5 October 2017

Cut foreign aid to help the world’s poor

By Matt Warner

Later this month, the World Bank will release a new finding that connects poverty reduction to how easy the world’s governments make it for the poor to make economic decisions for themselves. The finding puts more pressure on the US, Britain, and other major development aid funders to rethink their giving strategies.

The annual “Doing Business” report scores countries based on issues such as property rights, starting a business, paying taxes, and trade, to name a few. The complete list provides a kind of reform checklist for countries serious about economic growth and opportunity. Encouragingly, the new finding suggests that for every five-point increase a country can achieve on the scale, a reasonable jump, poverty goes down one percentage point.

For example, last year a research and advocacy organisation in India, Centre for Civil Society, pushed for and achieved the elimination of minimum capital requirements for new businesses, a practice that disproportionately burdened the poor. That one reform alone translated to the equivalent of 321,000 people lifting themselves out of poverty, thanks to expanded economic choice in India.

The implication is that the poor know how to get themselves out of poverty. They just need more opportunity to do it. The question we must ask ourselves is: to what degree are our current development aid strategies aligned with this insight?

It’s a question that is not so easy to answer because of a phenomenon we might call “the outsider’s dilemma”. There is something inherently disruptive to economic progress when outsiders attempt to solve economic problems on behalf of the poor. That’s because, somewhat surprisingly, the solutions to economic problems require much less technical knowledge than they do tacit knowledge, something outsiders do not possess and cannot attain.

Here’s an example: outside experts, representing the Millennium Villages Project, recommended and financially supported new crops and farming methods in a Ugandan village. It worked. Crop yields increased significantly, but the villagers ended up unhappy, even resentful, because there was no market for the crops and they soon rotted.

As it turned out, the cost to get trucks to the village to haul the extra load to market exceeded the value of the crops. Had the local villagers faced the true cost of this venture and had more control, they likely would have brought their tacit knowledge to bear by further scrutinising the downstream strategy.

Lasting economic progress happens when the tacit knowledge of individuals drives economic decision making. The utility of the “Doing Business” report rests on this insight. By implication, it also recognises that dismissing, suppressing, or crowding out that knowledge through excessive regulation, weak institutions, or paternalistic aid programs, as well intentioned as they might be, is at odds with the goal of eradicating systemic poverty.

What to do? This month the United Nations will observe its 25th annual International Day for the Eradication of Poverty on October 17, a timely opportunity to reflect on our philanthropic efforts to date. It also marks a little over six months since the US foreign aid community began drafting a major overhaul of its bureaucratic design in Washington in response to Trump’s proposed budget plan to reduce foreign aid in 2018.

Refreshingly, the appetite for reform appears widespread and bipartisan – even if there is disagreement on how best to do it. One question looms larger than others, however. If the intervention itself is part of the problem, what can outsiders really do to help?

That nonprofit organisation in India provides a clue. With a modest budget, it is accomplishing what billions in government aid have not: economic opportunity that lasts. There are others. Today there are at least 481 research and advocacy organisations in 92 countries pushing reform agendas to provide more economic opportunity and prosperity for all.

The “Doing Business” report provides a blueprint for change. Local reform organisations, supported by private philanthropy, provide the leadership to achieve it and the world’s poor will show us their own paths to prosperity if we will all just learn to get out of their way.

Matt Warner is Chief Operating Officer of Atlas Network