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"Aid money is undermining the growth of the countries that receive it."
—Angus Deaton, winner of the 2015 Nobel Prize for Economics, in his book "The Great Escape"

"USAID... from the American people" say the rice bags in Haiti. But for Haitian farmers, the free food is a monkey wrench thrown into their economy. In 2010 former President Bill Clinton publicly apologized: "I have to live every day with the consequences of the lost capacity to produce a rice crop in Haiti to feed those people, because of what I did."(1) The real aid recipients are American agribusiness and shippers who are paid far above market rates, and they make sure the system keeps working.

NGO money undermines developing economies

There is no doubt that the aid industry — international NGOs and government aid programs — has helped many individuals. The NGOs are not shy about telling us, and the media is happy to get an inspiring story.

Less obvious are the ways that aid money undermines the economy of countries where it is sent. (If and when it arrives. In this context, we can be grateful that so much of the money never leaves the donor country.)(2) Here are some of the ways it hurts:

It unfairly competes against local employers that need staff

A business must earn its money by selling things within the local economy. It cannot pay more than the value that a worker brings to the job. An INGO has no such constraints; An INGO worker typically gets 2 to 20 times what he or she could earn in the real economy. And the higher pay is usually for shorter hours — the foreign staff wouldn't feel comfortable making locals work longer hours than themselves.(3)

This is particularly problematic for health workers. Doctors and nurses must be trained, usually locally, often at government schools. An INGO arrives to build a hospital and hires them away from the local hospital. A hospital in Malawi reported that in an 18-month period, 88 nurses were hired away by NGOs that paid higher salaries.(4) Soon the NGOs can say, "We have to stay here! The government hospital does such a poor job, we can't leave," never acknowledging, and perhaps never even realizing nor wanting to realize, how much they have driven down the quality of government service.

Aid money distorts the labor market. An NGO worker typically gets 2 to 20 times what he or she could earn at a local business.

INGOs have several incentives to overpay. It moves cash out the door, and that's their job. It firmly binds the worker to the organization and puts the INGO in control: It will be the INGO that decides when to terminate the relationship. High salaries reduce the bad karma that the foreign staff would feel if their salaries were astronomically higher than the local salaries.

Most subtle but most important, the high salary vests the worker with the same goals as the organization: to look busy and make donors happy, but never solve the underlying problems. That would end the good times.

It unfairly competes against local businesses that need customers

It takes customers, as well as staff, away from local businesses. You can't compete against free.

A commonly cited example is a company which sold mosquito netting, but went out of business when INGOs began giving away nets for free.(5) In a crisis, free distribution might be appropriate. But as an ongoing approach, rich countries aren't going to give away enough.

Giveaways undermine the market in other ways. In Somalia, a World Bank "Discussion Paper" described several ways that a decade of food aid hurt local farmers. Urban dwellers switched from locally-grown grains — sorghum and maize — to rice and wheat. More importantly, noted the report, "food aid increases the uncertainties facing domestic grain producers" because the primary purpose of donors' exports is to get rid of surplus food from their country. They don't try hard to coordinate with what's needed at the other end.(6)

They need time and attention.

Each new aid project requires time and attention from government officials. They must have meetings and discuss plans, make an MoU (a Memorandum of Understanding, stating what will be done, though typically it's forgotten as soon as the ink is dry, with no consequences for either party), write reports, and visit sites. INGOs want the top government officials at their ceremonies, to appear in their photos and video, because that makes it look more important to donors.

Much of this could be done with less government time. But bureaucrats everywhere know a cash cow when they see one. By inflating the job, they can collect consulting fees, rents, and travel expenses, plus the odd cellphone or motorbike. While some INGO staff may grumble, institutionally the INGO doesn't really mind. It creates jobs for them, too. It creates good stories about the insufferable bureaucratic obstacles they must overcome, and provides excuses when things are delayed.

It is the country that suffers. Angus Deaton, the Nobel laureate who has called attention to the harm done by aid, says this is "one example of aid diverting government away from its own citizens and toward the aid agencies themselves."

People in poorer countries don't develop skills.

For an INGO to survive, it must please the donors in wealthier countries.

The Western staff (whether based in the poorer country, or back at headquarters) isn't about to turn this crucial job over to local staff, who less understanding of the donors' culture. They'll do it themselves. That creates jobs for them and it keeps them in control. But it also means the local staff doesn't get space to develop their skills.

The INGO needs a local person who speaks good English and can charm visiting donors, and to carry out routine work and mid-level management. But high-level planning, publicity, writing reports, accounting, and other key functions generally fall to the Western staff.

