OVERSEAS AID - Australia's conflict of interest

Pierre Huetter outlines a new plan for aiding Pacific nations SOLOMON Islands provides a stinging reminder of the utility of making aid work, and the cost of it failing. Whenever the cooperative intervention of ‘Operation Helpem Fren’ in Solomon Islands finishes, Australia will be faced with the same challenges there as six or seven years ago. One step forward after two steps back. Helping poor countries develop into wealthy countries is an infinitely complex task and development assistance can only ever help in the process.1 It can never drive it. These facts must be acknowledged plainly when approaching development issues. Presumably, however, helping countries develop is possible. Just as two individuals can cooperate for common ends, or two corporations, two bureaucracies, or two nations - so, too, wealthy countries should be able to cooperate with poorer countries to help them develop economically and socially. Clearly I believe this sort of assistance is possible though difficult, and infrequently successful. Many factors contribute to this lack of success on both sides of the equation. I would like to state plainly, as a matter of faith, that I believe things can always be done better if there is a need to do so. Aid is no exception. And now, in an age of global terrorism and instability in the Pacific, is a good time to re-evaluate how Australia provides aid and how we might improve its effectiveness. Fundamental problems with aid Aid, like all complex endeavours, suffers from a range of problems which can and often do make it ineffective, or sometimes worse than ineffective.2 Although I will not argue the case here I will briefly cover two of the main problems with aid. The first, a core problem, is its use as a short-term foreign policy tool. Long-term development objectives of aid policy tend always to be (intentionally or otherwise) secondary to short term foreign policy objectives, even when the latter undermines the former. This common societal problem of short-term thinking is the ‘bête noir’ of development assistance. Just as in domestic or national development objectives, long term goals often lose out to short term priorities. This truism also applies in the international realm of development assistance. Donors state long-term objectives but generally work towards short-term gains. When the PNG government wanted to hire mercenaries to quell the Bougainville revolt, Australia essentially vetoed the decision by threatening to withdraw aid and military support.3 It’s not clear that using Sandline would have been a good thing for PNG’s development, but it may well have been. Australia and PNG will never know because Australia removed PNG’s opportunity to make that particular mistake, or what might have been a decisive and sound move in the long run. The point is that, as a society, PNG was not allowed an opportunity to act, learn and perhaps take a small step towards development. The move was politically unpalatable to Australia. Development benefits which might have accrued to PNG were secondary. As Sir Michael Somare put it at the recent Pacific Islands forum meeting in Auckland, ‘Why don’t you allow us to do our own thing, learn from our own mistakes as we go along and improve upon our mistakes?’4 Another core problem with aid is that it is administered almost solely by donor bureaucracies, which suffer from normal bureaucratic problems. The greatest concern is an aid bureaucracy’s inability to know the development needs of developing countries, and to serve the needs of a people other than its own. Aid bureaucracies decide on development priorities based on imperfect knowledge. That is, AusAID understands the development needs of PNG the same way Soviet central planners understood the economic needs of their society - through bureaucratic decisions rather than individuals’ needs and wants conveyed through an impartial mechanism, like a price mechanism. This simplifies a complex problem. Both market mechanisms and bureaucratic decisions have their strengths and weaknesses. In developed nations, governments rely on both. In development assistance, there is only one type of strategic decisionmaking - bureaucratic. Hence the Soviet comparison. Donor bureaucracies purport to be the best judges of development needs. Donors clearly attempt to compensate for this difficulty through consultation with recipients on their development assistance needs. But several structural factors clearly inhibit a donor’s ability to really know what a developing nation needs, regardless of the extent of consultation. The first is the sheer complexity of understanding a society’s needs. Could a Department of Pens determine better than the market how many and what sorts of pens Australians desired? Clearly not. Recall stories of bread queues in the countries of the former Eastern Bloc. The second factor is of course the power relationship between donor and recipient. Can a beggar for food request mustard instead of tomato sauce? As with these examples the power relationship between donor and recipient is such that the party holding the money holds sway. The tendency of national donors to effectively tie aid to their country’s goods and services is the clearest evidence of this power dynamic. All evidence suggests tied