Sunday 16 May 2021 | 06:16 | SYDNEY
Sunday 16 May 2021 | 06:16 | SYDNEY

Email of the day: Aid program needs to be more liberal


Fergus Hanson


4 March 2008 13:04

Pierre Huetter writes in with this response to our aid thread:

Picking up on posts by Jenny Hayward-Jones  and Tim Wilson, I'd like to humbly suggest one possible innovative avenue for supporting private sector development in aid...more liberalism in its delivery. The rhetoric in aid is pro-market but the reality of aid delivery is anti-market.

Most efforts to support private sector development involve picking winners at some level. All donors know now that picking industry winners is a no-no. But current aid practice in support of private sector development, in essence, still picks winners. They choose which governmental institution should get the windfall. So conventional aid picks bureaucratic winners.

One way around this, as Jenny points out, is through matching AusAID's Enterprise Challenge Fund. But are you supporting viable businesses or businesses with good aid donor management skills? Another way would be to support commercial activity directly.

Why not give millions of dollars to millions of individual recipients?

Why not have a program which gives lots of people $2 for every $5 transaction they do in their normal lives?  [People could buy a $5 credit for $2. Or people could buy a $50 health credit twice a year for $10. Or people could buy a $400 education credit for their child once a year for $100]. A $100 million per annum program delivered this way would create 50 million transactions per annum. It would enrich tens or hundreds of thousands of people in a modest way. It would encourage, indeed create, commerce and reward those who are able to provide goods and services to those who have this extra disposable income. It would increase grassroots commercial activity by at least $100 million per annum, perhaps by many times more once you calculate the multiplier effect.

Bear in mind that the essence of economic growth is growing productivity. And productivity is born of the division of labour...something which can only happen over time as economies reorganize through the operation of reasonably free markets.

Think of all the aid programs or investment that is considered effective....microfinance, remittances, scholarships, foreign direct investment. What do they have in common? Individual beneficiaries once supported, spend their money or use their skills exactly as they choose in the market. No donor bureaucrats ticking the gender box or the ethnic minority box, no local bureaucrat taking a fee for a permit, no weekly donor meetings, no percentages to Australian aid intermediaries...just enhanced living standards and stronger private sectors in recipient countries. And some pressure for domestic reform. No tomes on harmonization. No development plans. Just lots of hard data on transactions and what people choose to spend their aid money on.

In other words we need a lot more liberalism in our aid program. Putting money in the hands of individuals and allowing them to make aid allocation decisions through market mechanisms. There are too many bureaucrats in donor countries and recipient countries making aid allocation decisions — William Easterly's 'planners'. If we deliver aid through market mechanisms (via Easterly's 'searchers'), not in spite of them or around them, we would be taking a giant step towards economic growth.

Alas, AusAID and many other government donors are not well placed to deliver such aid. Their mixed missions and accountability needs leave them averse to losing control of their aid. Or perhaps they just aren't the right structures to support economic development. Tariff boards, after all, would never advise that lower tariffs are the surest route to national prosperity.

We know liberalism works for us here in Australia. See the 1980s and 1990s. But it hasn't yet left its mark in the delivery of aid.