February 7, 2019 | by Matt Warner Print

Editorial credit: Kristi Blokhin / Shutterstock.com.

News that the World Bank’s president, Jim Yong Kim, is calling it quits to join the private sector has heightened the debate over what to do about foreign aid inefficacy. Kim made clear in an email to staff that, in his view, the “massive development finance gap” in low-income countries is best addressed by private investment. Kim’s likely successor, David Malpass, shares this view and has gone on record describing the World Bank’s financing approach as outdated due to increases in private capital available to developing countries.

Private investment is fundamental to economic development, to be sure, and yet it will always serve at the mercy of formal and informal institutions on the ground, such as property rights, financial regulation, and business licensing.

Tackling the institutional problem is the kind of upstream strategy the international community—not just the World Bank—needs to focus on in light of what we’ve learned about economic development to date. For example, it was just a few months ago that the first independent assessment of the Millennium Villages Project (MVP) was released by the UK’S Department for International Development.1

The findings call into question the investment of $300 million over 10 years on a “big push” strategy in Africa aimed at the symptoms of poverty, not the economic environment within which those investments were made. The report concludes “there is no evidence people living in the MVP areas have escaped the poverty trap” and that “what has been achieved could have been attained at a lower cost.”2

Encouragingly, some thoughtful solutions to the inefficacy problem were offered in 2018. For example, international development expert Dan Honig assembled a first-of-its-kind Project Performance Database (PPD), capturing data on more than 14,000 aid projects from nine different international development agencies.3

In his book Navigation by Judgment: Why and When Top-Down Management of Foreign Aid Doesn’t Work, Honig used the data to better understand reasons for project failure and concludes that many of the projects would be less likely to fail if they gave more autonomy to local aid workers. Honig wants central authorities to understand that many of the unpredictable decisions that need to be made throughout the course of an aid project require the kind of “soft” information that distant technocrats do not and cannot possess.

Similarly, Pablo Yanguas, in his 2018 book Why We Lie About Aid: Development and the Messy Politics of Change, stands on his ten years of work in international development to contend that aid agencies should grapple more directly with the local politics of institutional change, acknowledging such change is almost always difficult owing to a “a thick substrate of social norms, cultural values, policy ideas, and popular expectations,” which can easily frustrate the plans of any outsider.4

Both Honig and Yanguas want to see aid reformed, but since both are determined to keep international aid agencies at the center of any new strategy, neither takes their intellectual journey far enough.

Functioning institutions across countries may share some important things in common but their design is idiosyncratic as a function of local culture. For this reason, most agree public policy solutions can’t be transplanted from the outside, but too many won’t accept that their form and implementation can’t be centrally planned from the outside either.

Of course, market reforms and the institutions that support them do lead to economic development. Foreign investors know this and look to publications like the World Bank’s Doing Business report to see if the regulatory environment in a particular country is improving. Such investors need no further prompting when they like what they see. The question then is: what causes those improvements—and is there any role for outsiders to play?

Over the last twenty years a new player has emerged that represents a uniquely positioned solution to the dilemma outsiders face. This solution is as sophisticated in its strategic relevance as it is banal in its description: the local, independent think tank.

The quantity and quality of local, independent think tanks committed to strengthening economic institutions has grown considerably the last two decades. Of the 486 such organizations working today in 95 countries, only 151 of them existed 20 years ago and covered a mere 40 countries. More importantly, the best think tanks today are achieving tangible, institutional victories throughout the world on a monthly basis, according to grant monitoring performed by Atlas Network.

In Côte d'Ivoire, it was a local think tank, Audace Institut Afrique, that figured out how to work with village leadership to transition oral land-ownership customs to secured titles in the formal market. In Argentina, Libertad y Progreso rallied public opinion around their research that explained the injustice of a tariff on laptops and tablets, leading to the tariff’s elimination and a drop in prices. In Honduras, low-income would-be entrepreneurs faced steep government licensing fees until a think tank, Fundación Eléutera, made the case for their considerable reduction.

Each of those improvements represents a milestone on the institutional path to economic development. The prioritization, sequencing, and design of such pathways cannot be led by outsiders, no matter how technically savvy nor well-intentioned, because the underlying norms, culture, and customs are substantially influenced by local, tacit knowledge that is both integral to institutional development and at the same time non-transmittable to foreign minds.

From our work with local think tanks, Atlas Network believes the capacity to achieve even more reform is growing. It is our opportunity then, as outsiders, to learn from aid’s inefficacy and to increase our support for local, independent think tanks committed to economic freedom.

Emerging markets don’t need the World Bank’s loan guarantees for private investors. They need better institutions to support economic progress—and as local think tanks lead the way to institutional change, private investment is sure to follow.

[1] Barnett, Chris, et. al. “Endline Summary Report,” UK Department for International Development. August 2018. https://opendocs.ids.ac.uk/opendocs/handle/123456789/14060.

[2] Ibid. pp. xiii-xviii.

[3] Honig, Dan. Navigation By Judgment: Why and When Top-Down Management of Foreign Aid Doesn’t Work. Oxford University Press: 2018.

[4] Yanguas, Pablo. Why We Lie About Aid: Development and the Messy Politics of Change. Zed Books: 2018. pp. 81.

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Matt Warner is President and Senior Fellow of Atlas Network. Under the direction of the CEO, he is responsible for strategy, programming, and personnel management. Matt also leads the development of a research agenda to further demonstrate the invaluable role of think tanks in achieving freedom around the world. Learn More about Matt Warner >