International Affairs Forum: In your book, Development Without Aid, you argue that foreign aid, the way it is being distributed as it is now, is ineffective. Could you briefly summarize why this is and is there an effective way for developed countries to give aid?
Dr. David Phillips: There are many reasons for ineffectiveness – and I am talking of development aid not humanitarian aid. Among the fundamental issues is that foreign aid especially in the poorest (and lowest capacity) countries, largely in Africa, has systemic costs in terms of the undermining of domestic capacity even as it claims to be trying to strengthen it. The recipient countries incur high transaction costs aggravated by aid fragmentation across multiple donors with multiple motives; many, especially in Africa, have incurred high costs of economic and social dependence on aid including distortion of incentives and undermining of the democratic process. It is very difficult to see how large amounts of outside money supplied on a subsidized basis through a complex bureaucratic process can build a vibrant economy in someone else’s country, and very easy for it to distort incentives, fuel corruption and invite ‘rent seeking’, and the more of it there is the greater is that tendency. These overriding systemic factors also render the current large international effort to assess the impact of aid at the project level somewhat futile.
If it is to have any chance of effectiveness the way outside money is brought in has to be carefully designed and channeled through local institutions subject to local (legislative and budgetary) buy-in. One way could be to provide aid funds on a simple budgetary support basis to Governments to spend on goods and services through the open market via commercial contracts. There are a few aid vehicles such as the US Millennium Challenge Fund that do something like this but they also face various other problems that reduce their effectiveness.
IA-Forum: Is international pressure placed on developing nations through organizations such as the UN, the IMF, and the World Bank, ultimately damaging to those nations?
Dr. Phillips: [In terms of] conditions for lending, it is the IMF and World Bank rather than the UN who have put on the pressure. The era of maximum pressure was the 1980s and 1990s when structural adjustment programs were widely used in an attempt to push economic reforms often without genuine local buy-in and which in the light of experience were inappropriate and in a number of cases may well have been damaging. Subsequently they modified their conditionality to support recovery directly rather than expecting price adjustments to bring it about. Currently the World Bank and IMF are more circumspect and realistic in the conditions they impose, especially when asking very poor countries to ‘tighten their belts’ and make sacrifices, but the IMF seal of approval is still essential to poor countries and there is a large responsibility on their shoulders to get their advice right.
IA-Forum: How do you account for variation in development among countries? For example, what distinguishes many Asian countries that were able to successfully specialize their economies and make gains in economic development, from countries in Africa that still remain behind economically?
Dr. Phillips: This is the biggest question of all and I don’t try to answer it in my book. There have been many theories but the current wisdom is that variation in rates of economic development are due to differences in institutional and political development. Those economies that were able to develop open competitive institutions that induced innovation and risk taking without fear of State interference or corrupt pressure on private business were those that developed first. Competitive conditions were also created by democratic forms of Government which in turn reinforced those democratic forms. In many countries of East Asia it has been claimed that economic growth occurred under undemocratic conditions, with state intervention; however there were certain highly competitive markets operating in terms of the international migration of skills, knowhow and technology to East Asian countries such as South Korea, and Governments highly supportive of private sector development and exports despite their interventionist policies.
IA-Forum: Given that China was able to successfully industrialize and make unprecedented gains in economic development, do you think increased Chinese interest and investment in Africa is a positive thing since it is coming from a country that has undergone the process of development?
Dr. Phillips: It is difficult to predict what the impact of Chinese investment in Africa will be. Some would argue that it is no different from Western investment in the 19th century, based on the goal of resource extraction with little domestic value added. Obviously a country with one sixth of the World’s population has to look for resources all over the world. However China does have the recent experience of development out of widespread poverty, and it appears to follow certain more conducive policies, either by design or because it has to. Thus it has to accept more equal contracts than the 19th century colonial companies did; there is a lower gap between the living standards of Chinese and local workers which is psychologically important. It has an understanding of the need to avoid exploitative economic relationships. In this context it is heavily involved in infrastructure development in Africa not for reasons of extracting resources but for building local capacity.
IA-Forum: In Development Without Aid, you discuss diasporas and the phenomenon of skilled workers leaving developing nations to acquire skills or work in developed countries. You argue that the remittances sent to developing nations by these emigrants is key to development. Why is this more effective than direct aid and how can rich countries facilitate this method of development?
Dr. Phillips: [Remittances] are [actually] just the tip of the iceberg. More important is return of flight capital, reallocation of diaspora savings, and the transfer of skills, entrepreneurship and understanding of business from the diaspora. The contribution of the diaspora is important because it represents a type of indigenous resource, with cultural affinity and a willingness to take investment risks in the home country, much different from the contribution of an international bureaucracy subject to extensive rules and with no interest in the country. Rich countries can help at the margin, such as through easing banking regulations, but overall they would probably do best to step aside and leave diaspora investors to lead.
IA-Forum: With humanitarian crises such as the current ebola outbreak, what is the best way to distribute aid? How do you remedy coordination issues with organizations that use resources and funds from varying nations?
Dr. Phillips: Here we are talking about emergency aid, not development aid. Emergency aid is short term and requires the use of emergency measures such as military assistance. Even in such a case however local Authority involvement may be critical. Provision of inappropriate help can be counterproductive. For example the response to the Haiti earthquake involved widespread collections of used footwear which caused more trouble and cost than they were worth on the ground. And even a starving man has pride – something that some charities would do well to learn.
Dr. David Phillips grew up in Africa and is a development specialist who, after starting in the private sector, has worked for most of his career in development agencies including the World Bank, and as an academic, specializing in industry and private sector development. He has worked as a long term adviser and representative, living in Tanzania, Nepal and Belarus. He is currently director of a consulting firm based in the UK and US. He has a PhD in the area of technology and development and is the author of the recent book, Development Without Aid, published by Anthem Press.
Interview by Adriana Stephan