03 June 2007

The failure of western aid

One of the problems of the conventional approach to policymaking is that the risks of government failure are usually borne by the taxpayer. And one of the virtues of the Social Policy Bond approach is that if a government issues bonds, it is the bondholders who lose if they fail to achieve the targeted outcome. I'm currently looking at applying the bond principle to the poorest countries in the developing world. My work is made easier by the well-defined Human Development Index, which is a broadly-based measure of development as measured by literacy, school enrolment, life expectancy and income. Billions of dollars of western aid to the poor countries have done little to help. As author William Easterly observes in The White Man's Burden, western aid hasn't even provided the cheap fixes that could save millions of lives. Medicine that would prevent half of all malaria deaths, for example, costs just 12 cents a dose. A bed net that would protect a child from getting malaria costs $4.

The top-down approach to aid has mostly been a disaster, as Easterly describes. It's uncoordinated and unaccountable and channels billions to corrupt leaders who steal or squander the money. And it measures success by the volume of aid dollars pledged rather than the results they generate.

That's the key. The current measure of success is that of the accountant, rather than the human being. Now no single figure can encapsulate all the variables that make up human well-being, but at the low levels of social welfare prevailing in the developing countries there is a strong correlation between objectively measurable indicators such as those comprising the HDI, and well-being. Social Policy Bonds targeting the HDI of the poorest countries would generate incentives for people actually to raise well-being, rather than distribute government funds. The citizens of these countries should benefit, but so too would the taxpayer in the west who, if the bondholders failed as miserably as western governments have, would not lose a penny.

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