aid is less effective than untied aid, but donors persist with it nonetheless.5 Development is clearly not on the top of the donor priority list. Why do we allow our aid to be ineffective? The simple answer to this question is that we allow our aid to be ineffective because often we don’t really mind it that way. The cause of development is beleaguered by the curse of intangibility. Donors give aid but no one really knows if it has a positive or negative effect, unlike say the effect of water on plants or giving food to starving children.6 It’s a curse because it means donors can’t just pour dollars into the types of assistance which clearly work. Interestingly for donors, it’s also a blessing. Donors can pursue a range of objectives through their development assistance and no one can say whether they are actually helping or hindering development. It is impossible to prove whether Solomons Islands, for example, would have been better or worse off without aid. Donors simply don’t know for sure. Aid has clearly provided some valuable goods and services, but it has also provided opportunities for local corruption, discouraged commercial activity, disturbed natural social arrangements, imposed unwelcome values on the population and so on. What is clear is that money spent in the past has not clearly succeeded in its stated goal of development, however difficult that goal is to achieve. Even if you believe PNG and Solomons are a lot better off than they would have been without aid, development is not how you would describe what has been going on there. Yet ‘development assistance’ continues, and will now (at least to Solomons) grow dramatically. In the Pacific the failure of Australian aid has been constant.7 Its continuation without radical overhaul suggests Australia gets something else out of aid. Aid provides Australia with short-term foreign-policy muscle, it subsidises Australia’s development industry, it’s a salve for the wealthy’s conscience, and its a beach-head of national pride - to name a few. All this is legitimate and well understood in foreign policy and development circles. Clearly these other gains have been judged to outweigh the cost of aid failing. This situation had been deemed to be in Australia’s interests and is captured in its description as ‘hands-off chequebook aid’. Recent actions by the government suggest that ‘hands-off chequebook aid’ is no longer appropriate. In practical terms, state failure in Solomons is now judged to be a potentially costlier threat than the previous gains from Australian aid. In essence, the government has re-evaluated the cost of development failure in our region. One parallel which comes to mind is US Middle East policy - an equally complex and challenging field. Once, maintaining the political status quo provided the return of stable oil supplies. Now, the cost of that unhappy political status quo (international terrorism) is now believed to outweigh the gains, and in fact threatens them in the long term. Hence the more interventionist approach in recent times. With the arrival of the ‘war on terror’ era and the debilitation of the Pacific, development failure is similarly becoming too expensive for Australia. As the Solomons shows, the impending cost of aid’s failure dwarfs Australia’s gains from aid over recent decades. I can’t quantify the future dollar costs for Australia of PNG continuing on its current trajectory, but we can calculate roughly the costs of our ‘hands-off chequebook aid’ approach to aid in Solomon Islands. In the last five years Australia has spent $145 million in Solomon Islands.8 In the next year Australia is expected to spend between $200 million and 300 million9, then around $200 million per annum for several years thereafter. Estimating conservatively the last five years spending on Solomons aid and the next three years, I calculate that it will cost Australia over three quarters of a billion dollars over eight years.10 This equals roughly $200 of aid per capita per annum, a staggeringly high amount in comparative terms.11 So Australia spent $145 million over five years, to then spend a further $650 million over three years. In Australian foreign policy terms, was the money spent over the last five years a good investment? Did the short-term returns from aid over the last five years outweigh the costs of the next three years? No. The time has come for donors to recalculate the sums on aid, as Australia is starting to do.12 The externality of current aid policy (long term aid failure and its resultant price tag) need to be factored into calculations. Only then will donors be able to actually focus aid on its stated task of nurturing development. A potential remedy: the democratisation of development assistance If and when the cost of aid failure is judged to outweigh the short term gains, aid policy makers will have a new range of policy options with which to pursue development assistance. Ever optimistic, I believe that where there’s a will there’s a way. Accordingly I would like to put up an idea which could improve aid effectiveness. Two crucial shifts in aid delivery could improve its chances of success. Each is dramatic and would hurt Australia’s short-term interests as currently configured, but the long-term gains (better chances of development) would outweigh the short-term