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December 6 2019

Why Foreign Aid Does More Harm Than Good

featuring Beverly Hallberg

Matt Warner, president of the Atlas Network, joins the podcast this week to talk about the issue of foreign aid. With approximately $50 billion American tax payer dollars sent overseas each year to help people in need, the question is, “Does foreign aid really work?” Or is the traditional government-funded model flawed, leading to waste and negative, unintended consequences? Matt answers those questions and provides insight as to what is the best way to help lift people out of poverty. 
 
Matt is president of Atlas Network, a nonprofit organization connecting a global network of more than 475 free-market organizations in over 90 countries. Matt writes, speaks, and consults internationally on the topics of economics and institution building. His work has appeared in Forbes, Harvard's Education Next, Real Clear Politics, Washington Times, among others. Matt is also the author of a new book called Poverty and Freedom: Case Studies on Global Economic Development.
 
 
Beverly H:
Welcome to She Thinks, a podcast where you're allowed to think for yourself. I'm your host Beverly Hallberg and on this episode we focus on the issue of foreign aid. With approximately 50 billion American tax payer dollars sent overseas each year to help people in need. The question is, does foreign aid really work? Or is the traditional government funded modeled flawed, leading to waste and negative unintended consequences? Well Matt Warner is here with us today to answer these questions and provide insights on what is the best way to help people in poverty. Matt Warner is the author of a new book called Poverty and Freedom: Case Studies On Global Economic Development. And Matt is also the president of the Atlas Network, a nonprofit organization connecting a global network of more than 475 free market organizations in over 90 countries. Matt writes, speaks and consults internationally on the topics of economics and institution building and his work has appeared in Forbes, Harvard's Education Next, Real Clear Politics, Washington Times among others. Matt, thank you so much for joining us today.

Matt Warner:
Thank you. Happy to be here.

Beverly H:
And where I want to start is just this issue of foreign aid. I think so often as Americans we are not fully aware of how much money is sent overseas, what it is sent for. Give us a little breakdown to start off with of the background of how Americans send foreign aid and the purpose of it.

Matt Warner:
Sure. So historically foreign aid has been something that the Marshall Plan after World War II where we were looking at how to rebuild countries around the world and establish more stability. That became more formalized in the early 60s with legislation, major legislation out of Congress where we started to institutionalize in our country, a foreign aid model and a set of of institutions to advance foreign aid.

Matt Warner:
Fast forward to today and most of our foreign aid is handled through the USAID, the agency in charge of it, but not exclusively. There's actually up to 20 different entities among the Federal Government that have some type of foreign aid apparatus, and for the most part foreign aid is used in about four buckets. It's a longterm development attacking major issues like HIV, AIDS, et cetera, humanitarian disaster relief. That's a sizable piece, some institutional and political stability support. And then about a third of it is military support. And so that's going, to again, try to create stability around the world.

Matt Warner:
And of course when I think Americans think about foreign aid they think about helping the desperately poor around the world and trying to make the world a better place. And the interesting thing that we've seen in the last couple of decades is a really strong effort to start to ask tough questions about the efficacy of foreign aid and whether it's actually making a difference.

Beverly H:
And I think one of the things that we can point out is that Americans are very generous. I think if Americans thought that this money was going to something really beneficial to people overseas, especially in helping them get out of poverty, we would say that we should continue doing this. So it's not the generosity that's being questioned. It's, as you said, is this working? And so break it down for us. I know your book, Poverty and Freedom, it deals with case studies on what can work. But let's start with why foreign aid often doesn't work, even if it has good intentions behind it.

Matt Warner:
Well, I think we've all seen recently whether you're paying attention to the headlines related to Ukraine with both Joe Biden and Donald Trump being questioned in terms of how they've used foreign aid to influence other countries for different ends. There is a very natural inclination for foreign aid to be politicized and often intentionally so. I mean it's seen as on the one hand, something that we're doing to make the world a better place. On the other hand, from a holding government accountable from the taxpayer's point of view, what is this doing to advance our national interest? So at the crosshairs of these two things, you end up with a a set of objectives that may or may not at the end of the day actually match needs on the ground in countries. And I'll point to some examples real quick of what hasn't worked.

