Friday, February 10, 2012

Emil Ruderfer: Why International Aid Doesn’t Work

Recently received this interesting essay by email:

Why International Aid Doesn’t Work

By Emil Ruderfer

It’s raining development dollars. The World Bank enthusiastically pledged billions of dollars in new loans for education, health and agriculture during a Special Session of the UN General Assembly, in support of the Millennium Development Goals initiative to combat poverty. At that same UN session, President Barack Obama announced a new U.S. Global Development Policy, promising that “the United States will be a global leader in international development in the 21st century.” Come October, still more billions in loans to finance new projects in developing countries will be on the agenda of the annual joint meeting of the IMF and the World Bank. Indeed, there are hundreds of international aid bodies clamoring to lend for new investments in developing countries.

Poor countries certainly need the aid, but if such lenders as the World Bank really want to help, it should consider not only how much money to lend, but how to lend the money so that it actually helps to alleviate poverty more effectively. Despite the huge sums invested over the years, there is a broad consensus that efforts to better the lives of the poor in developing countries have fallen well short of expectations.

How far short? As things stand, the aid community’s policies have turned developing countries into vast junk heaps of dysfunctional and prematurely deteriorating schools, clinics, roads and other such “assets.”

Take the case of the World Bank itself, the premier lending institution. As much as 90 percent of all World Bank aid is used to finance such projects as irrigation systems, environmental protection schemes, health clinics, access roads, and so forth, what John Kenneth Galbraith once described as “the furniture of economic development.” Typically, these assets are intended to have a projected operational life of 25-30 years during which they will benefit needy populations. Their actual life, however, is often far shorter, and as a result the number of people they help is minimal.

What’s the problem? It’s not an issue of lending more aid money. The problem is that borrowing governments have been chronically short of the money they need to keep all these assets in good operating condition after the lenders are gone. (For economic and political reasons, the Bank does not underwrite such assets throughout their intended shelf lives.) What happens is that the Bank lends developing countries sufficient funds to cover the initial costs of creating the assets, plus some of the early operating expenses. This money, mostly in foreign exchange currencies, is spent within a fixed period, usually five years. After that the borrowing government must become responsible for the operations and maintenance costs.

It is at the end of this first five-year period, when the lenders are gone, that the aid process often breaks down, and with it the new schools, roads, and clinics. The Bank’s working assumption is that borrowing governments will generate enough local currency to pay the expenses of the assets when they assume responsibility for them. However, there is strong evidence that the Bank has been wrong. Borrowers have failed to come up with the money.

Moreover, there is historical evidence that the World Bank has known all along that borrowers were not taking care of the billions of dollars in vital assets. Thus, tens of thousands of poor families never receive the education, health care or other services intended for them. Not only has the Bank ignored this evidence, it has routinely increased its lending for the creation of new assets, thus compounding the problem.

Much development literature attests that the problem with failed assets is well known. One 1979 report states, “Rare is the country that has not witnessed this phenomenon. In Colombia, new tarmac roads have suffered rapid and premature deterioration for lack of maintenance. Throughout West Africa, many new schools have opened without qualified teachers, educational materials, or equipment. Agricultural projects are starved for extension workers, fertilizers, or seeds…. In Bolivia, doctors are often stranded at rural health centers for lack of gasoline for their vehicles." A 1996 Bank report notes “schools without teaching materials, health clinics without drugs, and rehabilitated roads once again becoming impassable because of the absence of subsequent maintenance.” Perhaps in a few years a future such report will add Afghanistan and Iraq, where vast development programs are now underway, to this frustrating list.

A report written in 1986 hit the nail on the head and remains sadly relevant 25 years later: “The problem is not that donors refuse to finance recurrent expenditures during project implementation…the real problem emerges in its most acute form after the end of donor involvement in a project; this is one reason why projects … often cannot be sustained.”

Nevertheless, the Bank continues to turn over billions of dollars in assets to developing countries without demanding any guarantees that the necessary funding for their operations will be provided. In the last five years alone, the Bank has turned over $200 billion in assets to borrowing countries, and many – if not most -- of them face the same discouraging fate: an abbreviated useful life serving relatively few beneficiaries.

The result is that dysfunctional assets have proliferated in developing countries. Neither the Bank, nor any other international aid lender has adapted its assistance strategy to take into account the fact that borrowers simply lack the wherewithal to take care of the assets they already have on the ground, to say nothing of those on the way.

A straightforward solution is available. The architects of international aid created the World Bank at a time when the only thing developing countries needed was new development projects. Borrowers have now acquired hundreds of billions of dollars in vital social and economic assets, but they are desperately short of the funds needed to keep these assets in good operating condition. The best thing the aid community can do is to lend only to those borrowers that can demonstrate that they will be able to generate the cash to operate and maintain the assets they already have as well as any new ones.

The U.S. Government successfully tackled the problem of a lack of local currencies to finance the operating costs of Europe’s rebuilt infrastructure under the Marshall Plan 60 years ago. As J. Bradford De Long and Barry Eichengreen wrote in their 1991 account of the Marshall Plan, the U.S insisted that “For every dollar of Marshall Plan aid received, the recipient country was required to place a matching amount of domestic currency in a counterpart fund…….”
The international aid community must recognize that it should no longer continue to lend without insisting that borrowers generate the revenues needed to maintain the expensive assets created to help them raise the standard of living for their poor.

To end this cycle of waste, the World Bank needs to include in its feasibility studies - the Bank’s blueprints for aid projects - an estimate of costs covering the 25 to 30 year projected life of each asset. In fact, a 2002 World Bank internal policy research paper recommended doing exactly this and a 2007 Bank publication made similar recommendations, stating that, “The evaluation of costs for a capital project should include not only the construction costs themselves but also any resulting ongoing operating and maintenance costs.”

Once those costs are established, the Bank must make sure that borrowers will be able to generate and allocate the necessary local currency revenues to take care of created assets before any new loans are approved. If the Bank determines that borrowers can’t generate the revenues to maintain new schools, clinics, roads, etc., it should not approve the loans. The rest of the international aid community should take similar steps.

Resolving this failed-assets situation will not by itself fix all the problems with development aid; developing countries also suffer a glaring lack of technical and professional expertise that must be addressed. However, solving the dysfunctional-assets problem will put an end to the breathtaking waste that is currently built into the international aid process. Indeed, the financial and economic losses from dysfunctional assets greatly dwarf any losses resulting from corruption, even though corruption gets all the publicity.

In his UN speech, President Obama renewed his call for “a new approach to development that unleashes transformational change and allows more people to take control of their own destiny.” A “new approach” would be to make sure that the expensive assets in poor countries last as long as they are supposed to; after all, they consume almost 90 percent of all aid money. The alternative is perpetuation of the waste.

Emil Ruderfer spent nearly 30 years with the World Bank.