This year's Nobel laureate in economics, Angus Deaton, thinks that traditional aid in the long run does more harm than good. I do not agree. Reality shows that development assistance can contribute to poverty reduction, more schooling and longer life, writes Annika Sundén, chief economist at Sida.
Many of us who work with development economics cheered when it was announced that the Swedish Riksbank's prize in economic science this year has been awarded to Angus Deaton, professor at Princeton University, for "His analysis of consumption, poverty and welfare". Deaton's research has in many ways been groundbreaking and has had a major impact on decision-makers. His focus has been studies of consumption and by theoretically modeling and empirically studying household consumption patterns, Deaton has contributed important insights into poverty and factors that affect poverty.
One example is Deaton's work to develop data to measure poverty. Historically, the development of poverty and prosperity has been assessed through GDP per capita. Angus Deaton showed early on why these measures are deficient and that data at the individual and household level are needed to be able to measure and understand poverty.
Thinks that aid is harmful to recipient countries
Deaton has also been involved in the public debate and, above all, has been strongly critical of development aid. In a interview with SVT says Angus Deaton that aid is not only bad - it is even harmful to recipient countries. His criticism of aid is mainly based on three statements:
- Aid to stimulate economic growth does not contribute to social development.
- Aid puts the social contract out of play.
- Aid does not yield results.
Deaton's critique makes headlines but is by no means new or unique. However, the reality and the evidence that exists about the role of development aid does not provide unequivocal support for his conclusions.
Poor people must be included in the development
Deaton's critique of the belief that economic growth in itself leads to poverty reduction is justified. Many developing countries have experienced high economic growth over the past decade without a corresponding reduction in poverty. In order for economic development to contribute to poverty reduction and social development, it is necessary that people living in poverty are included in the development, above all by having access to jobs with sufficiently high incomes.
Employment is a priority issue for Sida and we work on several levels with these issues, for example through collaboration with the business community to create jobs. We also work with the UN specialized agencies on employment and working life issues ILO and other actors to improve working conditions in our partner countries. Inclusive growth also requires a country to build health and education systems and social security systems that benefit the poor.
Ownership is important in development assistance
A prerequisite for inclusive development is that a country has functioning institutions and that they act in the interests of the citizens. The inhabitants of a country must be able to hold decision-makers accountable and demand responsibility for the efficient use of public resources and benefiting people. Angus Deaton believes that aid puts this relationship out of play. With access to financial support from donors, the state has no interest in collecting taxes from its citizens and taking on the obligations that this entails.
Development cooperation is always based on each country owning and driving its own development and ownership is important. Part of the development assistance is focused precisely on strengthening the community service and the country's institutions and the ability to collect taxes. But the aid also goes to strengthening the actors of civil society so that they can act as watchdogs and make demands on the country's politicians so that the state acts for the benefit of the citizens.
Important with secure financing
With limited development assistance resources, it is increasingly important that these funds are used strategically and in an innovative way, for example by mobilizing more actors and new financial flows for development. For market development and to encourage entrepreneurship, forms of financing other than aid can often be effective. But we know that investments to fight poverty will not be made because investors and lenders consider the economic and political risks to be too high. Here, development assistance can play a greater role as a facilitator by providing financial instruments, such as guarantees, which partly serve as security.
Deaton also believes that donors do not know what the aid is for and that it contributes to increased corruption. Corruption is a major challenge for development cooperation, and corruption and poverty go hand in hand. In recent years, Sida has strengthened its control and management of development assistance funds. This includes a comprehensive risk assessment of all projects prior to financing decisions. It is inevitable that there will be some risks in operating in countries with weak institutions and a deficient judicial system. That is why Sida regards corruption as an obstacle to development and in many countries works long-term with institutions to counter corruption.
Aid has positive effects
The possible positive and negative effects of development assistance have been discussed for decades. Many of the effects are long-term and arise in complex processes where the assistance is only a part and therefore can be difficult to substantiate. However, an extensive research project carried out by the UN Research Institute WIDER shows a positive link between development aid and growth and poverty reduction. During the period 1970-2007, development assistance is estimated to have contributed to an increase in investment by 1,5 per cent of GDP, an increase in average schooling by 0,4 years and an increase in life expectancy by 1,3 years.
Despite Deaton's criticism of aid, I will be one of those who claps his hands when he receives his award on 10 December. Sida and other development assistance actors need to be reflective and aware of the development assistance's risks and limitations. Deaton's critique of aid is not new, but it nevertheless helps to keep the debate going on the importance of working towards more innovative and effective aid.
Annika Sundén, chief economist at Sida