Matt Warner:
One of the more celebrated, traditional approaches that kind of backfired was a $300 million investment under Jeffrey Sachs to attack all the symptoms of poverty at once. This was his theory that there's this poverty trap that people in poor places are stuck within. And if you start to do better in one way, too many other things hold you back. After $300 million in 10 years, the first independent evaluation of his approach done by Britain's Department of Aid said that not only did they find no evidence that anybody escaped poverty longterm. But that many of the good things that did happen could have been done much, much cheaper.

Matt Warner:
And so this gets at the heart of why is it that if we have money, resources and technical knowledge, that's still not enough to go and help people escape poverty. And that gets to something fundamental about the nature of economic development, which is that it is something that is complex, iterative and is a function of individual choices in different places around the world.

Beverly H:
Well, I know that you have coined a term, it's the outsider's dilemma, which is really the crux of why it just doesn't work. Even when you have good intentions, the aid that we send doesn't lead to the outcome that we're hoping for. So what is this outsider's dilemma and why do you think this is the crux as to why foreign aid doesn't lead to the good work that we hope it will?

Matt Warner:
Well, I mean, I think many of us can relate to the idea that maybe there's someone in our life or in our family that we want to see them do better in life. But try as we might, we can't control them and make decisions for them. And the fact is, even if we could, we probably wouldn't get it right. This gets to the fundamental issue of why individual freedom is so important. It isn't just about human dignity, which is super important, that we acknowledge that nobody should be able to have power over someone else. But also that the choices that individuals make every day now represent their own sense of their trade-offs in local conditions.

Matt Warner:
So the outsider's dilemma says wanting to help is good, but interfering in someone else's life if you really aren't in a proper place to be making decisions on their behalf can actually do more harm than good. And I'll point to if listeners are interested in reading more about this, there's books by Angus Deaton, The Great Escape. Also Chris [Coyne 00:08:02], Doing More Harm Than Good. There is a real question that not only is foreign aid often ineffective, but often it starts to create moral questions of whether we've actually made places worse off or made it even harder for them to get to where they need to go. And so in ...

Beverly H:
And of course there's your book as well so the people could read this, about this, in your book, Property and Freedom. And I know while you deal with case studies of what can work, you've also delved into what hasn't worked. You've even given some very clear examples. What are some of those examples of ways that we tried to help and then actually led to more harm than good?

Matt Warner:
Well, I mean, you can look actually across both humanitarian and economic development. For example, coming in and telling the villagers in Uganda to switch from growing bananas to growing corn because it'll get higher crop yields. And you give them money to do that, they trust you, sounds good to them, they switch their crops to corn. And indeed they do have higher crop yields, but there's no market for corn and there's nowhere to get it to transport it for sale. And so it ends up rotting and attracting a rat infestation in the local village. And so you end up with resentment on the part of the villagers who initially thought that you were there to help. And obviously nobody wants to see those kinds of things happen.

Matt Warner:
But even the smartest people with big pocketbooks don't understand that economies develop because individuals make choices and they face trade-offs that they understand better than anybody else. And what they really need is more freedom. So in the book I talk about examples of local think tanks who have local knowledge, who aren't outsiders, who are working for systemic change that removes barriers for individuals to be able to make more choices. And there are some great examples from countries all over the world where you're seeing think tanks achieve these reforms and the payoffs start showing up immediately.

Beverly H:
And I know that you had a conference last last month and you brought in some of these leaders from these organizations across the world. You also have some great videos featuring some of these case studies on your website, atlasnetwork.org. But give us an example of one of the case studies you highlighted in the book on how when the initiative was locally led, it led to much better outcomes than foreign aid could ever lead to.

