09 January 2013

Does Policy Work?

This might be my most popular tweet ever.
So I thought it might be worth some elaboration. The idea of course, is from Duflo & Banerjee's "Poor Economics" and Karlan and Appel's "More Than Good Intentions", but I'm not sure they stated it so succinctly or hit upon the direct metaphor of domestic policy. It's also been further embedded in me from directly working on a wide range of aid-financed policy at OPM. And most proximately, inspired by yet another abysmal right-wing aid attack article in the Spectator (which I won't bother link to because it is awful and you shouldn't waste your time and frustration on it like I did).

The question "does policy work" is jarring, because we immediately realise that it makes little sense. Governments have about 20-30 different Ministries, which immediately implies at least 20-30 different areas of policy. Does which one work? We have health and education policy, infrastructure policy (roads, water, energy), trade policy, monetary policy, public financial management, employment policy, disaster response, financial sector policy, climate and environment policy, to name just a few. It makes very little sense to ask if they all collectively "work" or are "effective". Foreign aid is similar. Aid supports all of these different areas of policy. My colleagues and I at OPM work on aid-financed projects that support most of these different policy areas in different developing countries.

There are of course reasons that aid is different to domestic policy, and why we might want to think about it a bit differently. Classic concerns are about dutch disease, and undermining domestic accountability. But here there is actually not any really robust evidence pointing either way. The really robust evidence is all to be found at the project-by-project, policy-by-policy level.

A common concern is about the impact of aid on growth. But do we judge UK health policy by whether it has an impact on growth? Admittedly, we might expect an external infusion of spending to a poor country to have at least some temporary impact on growth regardless of what it is spent on. But is that really the outcome by which it should be judged? Some aid is specifically targeted at growth - such as financing infrastructure or private sector development. But much of it is not. One of the few papers which looks at the macroeconomic impact of aid and actually bothers to disaggregate even a little the different types of aid, finds that the aid that could be considered to have growth as a target, does increase growth. It's the aid that was never intended to impact growth at all, such as humanitarian assistance, which doesn't have any impact on growth.

So. Africa is not a country. It is many. And aid is not a policy. It is many.

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