The truly big decisions are made far away, in the home office. Local people don't get a voice in setting the policy, and don't get experience in such decision-making. This also avoids a potential problem: Things could get uncomfortable if the local staff realized the extent to which INGO policies focus on donors, rather than on what's best for the aid recipient.

Aid money creates a new class of people.

Developing countries today face an obstacle that the wealthy countries did not have.

Aid money creates a new class of people whose income depends on their country remaining dependent on foreign aid.

Each of these countries has a new class of people whose income depends on their country remaining dependent on foreign aid. This includes INGO staff, government officials, high-end hotel and restaurant owners, SUV dealers, construction contractors, and a host of others who get money from INGO and foreign aid. Many times, they've developed connections that allow them to get vastly overpaid. It's a group that includes many powerful and influential people.

Typically they are people who love their country. If asked, they would say that of course they want their country to become stronger. But they'll lose their income if their country becomes economically independent. They are not trying to make that happen.(7)

INGOs like short-term projects.

Effectiveness requires long-term planning and commitment. As you progress, you discover what works and what doesn't, and make adjustments.

But INGOs face pressure to prefer short-term projects. Donors want to see tangible results soon. It's easier to raise money for something "new!" than for ongoing expenses of an existing project.

Most staff only come for two or three year stints; they focus on what can be done in that period, not on what will happen two successors hence. In reality, often their new project runs into obstacles and cannot be finished in two years. The person who started it leaves, and writes a few notes for their successor. But the new person doesn't want to pick up someone else's mess, just at the point where things got complicated. They have their own ideas. The old half-done project is quietly forgotten.(8)

New projects have another attraction: It's easy to imagine a new idea becoming successful. It's easy to get everyone excited. After a year or two, problems arise. Perhaps they can be fixed with careful attention. But it's easier to start something new.

INGO like expensive approaches.

International charities would rather build a $1 million hospital, than set up a $100,000 long-term training program for nurses. Why?

Expensive approaches create the impression that simple, locally-based solutions couldn't do the job.

First, donors like to see what they paid for. They are perpetually worried, and not without reason, that somebody will just take their money and do nothing. A picture of a school or hospital proves that something happened. It's easier to raise the larger sum for concrete, rather than the smaller sum for "soft goods."

Second, the INGO can keep 20% of $1 million for its overhead, rather than 20% of $100,000, and still look suitably thrifty to the charity-rating agencies.

Third, construction is a clear-cut job, and then it's finished. The INGO hands over the hospital to the local authorities at a grand ceremony, and moves on to a new project. "New" is what donors like to hear. A nurse-training program creates on-going expenses which nobody wants to fund.

Finally, the greater the money, the greater the spray. It's hard to keep track of where $1 million goes, and nobody tries very hard, because it wasn't their money to start with. No one will ever check to see if there really are 2000 meters of rebar buried in that concrete. Nobody will be rewarded for trying. If irregularities do come to light, they can always be blamed on a sub-contractor that didn't follow the rules.(9) But for the country receiving aid, these expensive approaches create the impression that a problem can't possibly be solved by simpler, locally-based approaches. The big money discourages local people from trying to find solutions. And if they do, the government is too busy pandering to donors to give their own citizens much attention.

* * *

At a quick glance, we might think that the costs of the INGO presence — government time, unfair competition against local businesses that need staff, the class of people looking to prolong the problem — are simply a cost that must be borne, if INGO are to come solve problems. On closer look, it's a cost to be borne with remarkably few associated benefits.

Notes and Sources

1. "A Subsidy as Shameful as They Come," by James Bovard, The Wall Street Journal, 25 May 2016. Clinton's apology came as USAID was preparing to dump a million pounds of surplus peanuts into Haiti, which a Haitian farmers organization denounced as "a plan of death." USAID is well aware of these issues but goes ahead anyway. The Journal reported that "in 1984, 10 people were killed in Haiti when government troops fired on crowds rioting to protest corruption in the U.S. food donation program." (back)

2. How much aid money never leaves the donor country? The people passing out the money aren't eager to pass out that information. In his book Beloved Land, Gordon Peake writes that "The Dili-based NGO La'o Hamutuk estimates that around 90 per cent of development assistance never reaches the country, being mostly spent on salaries, overseas procurement, imported supplies, and overseas costs." Angus Deaton, in The Great Escape: "By some estimates, 70 percent of aid from the United States never reaches the recipient countries, at least not in cash." The Nation reports that "According to the Center for Economic and Policy Research (CEPR), of the $1.38 billion in USAID funds Washington has poured into the [Haiti earthquake] recovery effort, 'just 0.9 percent has gone directly to Haiti organizations, while 56.6 percent has gone to firms located inside the beltway (Washington D.C., Virginia and Maryland).'" USAID responded that some of that Beltway money eventually got to Haiti but would not give details. (back)