Matt Warner:
You bet. So as a grant maker, Atlas Network, we have standards that our grantees need to meet, but we don't prescribe the content or the substance or the strategy of what our grantees are trying to do. So a partner of ours in Burundi, a country in Africa that is scores very low on international indices of freedom and ease of doing business by the World Bank, et cetera. It's a tough place to thrive, a fairly authoritarian government. We have a modest think tank partner there who is actually just very inspirational and enterprising and they do a lot with a little. And they came to us with a set of plans that they wanted to advance, to change the rhetoric in the country to say, let's stop holding ourselves back and let's believe in ourselves as modest entrepreneurs. And here are the things that the government can change in order to help support our country becoming more prosperous.

Matt Warner:
And that was a message that resonated with both government and with people. And one of the outcomes of that is that they lowered it, the cost to register a business formally. It had previously been pretty cost prohibitive, about $78 US to register your business formally. This is in a country with a $300 GDP per capita. And they dropped that down to $22 US and they immediately saw within a year, a 49% increase in formal registrations of businesses. Let me explain one person's story of the difference that this made.

Matt Warner:
There's a gentleman named Papa Coriander or that's how he's known locally because he creates products out of coriander drinks and other foodstuffs. And he had a business for years, extremely modest, barely getting by, where he would create products out of coriander. And in fact because he was in the informal sector and hadn't registered as a legal business because it was too cost prohibitive, he had no legal protection and he had been jailed several times. This happens often around the world. If you're not a legal business, then police can just take all of your inventory and take your cash and you have no recourse. Once he was able to become a formal business and join the legal sector, not only do you have protections, but that allows you to grow and to start to establish yourself. And within one year after this change and him registering, he now has 100 employees. He went from 2 to 100. That's explosive growth and really has huge ripple effects in a country like like Burundi.

Beverly H:
And I think a natural question that people would have is, is first of all, how do you find these individuals? If this is the right way to do it, find people on the ground who are doing good. I think it's hard for people to know, okay, then how do you get the money to them? How do you find the people who are doing good? Especially when you consider that often so many times bad actors get ahold of foreign aid, whether that's a government or people behaving poorly, who have some type of influence in the region. How do you connect with the people who want to do good?

Matt Warner:
Well that's a great question and it's a real challenge and that's one of the things that our organization has identified as a value add that we can provide. We have a robust team that is constantly spending time getting to know, reaching out, inviting people to our events and to our trainings so that we can learn who's trustworthy, who's the real deal, who's really being innovative and holding themselves to account. And unfortunately, if you step back into the broader NGO foreign aid world, there's a real culture of opportunism and tell me what I need to say to get funded and I'll say it, that kind of thing. And so what our job is at Atlas Network through both our grantmaking and the training programs that we do, is to really develop a sophisticated understanding of who is out there doing this for the right reasons, trying to make the world a better place, and has a deep understanding of economic freedom and its importance in society.

Beverly H:
So are you suggesting then that America should not give out any foreign aid? That, that should be eliminated altogether? What's your perspective on that?

Matt Warner:
Well, I'll put it this way. I don't think discontinuing foreign aid would create some sort of a crisis. We recently this year had a political drama over threats to rescind unspent foreign aid funds. And of course the the aid organizations that depend on that money were facing existential crisis at that. And my message to them is why are you pinning your ability to do good in the world on political benefactors? You ought to transition to a diversified voluntary funding model where you aren't dependent on politicians for your resources to do what you think is so important. But I will say that our focus at Atlas Network is on expanding what we're doing as an alternative, and that's really what's most important. And making sure that all of the great projects that we learn about around the world that promise to remove barriers for people living in very modest circumstances, that those organizations are funded and able to achieve these kinds of things.

Matt Warner:
There's a another great example if I may, that sort of highlights how important it is to get the local vision driving these projects. We have a partner in Sri Lanka, Advocata Institute, who among other things, identified that one of the reasons that participation in school in the workforce among girls and women was lagging in their country, was an absurd number of artificial costs imposed on sanitary napkins. That made it such that very few women and girls were able to afford what they needed in order to take care of themselves and be able to continue to attend school regularly and attend work regularly. They did a campaign in the country to point this out. There was over 100% increase on the cost as a consequence of various taxes and tariffs. They've succeeded so far in eliminating one of those tariffs, roughly about 30% of the artificial cost has been removed. But they're fighting on and trying to remove the remaining 60% and you can imagine what kind of impact that can have when you realize all the little ways that add up, that bad government policy holds people back in poor places.

