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Better institutions are key to development aid

ADB Complex

ON Wednesday, May 10, Dr. William Easterly, a renowned development economist and a professor at the prestigious New York University, was a guest at the headquarters of the Asian Development Bank (ADB) in Ortigas, where he delivered an enlightening lecture on the topic, “Facing the challenge of donors’ self-interests in foreign aid.” While the lecture was obviously framed for his audience, that is, an institution devoted to channeling those donors’ funds to countries and communities with development needs, Dr. Easterly’s views contained several important lessons for development aid recipients such as the Philippines.

Foreign aid that is used for various development goals, such as poverty reduction, education, public works projects, climate change response, and other programs intended to improve the economic and social conditions of beneficiaries can either come directly from individual governments, by way of institutions such as the ADB or various organizations in the UN system using funds provided by those governments, or from private sector philanthropists. As it is quite rare for any person or group to be purely altruistic, it is only natural that the benefactors attach their own interests to the money they are donating, either by intending it for specific purposes, or directing it to beneficiaries that have an agreeable political or social perspective.

Self-interest is not necessarily a bad thing, but where it becomes a problem in the context of development aid, Dr. Easterly explained, is when self-interest overrides rational choices and leads to aid being directed to countries where it will be less effective than it otherwise could be. What happened with the orientation of US foreign aid in the wake of the Sept. 11, 2001 terror attacks on the US and the subsequent launch of America’s “war on terror” is an excellent example, Dr. Easterly explained.

Even though the amount of money the US devoted to foreign aid increased significantly, almost all of it was directed to countries perceived as being on board with the US counterterrorism agenda. That meant that a great deal of the aid was wasted on countries with weak institutions, serious corruption issues, or struggling with conflict and instability, rather than to countries with equal or greater need, but better positioned to use the aid more effectively. Afghanistan is probably the most familiar example to illustrate the failure of US aid that is overly constrained by US self-interest. The US is likely the biggest example of counterproductive self-interest in aid, but it by no means is the only one.

While Dr. Easterly’s discussion looked at the problem from the aid distribution end, looking at it from the perspective of an aid recipient reveals a couple of important lessons for our government. First, in the research that empirically determined that “too much self-interest in aid donation makes the aid less effective,” aid from multilateral sources, institutions such as ADB, the World Bank, the UN Development Program, and their peers, is used more effectively and has fewer strings attached than aid from bilateral sources such as the US Agency for International Development, or aid agencies that are controlled by their respective countries’ foreign ministries, such as the Australian Agency for International Development, which is a part of Australia’s Department of Foreign Affairs and Trade. Thus, to ensure its own policy independence, the Philippines should prioritize multilateral sources in seeking funding support for its development goals.

The second important lesson is that, with the potential pitfalls of self-interest being known, development institutions such as ADB, and even some bilateral institutions, of which the Japan International Cooperation Agency might be the best example, which are trying to avoid or minimize the potential waste of aid prioritize striking the best balance between a beneficiary country’s need and its capacity to make the best use of it. That means that political and institutional stability is important. The Philippines is fortunate to be in a position where its need for outside assistance is not so desperate as some other countries, but the outside assistance is still frankly needed for some of our government’s biggest objectives. To ensure that assistance is forthcoming, the government needs to continue to work on improving institutional reliability and fighting corruption.

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