3. Excessive pay by INGOs has been widely noted. Linda Polman, in The Crisis Caravan: "Hospitals in countries in crisis see their doctors, nurses, and midwives leave to work on aid projects, and schools find themselves without teachers, who have opted to work for aid organizations, as interpreters, for instance. Aid agencies pay them up to twenty times their old salaries." David Brooks in the New York Times: "This incredible infusion [of aid money] distorts labor markets. An Afghan can make $75 a month as a teacher but more than $1,000 a month as a translator or driver for aid workers. The most talented people get sucked out of the real economy and into the aid economy." Michael Maren in The Road to Hell: "An African entrepreneur doing a rational analysis of his economic opportunities would likely conclude that the future was in relief and development work." Maren tells of a 19-year-old Somali man named Jiis who earned $300 a month as a security guard for the UN at a time when the average per capita month income was about $13. It's not that Jiis brought rare and important skills to the job: Previously he had been a looter. Jiis's income continued its upward trajectory: He and three friends held up the same UN office at gunpoint and made off with nearly $100,000 from the safe. (back)

4. The 88-nurse figure was first reported in The Lancet, 25 Feb. 2006, in "Must aid hinder attempts to reach the Millennium Development Goals?" by G. Davey, D. Fekade, and E. Parry. We relied on coverage in an excellent article, "The End of the Era of Generosity?: Global Health Amid Economic Crisis," by Kammerle Schneider and Laurie Garrett in Philosophy, Ethics, and Humanities in Medicine, January 2009. They give other examples: "One quarter of physicians and one in 20 nurses trained in Africa currently work in the 30 industrialized countries in the [OECD].... In Ethiopia, contract staff hired to help implement disease specific programs earned salaries three times greater than regular government health employees." (back)

5. References to this story are frequent. We have not found a well-documented actual case involving mosquito net producers. Many references may stem from a story told by Dambisa Moyo in her book Dead Aid, but we understand her story to be a hypothetical example, which she returns to several times in her book to illustrate her points. If a small producer in Africa manufactures and sells 500 mosquito nets, then a celebrity jets in with 10,000 nets to give away, that will put the producer out of business. But five years later, when the nets have worn out, there won't be any nets at all, because the celebrity wants to go somewhere else next time. There is room for more thoughtful solutions, suggests Moyo. For example, the celebrity could buy locally-made nets, then sell them at a subsidized price, or even give them away. Good idea! But it doesn't often happen. INGOs have a financial incentive to get the nets donated from a business in the Western country which will benefit from a tax break and publicity. These will have a higher valuation so the cost of flying around a celebrity-and-entourage won't look so outrageous when compared to the value of the goods being donated. Our story Free books explains why businesses like to donate goods, and World Vision's t-shirts explains non-obvious reasons that INGOs like to get them. (back)

6. Food Import Dependence in Somalia: Magnitude, Causes, and Policy Options, a World Bank Discussion Paper, 1988, by Y. Hossein Farz, pages 17-18. (back)

7. Michael Maren portrays this new class in The Road to Hell:

Today, after huge infusions of international aid, Somalia and all its formerly self-sufficient neighbors are chronically hungry and dependent on foreign food. It becomes increasingly difficult for aid workers to ignore the compelling correlation between massive international food aid and increasing vulnerability to famine. "Our charity does not overcome famine, and may help to prolong it," someone will always lament. Those who spend the time to study the local economies see that the people have now geared their own activities not to returning to their old lives but to getting their hands on aid. (back)

8. The short-term focus of aid workers is widely lamented. In Social Entrepreneurship: What Everyone Needs to Know, David Bornstein and Susan Davis explain why entrepreneurs are more successful than aid workers: "Foreign aid workers typically had little time for trial and error. Like politicians, they needed success in two-year cycles, because that was the average stint before they moved on." (back)

9. Dambisa Moyo elaborates on this point in her book Dead Aid:

The allocation of government spending suffers as corrupt officials are likely to choose projects less on the basis of public welfare and more on the opportunities for extorting bribes and diverting funds. The bigger the project, the greater the opportunity. Projects whose exact value is difficult to monitor present lucrative opportunities for corruption – it is easier to siphon money from large infrastructure projects than from textbooks or teachers’ salaries. (back)