The Magazine

Help That Helps

A new business model for foreign aid.

Aug 31, 2009, Vol. 14, No. 46 • By CAROL C. ADELMAN and NICHOLAS EBERSTADT
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Among the reasons adduced in the literature for the lack of identifiable macroeconomic impacts of development aid are that state-to-state transfers inhibit competitiveness, create dependency, and absorb or misallocate political resources or energies in recipient countries; that aid is motivated by nondevelopment donor and contractor interests; and that aid engenders a lack of feedback and accountability, encouraging host country graft and corruption.

Since recipient countries' policies are almost always far more important than the volume of foreign assistance in hastening the pace of material advance in recipient countries, we need to ask where and how our foreign aid can matter? This requires a shift in focus from macroeconomy to projects on the ground. We in the West have transferred nearly $2.7 trillion in official development assistance since 1960. What evidence of program-level success do we have? Why have some projects been successful? Even if the macroeconomic impact of aid transfers is debatable, aid projects could still be justified by policymakers, and perhaps even by taxpayers, if they have generated high and sustained returns of other sorts for their beneficiaries in low-income countries. Determining these characteristics of how foreign aid has positively affected the lives of individuals and communities in poor countries can inform our approach to future aid programs.

In recent years, many donors have begun to examine the effectiveness of their foreign assistance. By and large, their findings have not been encouraging. In its evaluation of Canadian foreign aid, the Canadian Senate's foreign affairs committee concluded that Canada's development agency had failed to make a difference in sub-Saharan Africa despite $12.4 billion in aid expenditures between 1968 and 2007. The failure was attributed to slow, unaccountable, and poorly designed development assistance and ineffective foreign aid institutions in Africa. Maintaining that vibrant economies and good governance are the path to prosperity and that these can only be generated from within African countries themselves, the committee recommended that Canada move to a foreign aid model similar to the U.S. Millennium Challenge Corporation, which provides assistance only to those countries that can demonstrate progress in building strong private sectors, creating jobs, and strengthening governance. Australia, Ireland, the Netherlands, and Sweden have also completed assessments of their aid programs that call for improved evaluation, more local ownership, and better institutional capacity in governments.

Other donors, particularly the World Bank, have attempted to measure programs for results such as poverty reduction. The bank's evaluation unit found that its poverty reduction record is problematic. In a 2006 evaluation of 25 World Bank-assisted countries, only 11 were said to have reduced the incidence of poverty between the mid-1990s and early 2000s, with poverty either stagnating or increasing in the remaining 14 countries.

We reviewed projects by USAID, the World Bank, foundations, and corporations that have been identified as having measurable impact and analyzed them for their shared characteristics. Our examination identified nine principles of foreign aid projects that work:

Local Ownership and Initiative. Successful programs and projects reflect the actual needs of the recipient countries as expressed by local actors, rather than simply reflecting what projects and programs may be available for local recipients from USAID. Local "ownership" increases the prospects of long-term success and can, indeed, lead to the continuation of institutional relationships between American and partner leaders long after the end of USAID funding. The Rotary Club campaign to eliminate polio succeeded because of the ownership and financial commitment of local Rotary Clubs throughout the developing world.

Partnership. Successful projects and programs are a collaboration between American and developing-country institutions, especially private institutions. Indeed, such collaboration seems virtually essential for a sustained engagement that brings benefits valued by all. The U.S. government should always attempt to ensure partners are committed to a program before it makes an investment. As a general rule, the U.S. contribution should be the second or third dollar on the table, not the first. When everyone is committed to common priorities and has made an investment, then everyone will be accountable for the results. With mutual accountability comes sustainability. The Consultative Group for International Agricultural Research, which spawned the Green Revolution, was a partnership among governments, foundations, and the private agribusiness sector.

Leverage. The U.S. government can take advantage of the myriad new sources and techniques of global support for developing countries, including foundations, private voluntary organizations, corporations, universities, and remittances. USAID alliances with new American philanthropic activities overseas can help leverage resources that far exceed those contained in federal budgets. Such partnerships can recognize the priorities and expertise of philanthropic leaders and their institutions. Similar strategies can be used to link U.S. programs to emerging local business leadership in developing countries. Within this framework, USAID would become not a controlling taskmaster of U.S. development programs, but a facilitator, the creator of syndicates of resources targeted at self-reliance. USAID's Global Development Alliance, for example, has successfully leveraged government funds with contributions from private companies, foundations, charities, and universities. This type of partnership should constitute the model for virtually all U.S. foreign assistance in the future.

Flexibility. Efforts by today's aid projects to tackle new problems are often hampered by decades-old legislative mandates. USAID's popular child-survival program began with a legislative earmark in 1986 and has spent over $15 billion providing education and preventive services for childhood communicable diseases. Today, however, non-communicable diseases in adults such as cardiovascular, cancer, and diabetes have overtaken infectious diseases as the leading causes of death in most of the developing world. Child-survival funding dominates USAID's health budget, leaving little to help with diseases that are sapping adult productivity and economic growth. Where the nature of the problems and opportunities for change are evolving, aid must be able to anticipate and respond to such changes.

Peer-to-Peer Approaches. Long after USAID's financial role has ended, U.S. foreign assistance can help America's professionals and institutions to build relationships with their developing country counterparts on the basis of perceived professional self-interest. Such opportunities are exemplified in USAID's Hospital Partnerships Program, through which U.S. physicians volunteered their time to work directly with physicians in Eastern Europe and the former Soviet Union. This peer-to-peer approach is patently superior to the contractor model that currently dominates USAID programming and which, as President Obama noted, takes up inordinate percentages of our overall foreign aid.

