The Cartel of Good Intentions: Bureaucracy vs. Markets in Foreign Aid

Abstract

The tragedy of foreign aid is not that it didn’t work; it was never really tried. A group of wellmeaning national and international bureaucracies dispensed foreign aid under conditions in which bureaucracy does not work well. The hostile environment under which such aid agencies functioned induced them to organize a cartel that increased inefficiency and reduced effective supply of development services, frustrating the good intentions and dedication of development professionals. The cartel of good intentions allows rich country politicians to feel that they are doing all in their power to help the world’s poor, supports rich nations’ foreign policy goals, preserves a panoply of large national and international institutions, and provides resources to poor country politicians with which to buy political support. In short, foreign aid works for everyone except for those whom it was intended to help, with results such as the aid agencies’ calculation that it takes $3521 in aid to raise a poor person’s income by $3.65 a year. The environment that created aid bureaucracies led those organizations to (a) define their output as money disbursed rather than service delivered, (b) produce many low-return observable outputs like glossy reports and “frameworks” and few high-return less observable activities like ex-post evaluation, (c) engage in obfuscation, spin control, and amnesia (like always describing aid efforts as “new and improved”) so that there is little learning from the past, (d) put enormous demands on scarce administrative skills in poor countries. Now rich countries have used their past lack of effort at assuring effective aid as an excuse to keep aid at paltry levels. Instead, to change this unhappy equilibrium, policymakers in rich and poor countries should experiment with decentralized markets to match those who want to help the poor with the poor themselves freely expressing their needs and aspirations.