Foreign aid can be effective without the US

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writers are professors at MIT and winners of the Nobel Prize in economics

On Wednesday last week, the Trump administration cancelled 90 per cent of the contracts signed by USAID. A few days earlier, most of its staff had been fired. Our lab at MIT received several of those dreaded letters. Our funding was terminated for the “convenience and the interest of the US government”. For many throughout the world, this is a bloody time. 

The abrupt manner in which much of USAID was terminated (something still playing out in the courts) is unique, but the sentiment is not. Around the world, countries are slashing their aid budgets: Sir Keir Starmer recently announced that the UK would cut aid to 0.3 per cent of GDP to partially pay for an increase in defence spending. In France, aid was down by more than €2bn in last month’s budget. Private foundations and ultra-high net worth individuals alike are strangely silent on ways to fill the gap.

One might be tempted to find common ground with these governments by pointing out where aid could serve the interest of the donor. But to do just that is a mistake. The world must now affirm that human lives matter, no matter where they are.

This simple principle is widely shared: after natural disasters such as Haiti’s 2010 earthquake, humanitarian organisations were deluged with funds from individuals, including Americans of all stripes. When it is possible to help others, people are willing to pitch in.

Aid’s deep unpopularity stems from the fact that people think it is a larger part of the budget than it really is — polls show Americans believe foreign aid is 25 per cent of the federal budget, when it is closer to 1 per cent — and that it is wasted and inefficient.

To be sure, the principle that all human lives matter does not provide a justification for the aid industry as it is currently structured. We have spent our careers arguing that it is almost impossible to know whether aid spending is effective or not, because too little of it is evaluated. In part, this stems from the fact that its objectives are often unclear, and sometimes conflict: aid is meant to reinforce soft power, help donor companies, save lives and promote long-term development all at once.

Reaffirming the most basic principle of aid would provide clarity. The goal should be to invest in projects that will have the largest impact on the quality of life of poor people around the world. Saving lives during environmental catastrophes qualifies, as does financing global public goods such as vaccinations or epidemic control. Helping local actors to learn from each other and adopt the most effective ways to fight poverty can also have enormous benefits, even if this sounds a bit vague. That is because any aid money invested can then be spent in the best way possible.

Michael Kremer, co-recipient with us of the 2019 Nobel Prize in economics, was involved in the creation of a small group at USAID that was doing just that. The Development Innovation Ventures fund (DIV) applied a venture capital mindset to aid funding by providing staged financing to innovators to pilot, test or help scale up effective social innovations. Kremer estimated the social rate of return of the DIV’s portfolio in its first year was 17:1, enough to make a Silicon Valley investor jealous.

That calculation assumes we value human lives wherever they are: shutting down the DIV with the rest of USAID is in line with the US government’s current priorities. But if other governments, multilateral institutions and private philanthropists can reaffirm that lives matter, they can take comfort in the clear evidence that aid can be hugely powerful and cost effective.

Now is not the moment to follow the US’s example. The rest of the world should take the lead on aid and show that it does not need the US to raise money, and that it can spend it better.

We must not let lack of funds serve as an excuse. Just 1 per cent of the wealth of the world’s 3,000 richest people would cover the budget of the five largest bilateral donors. Co-ordination to make sure the largest multinationals and richest individuals pay their share in taxes would generate more than enough revenue to replace US funds. More than 140 countries have signed up to the OECD global minimum corporation tax, but implementation is slow. Last year, the G20 agreed to work on an effort to collectively tax the super-rich. Calculations suggest if billionaires pay a minimum of 2 per cent of their wealth in tax annually, it could raise up to $250bn a year. The US is not necessary to get these policies going.

The US boycotted February’s G20 meeting. But at that gathering, South Africa’s President Cyril Ramaphosa re-emphasised the need for multilateralism and renewed efforts focused on the poorest nations. It is a historic necessity that the rest of the world join that commitment.