15 August 2011

The Changing Aid Landscape

In this world Europeans and Americans no longer dominate aid. China is the biggest source of investment in Africa and the Gates Foundation is as important as many donor governments (and much more innovative). Private capital flows to Africa outstrip aid flows, contradicting an old justification that aid is necessary because investors hold back.

For the poorest, the new donors are more important because Western aid is shrivelling. Congress is proposing to chop American aid by a fifth. Brazil is giving more to the Somali famine than Germany, France and Italy combined. There are exceptions: Britain and Australia promise to boost aid spending. But they seem like a last hurrah of Western generosity...

In this new world the justification for aid and the behaviour of donors must change. For India and others, it is far from clear why the government should send aid abroad when it has so many poor people at home. No doubt, aid will be defended as a boost to global influence. The risk for India is that, just like the West did in the 1960s, it will pour money into grand projects which fail—and encourage bad government.

For Westerners, justifying aid will be harder. But there is a reason to give: like trade, aid benefits from specialisation and comparative advantage. Emerging countries, with recent experience to draw upon, might do a better job of infrastructure spending. The West should focus more on policies and good governance (something many poorer Indian states are crying out for). There is a new world of aid but over a billion people remain poor; they still need help, even if some of them live in countries that now give aid as well as get it.
The Economist says that India is helping to usher in 'aid 2.0.' I think they are right. What is interesting is the argument that India should focus inwards rather than out with their new resources. To me, this is a problematic argument since it is the same that is used by opponents to America's international aid. That is not to suggest that India should not care, rather it is to point out that the argument is a slippery slope if accepted.

Last week, I said that the value of life is equal regardless of boarder. Maybe aid 2.0 can be a shift towards recognizing that connection of humanity.