agents will also help to assure donors of their quality with ratings and generated accountability track record. For those who perform well (get a high score) it will be easier to seek funding, but for the inefficient it will become harder. This will pressure them to seek more benevolent projects and to improve project management. It will also allow the global community to award and recognize agents for reaching goals, as opposed to for setting them. An international organization, such as the UN, could also place more weight on these positive incentives by establishing a prestigious award for the ‘best’ projects, agents, and donors—the highest scores.

In a transparent marketplace where donors are able to browse for and support particular projects, donors will have more control over the allocation of funds and be capable of monitoring the benefits of their direct involvement through the means of photographs and videos. The egocentric donors are often unwilling to exert themselves and spend the time needed to find the most benevolent project and the most accountable agent because his/her gain comes from the action of aiding, not the result of that aid. However, in a new aid environment, because various individuals have already rated the projects, donors can easily browse for and support highly rated projects, yet feel assured that their funds are being utilized efficiently. The scores that donors receive will encourage them to give more often and to more benevolent projects. This sort of appraisal system is a simple way to establish constructive incentives and align development effort for greater collective coherency.

Although the marketplace is better suited for small-scale projects and piecemeal improvements, it should also feature larger endeavors such as the construction or maintenance of a health center or an education center. On top of providing immediate funding, donors should have the opportunities to assume responsibility for particular parts of large-scale projects (to pay the teacher’s salary, sponsor a scholarship, cover the cost of utilities, etc.) and to permanently fund certain operational or maintenance expenditures.

Donors have the opportunity to donate funds as infrequently as they wish and without future obligations. The people who may not have a lot of funds to contribute will still have the power to set standards and measure performance. In doing so, registered users will positively influence development policies and management to ensure that aid is used in productive ways and gets to those who need it the most.

Recently, Google Earth and Cisco started working with the UN, they plan on pooling available information and building a database so as to help improve effectiveness. I sincerely hope that this particular development will progress towards a transparent marketplace similar to the one prescribed here—an aid market for the new aid environment.


The New Aid Environment

The benefits of establishing an aid market for the funding of development projects are broad and essential for greater effectiveness. The transformation will address many of the issues created by collective responsibility and constructively build on the egocentric nature of donors. Its constructive processes could generate basic context information and help to improve both the evaluation and utilization of aid. It will foster constructive cooperation between investors, local NGOs and other stakeholders. The available information will help to reduce costs of selecting the appropriate recipients of tax credits and, for investors, to identify benevolent opportunities.

The World Bank reported that in 2004, the average fee charged for remittances was 12% of the transfer amount. Real Aid (2006) reported that in 2003 about 13% of the donated aid funds were used to pay for the transaction of those funds. As opposed to setting conditions for top-down reforms, the World Bank (or other IFIs) should promote and provide the services needed to share wealth and minimize the cost of transactions. The interplay of cell phones and internet platforms will help to reduce this cost of delivering assistance. The appraisal system suggested above calculates a 2.5% transaction fee. This charge should be used to cover any operational costs. If there are surplus funds, then those funds ought to be redirected into the market to support benevolent projects.

Remittances have the potential of benefiting the most from the introduction of a project-based donation market. Legal workers (paying taxes), no matter whether they just migrated or not, should be able to donate funds to a charitable cause and take advantage of the provided tax benefits. If the funds are to help people alleviate from the state of poverty, then the donation of those funds ought to have the same sort of tax benefits, as do other charitable donations. In the case of remittances, as long as the recipient family has proposed how to allocate the donated funds in a benevolent manner, the provider of that aid should be able to enjoy tax credits. By facilitating these transactions, the market will increase the realized value of remittances and help to improve the monitoring of their utilization. In addition, the project-based donation market allows us to advance market commitment wherein donors may promise to purchase a set number of doses at a set price, this sort of a drug innovation project would install an incentive that drug companies are more likely to respond to.

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