costs (loss of regional influence and diminished industry subsidies, etc). The two shifts are: insulating development efforts from short-term foreign policy objectives and donor country influence (insulation), and shifting some aid decision making from bureaucracies - donor and recipient - to individuals (decentralisation and democratisation). Insulation Recall Australia’s more volatile monetary policy before the Reserve Bank’s move to greater independence in the early 1990s. Stability is a universally acknowledged prerequisite for economic prosperity. Yet at certain times for certain expedient reasons governments are happy to destabilise the economy to achieve certain short-term ends. Good government intentions were undermined by short-term political realities. Consider bodies in Australia whose effective functioning relies on insulation from the government of the day, such as ombudsman institutions, auditors-general, the Australian Consumer and Competition Commission, the judicial commissions and anti-corruption commissions. If they were not insulated from actions by the government of the day, they would inevitably be less effective. With such institutions a balance is reached whereby they work according to their own specific mandate, at arm’s length from government, while ultimately being accountable to it. In development assistance, donor organisations like AusAID ostensibly aim to help Australia’s neighbours develop economically - an honourable pursuit which would help them and us. Unfortunately aid policy is not insulated from short term foreign policy. In the political wash-up Australia’s foreign policy ultimately prevails, even if it is at the expense of nurturing development. Why does Australia tie its aid, formally and informally, when it is clear that it substantially diminishes aid effectiveness?13 Because good long term intentions acquiesce to short term gains. Imagine what would happen if, in an Australian aid dependency like PNG, a developmentally oriented strongman came to power - like Suharto in Indonesia. Australian public opinion would bring pressure to bear and, regardless of PNG’s economic development progress under the strongman, almost any means would be employed to depose him. Clearly Australia’s best available pressure point is the $333 million aid budget. Long-term development succumbs to short-term objectives. I am not suggesting Australia nurture tyrants in Australia’s neighbourhood, but demonstrating how in difficult circumstances long-term development objectives can be co-opted by short term foreign policy - regardless of the fact that the unacceptable strongman might deliver development (and democracy).14 Good intentions acquiesce to short-term realities. A development agency insulated to some degree from short-term objectives and foreign policy influences, concerned solely with long term development, would provide clearer thinking and more strategic support for development assistance activities. Australia would be left to use normal foreign policy measures to influence the PNG strongman, like ones it might use with the Philippines, New Zealand or Italy. Decentralisation and democratisation Imagine the effect on Australian society if tomorrow the US decided to contribute to Australian well-being by supplementing health and education spending in Australia by $32 billion and $12.5 billion per annum respectively (roughly the same as Australia’s government outlays in these sectors and together roughly a quarter of all government outlays).15 The support would be distributed in block grants, some of which would go to relevant government departments. The rest would go through select funding organisations such as private hospitals, church groups, charities, community groups, schools and private organisations - most of which are US organisations with Australian subsidiaries. Take a moment to consider the profound impact on Australian society of this sort of well-intentioned intervention by foreign donors. People who might otherwise pursue a living through regular commercial activity, rationally perceive great fiscal opportunities in pursuing a living through the chosen health and education funding organisations. The ‘new frontier’ for prosperity would be health and education. Much economic activity would skew towards accessing these funds, in a way that is only notionally tied to service provision. That is, to earn a share of this money you would focus on influencing bureaucratic decisions made in Washington, not on divining Australia’s needs or serving the Australian public directly. Overnight the relevant funding organisations would gain a massive power of patronage and rival, in influence and resources, the union movement, corporations, universities and Australia’s government. It would cause social unease, political instability and economic upheaval. This broadly, is the reality of development aid in poor countries. How would you attempt to avoid the disruptive effect of such measures? Consultation is the main method of controlling for aid’s distortive influences. Using the education example, ‘consultation’ means the US government would consult the Australian government, community groups and private organisations about which education services Australia should buy with the money given by the US. Clearly consultations would be unlikely