International Aid: Skip the Middle, Skimming, Man?

Slate had an article this past Friday on the international aid/development community: Is it better to give money directly to the poor people of the Third World, or give to their governments, who in turn distribute to the people.  This article coincides with the current discussion over Mubarak's and Qaddafi's personal fortunes skimmed from their countries.  Many government employees in the Third World are corrupt.  Development groups and advocates have long recognized the inefficiency of corruption.

There have been previous attempts to impose accountability on Third World bureaucracies.  American governmental aid generally comes with auditors, monitors, and reams of forms to fill out, in part to minimize foreign corruption.  The structural adjustment programs of IMF and World Bank were a response to the bloated and corrupt bureaucracies: With the ministries and state enterprises being a source of patronage and a job program for the ruling parties, it was no surprise that these countries would have to default.  To get new loans and aid, then, these countries must pare back their government, enact "austerity measures", to get back to an affordable level.

We can see that the Structural Adjustment was a proximate cause of the current troubles in Egypt: World Bank and IMF forced Egypt to limit government size and to divest state enterprises.  Therefore young men could not get a cushy government job like their parents.  Therefore they can't marry and they got angry.  QED revolution.  Although the fundamental question naturally arises: How did their parents get all those iron rice bowl government jobs?

In any event, Mubarak and his people had it coming to themselves.  Knowing that structural adjustment was coming, they could have prepared their people for a private-sector economy.  The redtape against starting a business in Egypt is legendary, sometimes exceeding the already bloated obstacles in India.  That could have been a starting point for Mubarak, coincident with the privatization.

In any event, the move to cut out the middle man/government in dispensing aid is an alluring proposition.  If you just give poor people money directly, they can spend it well.  We're in the post-Westphalian age, anyway.  But the authors went ahead and cited two native government programs, where the government, that skimming government, was monitoring the poor for compliance with program conditions.  So you end up having to depend on a bureaucracy, either government or private, for ensuring compliance [such as sending kids to school and receiving vaccinations.]

To go around the government corruption problem, aid organizations and donors will essentially have to create their own private bureaucracy to execute the program on the ground.  Then, if corruption is an intractable cultural problem, this private bureaucracy will become corrupt over time, less and less effective.  And that's assuming your conniving government was willing to stand aside and forgo its loot.  Cutting out the government works only when the government has ceased to exist.

In addition, Western donors and aid organizations run into the command economy problem: they just do not have enough information at their level to make effective spending decisions on a long term basis.

The real answer, as many conservatives concluded in the '80s, was to cut the dole.  Most of the Third World governmental dysfunction come from our misguided welfare program.  Western food subsidies drive African maize and yam farmers out of business.  Western aid creates a large bureaucracy more focused on life in the cities than the poor in the countryside.  College grads make more money being the drivers of aid workers than being an engineer.  Only by stopping the money can we hope to starve the distorted incentive structure we have created.