Beverly H:
And just kind of rounding out the conversation, we started up top, you were talking about the situation, the controversy surrounding President Trump and the Ukrainian President. You talked about the politics. Kind of leaving that specific issue aside, but thinking about this as a whole, do you find whether it's from the United States using foreign aid as leverage, which plenty of past presidents have done. And also the politics that are played by the other countries, do politics play a big role in foreign aid? Obviously the method that you're talking about does it in a different way. It does development differently, but do you find that politics are often a big role?

Matt Warner:
Absolutely. So if you think in, the two categories are donor countries and recipient countries. And in recipient countries they, public choice theory, someone in government isn't immune to incentives just because they're in government. And you see lots of, in fact it's sort of considered business as usual that there's going to be some set of basically corrupt practices in terms of conditions put on. Yes we will accept this funding but you have to use our airplanes and you have to make these kinds of payments. And there's a paper by Nathan Nunn out of Harvard where he tracks that not only is there some high expectation of [inaudible 00:19:59], 50% even of aid dollars being siphoned off. But he's even identified cases where 100% of the funds were siphoned off and not able to land in their specific areas.

Matt Warner:
And look, the other important issue that that comes up and is what are the implications for the evolution of these local democracies when our foreign government is creating a completely different set of incentives for local politicians to pay attention to? It becomes ... They by nature are less sensitized to what their people want and are paying more attention to what they need to do to get something from us. And this gets to another issue that I think is worth throwing in here right here at the end is I recently attended earlier this fall an event at the Center for Global Development that was hosted by an organization called Black Women And Development. And I went to observe and learn and I learned quite a lot, which was they are focusing on how they, who have a lot of experience going around the world supporting aid projects. These are very experienced professional women in the aid industry. Starting to ask the question, what does it mean to get consent from the people that we're trying to serve?

Matt Warner:
And they gave examples of responding to earthquake in Haiti and that the actual operations on the ground were a bunch of white educated people behind closed doors making decisions on behalf of Haitians who are kept out of the process. And so this really gets to some fundamental, not only questions of efficacy but questions of morality and ethics. We believe in democracy and I don't believe that we should be inadvertently purchasing away democratic institutions from other countries because we run roughshod with our good intentions.

Beverly H:
And just kind of to finish up on that, I think there's also this other side where people are incentivized to give, when they know exactly what they're giving to and know that it could be of help. I think when we realize our tax money is going to, obviously the United States. United States is going to determine how to use that money where people themselves are disconnected from the people they're helping. I even think about when there was Hurricane Katrina, it was often just the local community. It was churches who went out there and helped and it was the local community that really helped to build and people coming in from other places. So I think that there's also this aspect where people want to help people and when government's in the middle, it takes away that human connection that often leads to to better outcomes.

Beverly H:
So I just want to thank you for the work that you're doing, the work that Atlas is doing. Do get his new book. Matt Warner's new book is called Poverty and Freedom: Case Studies On Global Economic Development. It's a good read, has lots of great stories. But Matt, thank you so much for joining us today.

Matt Warner:
My pleasure. Thank you.

Beverly H:
And thank you all for joining us. Before you go. I wanted to let you know of a great podcast you should subscribe to in addition to She Thinks. It's called Problematic Women, and it's hosted by Kelsey Bolar and Lauren Evans, where they both sort through the news to bring stories and interviews that are of particular interest to conservative leaning, or as we call them, problematic women. That is women whose views and opinions are often excluded or mocked by those on the so called feminist left. Every Thursday, hear them talk about everything from pop culture to policy and politics by searching for problematic women wherever you get your podcasts. Last, if you enjoyed this episode of She Thinks, do leave us a rating or a review on iTunes, it does help and we'd love it if you shared this episode and let your friends know where they can find more She Thinks episodes. From all of us here at Independent Women's Forum, thanks for listening.

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