Technology Adaptation and Adoption. Some of the most widely acknowledged foreign assistance successes, like the Green Revolution, have at their core the application of technology to improving the human condition. As the scientific and technological capacity of developing countries expands, so does the potential for technology partnerships. Local ownership is also important in this context, as integration of technology such as bed nets and oral rehydration salts is vital to ensuring their effective use within the communities where they are introduced. Local foundations' growth and social entrepreneurship's successes in developing countries have shown how technology can work for poor people throughout the world.

Self-Reliance. The most important steps taken to improve the long-term success of developing nations will come from within those countries. In successful and self-sustaining projects, local leaders are the engines of change. Conversely, encouraging leadership and good policies may mean ending or reducing aid to a country. We must not be afraid to withdraw funds to ensure that assistance does not result in dependency in recipient countries.

Continuous Information Feedback. The best evaluation systems are not simply signposts that demand reports. They are continuous loops that give information to managers in real time so programs can be constantly adjusted to improve performance. Success comes from a sustainable process, not a single event, and it requires flexibility to adjust programs to changing situations.

Risk. A partnership and venture-funding culture implies a tolerance for risk and a willingness to recognize failure. Such a tolerance is, unfortunately, widely lacking in our aid programming (for all-too-understandable political reasons). But USAID must be willing to experiment with new approaches to development assistance. If it hopes to increase the likelihood of project level successes, USAID will need to develop a mechanism for rewarding the willingness to take calculated risks within its own personnel and programs.

The pervasive lack of convincing evidence of significant benefit from past foreign aid efforts, the changing nature and capabilities of the developing world, and the emergence of new sources and approaches to resource transfers for development all point to the need for a fundamental rethinking of the objectives, strategies, and instruments of U.S. foreign aid.

Project earmarks, directions, and limitations in foreign aid legislation are a "design for failure" and should be removed--with the exception of those deemed essential to U.S. national security. U.S. foreign assistance programs should be able to respond fully and flexibly to demand-driven opportunities emerging within developing countries.

With again the exception of expenditures deemed essential to U.S. national security, the United States should avoid distributing foreign aid without monetary or monetized resources co-invested in and by the developing country itself. Appropriate partners include local affiliates of NGOs and corporations, indigenous foundations, local businesses, and public agencies. Allocations of U.S. development aid should favor sustainable public-private partnerships in the host country.

The main competition for U.S. foreign assistance dollars should involve not contractors but rather ideas--more specifically, ideas coming from the multiple actors now involved in foreign aid and philanthropy, particularly on the demand side of the equation in developing countries.Those who wish to attract U.S. resources should bring to USAID their best ideas and their own resource contributions from the private sector, explaining their goals in terms of economic and social impact, local ownership, partnership with local institutions, and achievement of community self-reliance. USAID should operate more like a foundation (and less like a disbursement agency), articulating areas or problems of interest and inviting competition for new approaches.

One fruitful avenue for USAID might be to create a venture fund through which any individual or organization with a new idea about how to solve a problem in development in an innovative way can apply for a seed grant. In this scheme, the grants would be for limited duration and limited amounts of money and risk would be welcomed. Grantees would report directly to a panel consisting of all government agencies contributing to official development assistance.

America's private charitable donations to low-income areas of $36.9 billion are over one and one-half times greater than government aid of $21.8 billion for the same year. Thus, USAID should provide for regular, substantive consultations with private-sector players involved in global development, including foundations, charities, corporations, religious organizations, universities and colleges, and individuals. (Beyond the philanthropic sector, millions of migrants throughout the world sent $281 billion in remittances back to their lower-income home countries--a sum two and one-half times greater than all donors' official development assistance in 2007, the latest year for which comparative data are available.) USAID must not only be aware of but also work with the vast array of new players in global development who are transforming the ways in which resources are reaching low-income regions.

The new model for foreign aid proposed here departs from the past in at least three important ways.

First, it is based on flexibility. The programs pursued, the opportunities seized, the partners aligned, and the ways in which funding creates self-reliance are driven not by earmarked legislation, not by the capacities of contractors, not by the world of 1970, but by the nature of the problems and the presence of opportunities from the promises of a changing world.

Second, it reduces centralized control. USAID becomes not the taskmaster of U.S. development programs but an aggregator or facilitator of efforts and a creator of syndicates of resources targeted at self-reliance.

Third, it emphasizes innovation. USAID should seek fresh faces, new approaches, new technologies, and new mechanisms for allocating its resources. It should seek out and link its activities to new streams of resources, looking for leverage for every dollar it dispenses--or, better, invests--and constantly searching for emerging cofinancing partners. This business model transforms USAID from a passive funder of projects to an investor in innovation.

Too often, the talk of "fixing" foreign aid is dominated by discussions of organizational structure, the volume of resource commitments, and the configuration or harmonization of objectives and players in the U.S. government. Such preoccupations are easy to understand: They reflect the force of habit. Such thinking, however, is conceptually trapped within a world that existed 30 or 40 years ago, when the public sector was the leading player in financial flows to poor countries. Today, the U.S. government's official development assistance constitutes just 9 percent of total U.S. financial flows to developing countries.

It is time to give serious thought to making our foreign aid expenditures work more effectively. What matters is less a redrawing of organization charts than a serious consideration of how these dollars are delivered and whether they are responding to local ideas and actually reaching partners with stakes in the outcome of the investments. A new business model for foreign aid is the main hope--perhaps the only hope--for fixing a broken system.

Carol C. Adelman is the director of the Center for Global Prosperity at the Hudson Institute. Nicholas Eberstadt is the Henry Wendt scholar in political economy at the American Enterprise Institute. They were co-vice chairman and commissioner, respectively, of the U.S. Helping to Enhance the Livelihood of People around the Globe Commission, a bipartisan panel that assessed the efficacy of U.S. foreign assistance.