Betting on the poor

This is the second of seven parts in the Devex series "Foreign aid effectiveness: A radical rethink," written by Diana Ohlbaum — a former deputy director of USAID's Office of Transition Initiatives and senior professional staff member of the two congressional panels overseeing U.S. foreign affairs. Looking at the situation in Iraq, I’ve often wondered if we might have done more good by simply dropping dinars out of airplanes than by doling out billions of dollars for projects that failed to outlast our military presence or never even got off the ground. Outlandish as that might sound, there’s increasing evidence to suggest that unconditional cash transfers to ordinary citizens are one of the fairest, most cost-effective and most impactful ways to alleviate poverty and stimulate economic growth. Professors Christopher Blattman and Paul Niehaus recently published an essay in Foreign Affairs magazine about their research on giving cash directly to poor people, as opposed to the traditional project model of aid delivery, under which the U.S. Agency for International Development pays a U.S.-based company or nonprofit to provide material and technical assistance to the intended beneficiary. After examining common perceptions that poor people will squander cash (for instance, by using it to buy alcohol or to avoid looking for work) the authors conclude that these fears are largely unsupported by the available evidence. By and large, they found recipients of cash transfers have used the money to buy the same types of things that aid projects would have provided — except that they spend it on what they need and value most, whether it is school fees, medication, business training or a better roof. Whatever amount is wasted is likely far less than it would have cost, in terms of salaries, management, travel, shipping and various overhead expenses, to provide goods and services through intermediaries. Now, there are many reasons why we could not and should not shift primarily to a system of cash transfers. Development assistance can generate public goods — such as a medical facility, a road or an improved governance process — that people would be unlikely or unable to purchase on their own, even if they pooled their funds. Many aid projects are designed to transfer knowledge, experience and skills rather than financial resources. And the American people are unlikely to support a system of cash payments to foreigners, particularly when most domestic poverty alleviation programs are tied to specific types of consumption and are continually targeted for cuts or outright elimination. Outlandish as that might sound, there’s increasing evidence to suggest that unconditional cash transfers to ordinary citizens are one of the fairest, most cost-effective and most impactful ways to alleviate poverty and stimulate economic growth. --— Diana Ohlbaum, former deputy director of USAID's Office of Transition Initiatives But what we can do, as Blattman and Niehaus propose, is to use cash transfers, or the anticipated effect of cash transfers, as the “placebo” or control study against which traditional aid projects are measured. Instead of judging the value of our aid against doing nothing, which is how projects are currently evaluated, shouldn’t we gauge their impact against what would have happened if we put cash directly into the hands of the poor? Cash transfers, of course, have their own administrative costs, although, as the authors note, the process is becoming much cheaper thanks to technology such as mobile money. We don’t know what would happen if we dropped cash from airplanes — or more reasonably, dropped it into cellphone accounts. But it is becoming apparent that our tightening grip on how aid is spent does not necessarily make it more cost-effective, less susceptible to corruption and fraud, better at meeting local needs or more transformational than a more hands-off approach. Sharing authority, not just responsibility Regardless of whether aid is given directly to people, directly to a foreign government or indirectly through an intermediary, there needs to be a transfer of power and responsibility — not just of resources. If “the purpose of aid must be to create the conditions where it is no longer needed,” as U.S. President Barack Obama stated back in 2009, then local partners — whether governments, civil society organizations or private sector entities — must be able to participate in resource allocation decisions, manage the implementation of programs and be held accountable through their own political processes. “Consultation” with local partners and hiring of local staff does not go far enough to transform “beneficiaries” into self-reliant development actors. Alongside decision-making power over priorities, implementation and resources — as the Modernizing Foreign Assistance Network defines “country ownership” — partner countries need to “own” the ideas, the initiative, the capacity and the experience to advance development for themselves. USAID seems to endorse many of these ideas, at least in principle. Its April 2014 “Local Systems” framework calls for “embracing facilitation” by minimizing direct provision of goods and services and focusing on “catalyzing behaviors, relationships and performance as a way to support local systems.” It acknowledges that “this attention to annual targets and results often comes at the expense of attention to the capacities, relationships and resource flows that are crucial components of lasting local systems.” Yet at the same time, the agency continues to insist upon rigid adherence to its own inefficient, inconsistent, cumbersome and irrational procurement rules, thereby creating a new layer of dependency. Local partners must either rely on U.S. contractors and grantees to handle their accounting, compliance, legal and reporting requirements or else create their own bloated administrative structures whose main talent is navigating the Washington bureaucracy. To its credit, USAID is now experimenting with a range of new contracting mechanisms that can overcome some of these hurdles. It is pioneering the use of fixed obligation grants and fixed amount reimbursement arrangements, which pay a set amount for an agreed deliverable and do not require advanced accounting systems. The agency has begun assessing the reliability of foreign public financial management systems in order to allow direct government-to-government assistance. And it has created the Development Innovation Accelerator, described as “a method to reach out to a potential partner and, literally shoulder to shoulder, co-create and co-design a development solution based only on an initial idea.” These advances are surely welcome, but even the tried-and-true “program statement” — in which USAID states a general area of interest and invites specific proposals, ideally conducted on a rolling rather than an annual basis — would be an enormous improvement over the standard contracts and cooperative agreements that govern the overwhelming proportion of our aid. Stay tuned for part 3 of our seven-part series "Foreign aid effectiveness: A radical rethink," written by Diana Ohlbaum, and share your thoughts by leaving a comment below. Join the Devex community and access more in-depth analysis, breaking news and business advice — and a host of other services — on international development, humanitarian aid and global health.