to result in Australia choosing to buy French education services! This also is broadly the reality of development assistance. One way to avoid this problem would be to decentralise and democratise development decisionmaking as much as possible. In other words, to provide aid through a mechanism which gives the actual, intended individual aid recipients a range of social capital-type entitlements (a set period of basic schooling, a period of certain types of health care, a choice of certain types of skills training), which they can spend at an accredited service provider of their choice - local, Australian, American, Dutch or Japanese. In this engineered market for development services, the individual recipients are empowered. The development industry must queue to serve them. A more democratic market mechanism can provide signals about which services and which service providers are most in demand. Decentralisation would empower individuals, who then use their purchasing power to influence development service providers, making service providers accountable to recipient individuals. This is in contrast to the current model, where all power emanates from the donors and accountability flows back to the donors. Recipient individuals are the furthest from the origin of development resources, and no one is accountable to them for the affects of the aid. All external, unearned funding distorts and undermines normal commercial and societal relations. External funding (unearned income) creates a society of patronage (much like oil-wealth), not commerce. Social capital-building assistance to individuals makes them the buyers, selecting which services they desire - the inverse of the current situation. At a minimum, it could encourage the provision of at least basic services and a culture of service and commerce. Distortions to commerce and the social fabric are minimised, social capital maximised, while aid resources are distributed more efficiently by an engineered price mechanism. Balancing development interventions One other gain in pursuing a decentralised and insulated approach to aid would be its ability to be used in combination with more traditional aid. Prudent use of traditional budget or program support could be balanced by decentralised aid. So, for example, if a country receiving aid fails to raise any spark of development with current aid, donors could choose to transfer funding to decentralised aid. This would ensure that as a recipient government loses funding support in one area, health and education are still supported through an alternate distribution process. If, alternately, a recipient government improved its performance on certain development criteria, it could be rewarded with more budget support (and therefore discretion), and less decentralised aid. The use of decentralised aid could act as a sanction on poor performing governments, while ensuring the continued provision of basic health and education services. I believe recent direction changes by the Australian government suggest new directions in aid are likely. In the Australian recently, the Prime Minister was quoted as making a strong statement on future Australian aid being heavily conditional on reduced corruption.16 The traditional problem with conditionality in aid is the fear that cutting aid will cause a collapse in the country. I feel strongly, for example, that cutting aid to PNG would, in the long run, sharpen thinking in PNG on utilising its own skills and resources to advance their economy and society. I would, however, be very nervous about giving the order to do so, because the government may well collapse and people may well suffer as a result. Additionally, if we’re not supporting PNG with aid money, someone else, like China, might. But conditionality built on the sanction of loss of discretion in aid expenditure, by diverting funds to the decentralised model, maintains some core development services, while sanctioning poor governments. The perennial problem Of course the key problem with insulating and decentralising aid is that the donor government loses immediate control of its money and influence. Why should Australia give money to Papua New Guineans, who then spend it with Japanese organisations? The answer is, because if done well, it will minimise the chances of PNG costing Australia billions when it collapses further down the track. The important issue therefore, is whether the long term gains from such changes outweigh the short term costs. Pierre Huetter is a public servant who previously worked in development assistance. Email: pierrehuetter@hotmail.com Footonotes 1. Aid and development assistance, in this paper, will refer to all measures adopted by wealthy nations to assist undeveloped nations develop. It excludes all emergency and humanitarian assistance not intended to assist with societal and economic development. 2. William Easterly details many of the particular problems of development assistance in his work ‘The Cartel of Good Intentions’ published in Foreign Policy magazine, which was based on a larger research paper of a similar name published by the Centre for Global Development. The landmark World Bank study ‘Assessing Aid’ (1998) also covers many common problems with aid. For regional examples see Helen Hughes ‘Aid has failed the Pacific’ and Windyba