Foreign aid could be accomplishing so much more

Unlock Aid's recipe for doing good better

I’ve written before about Slow Boring’s support for GiveWell’s Top Charities fund, which directs donations to what GiveWell believes are the most cost-effective efforts to save lives and improve living standards.

The programs are diverse — some vitamin A supplementation here, some deworming there, a couple of malaria programs, an initiative to offer financial incentives for childhood vaccination — but they fit under the broad umbrella of public health programs in poor countries. This is, generally speaking, the category of program that is more efficient than a pure cash transfer. Although giving people money is a very effective way of improving lives, public health involves a lot of technical issues and asymmetric information, so a team of experts can sometimes identify a health intervention that is more cost-effective than what the average person would use a cash grant for. And poor countries are where the impact is largest because the people who live in them have the most unmet needs and because they are generally the cheapest places to do work.

Of course it’s easy to say that public health in poor countries is the best opportunity for giving; it’s much harder to develop and evaluate cost-effective undertakings that can be executed at scale. That’s the work of entrepreneurial do-gooders and a major funder and evaluator like GiveWell — to be both supportive and rigorous.

These ideas have become much more mainstream over the past decade because they’re interesting on the merits and also because those of us who feel strongly about them have made a deliberate effort to talk about them in hopes of getting more people on board.

What I haven’t written much about is the world of official development assistance, what most people call “foreign aid.” GiveWell has moved over $1 billion to organizations it recommends over its lifetime, but USAID’s budget is over $27 billion per year, and globally, ODA runs at around $150 billion per year.

Government aid budgets will never be fully optimized. The nature of democratic politics means some attention will always be paid to the donor government’s strategic goals and to national and historical circumstances. But by the same token, the scale of ODA is so large that modest improvements in its cost-effectiveness can do as much good as large increases in the amount of money that’s given to the most effective charities. And of course there can be an interplay between the two — the more governments do to support the most effective programs, the more good private philanthropy can do by helping to launch and incubate them.

This is the agenda of a coalition called Unlock Aid that’s come together to push for substantial overhauls in how the United States — and hopefully smaller countries, too — spends its aid money so more ends up in the hands of the people who need it and less in the pockets of NGO staff in rich countries.

Phantom aid and the trouble with contracting

One way to think about this is in terms of what the University of Washington’s Steve Gloyd terms “Phantom Aid,” the large share of aid dollars that goes to things like salaries for NGO staffers from rich countries or to offices located in D.C. or Seattle.

Some of this comes down to mendacity, selfishness, self-dealing, and other problems.

But so much of it is just baked into the contracting model the government uses. The American public sector is very concerned about avoiding “waste,” which somewhat counterintuitively often leads to patterns of practice that are, in fact, quite wasteful. The government can’t give money to just anyone — recipients have to write proper grant proposals, maintain rigorous accounting, reply to RFPs in just the right way, and otherwise develop a lot of expertise in the field of obtaining contracts from the government. This is a costly undertaking that generates a lot of overhead, and it also creates substantial barriers to entry. Very little about this is unique to the aid world; it represents a broad shortcoming of the political system’s effort to improve public sector spending after the collapse of old-fashioned political machines and “honest graft.” And it does tend to ensure that the spending is above board and well-documented, at the cost of making it somewhat challenging to actually achieve goals in a cost-effective way.

One particularly big issue here is the government’s tendency to rely on “cost-plus” contracts in a variety of scenarios ranging from the military to foreign aid.

In a cost-plus contract, the government spells out in excruciating detail exactly what it wants, and a contractor comes in, does what the government asked, and gets paid what it cost them to do it, plus a bonus that counts as their profit margin. Cost-plus is meant to give the government certainty — the vendor will deliver exactly what was asked for — but it gives contractors no incentive to try to find cheaper ways to do things. Cost-plus also builds a lot of inflexibility into the system. A little while back, I wanted to add storage capacity to my garage and when I talked to a guy about my idea, he told me that it would cost a lot of money. But, he had a slightly different idea that would accomplish more or less the same thing, and he could do it faster and charge less for it. That’s a pretty normal way for a household to get a job done. You discuss with potential vendors broadly what it is you are trying to accomplish and they might say “for a little more money, you can get this thing that’s way better” or “for less money, I can get you this thing that’s almost as good.”

Cost-plus also tends to perpetuate insider-outsider dynamics. In practice, the people writing the RFPs know who their vendors are and who can do what. They are putting out requests designed to attract a handful of bids (or maybe just one) from established players who know how to write the bids. Unlock Aid says “it can cost more than $200,000 to invest in systems just to apply for and comply with a single USAID award,” which means, of course, that it’s very unlikely anyone looking in from the outside with one good idea will, in fact, apply. Instead, established players who already have the bidding infrastructure keep on winning the awards. They have no incentive to figure out how to deliver things more cheaply (they’d just be undercutting themselves), and it’s very hard for anyone to underbid them.

Paying for results

An alternate approach would be to identify some outcomes that seem worth achieving and then attach some monetary value to doing so. How much money grantees get should be a function of how valuable the government thinks the outcome is, not how much expense they incur in achieving the goal. One consequence of this, it’s true, is that companies could conceivably reap a windfall profit if they come up with a way of doing something very cheaply.

That’s probably why cost-plus came into vogue in the first place.

There’s something unseemly about the idea of a private company scoring very high profit margins during an emergency. When the government was spending a shitload of money on the Apollo Program, the expense was of course controversial, and the idea that nobody was earning fat margins seemed reassuring. Similarly, in an aid context, you’re supposed to be helping people, and in theory cost-plus ensures the amount spent is proportionate to the actual cost of doing whatever it is that’s supposed to help.

That’s a shortsighted view. If you really do think accomplishing something is worth a certain amount of money, then letting someone earn a big profit by doing it is good because that will attract more players into the space over time. This can ultimately bring costs down via competition or expand your capacity to accomplish whatever it is you want to accomplish. But it requires viewing the landscape of potential suppliers as larger than the landscape of current suppliers. When Bill Nelson was a senator from Florida, he was very interested in NASA issues, and NASA’s existing base of aerospace contractors was very interested in him. With those incentives in place, he was a big proponent of the cost-plus status quo, but now that he’s actually running NASA he’s become a critic — the emergence of Space X and Blue Origin shows that you don’t need to think of Boeing and Lockheed as the only possible partners. There are big benefits to being more open-minded.

In the aid context, similarly, a more results-oriented approach could open the space up to more providers — ideally ones based in developing countries themselves where the cost basis is lower.

However, if donors simply stated the results they want achieved — and left the “how” to doers — this will open the doors to more innovative players. When designed well, pay-for-results models do not require lengthy responses to jargon-laced RFPs. They become an effective way to increase impact while also cutting red tape and generating greater interest from non-traditional market participants. Within four years, at least 40 percent of all US foreign-assistance funding should flow through mechanisms that pay for results.

As long as the results are, in fact, worth what you’ve agreed to pay for them, it just doesn’t make that much sense to be hung up on margins. Suppliers reducing their own costs is good. People earning profits by delivering valuable services at a reasonable price is good.

The question the government should be asking is what’s actually worth spending money on.

USAID should use its own evidence

During Barack Obama’s first term, Maura O’Neill was appointed to be USAID’s first-ever Chief Innovation Officer, and in that capacity she launched a program called Development Innovation Ventures.

DIV gives out a lot of relatively small grants (plus a few bigger ones), the main purpose of which is to try out new ideas based on research in development economics. Michael Kremer, Sasha Gallant, Olga Rostapshova, and Milan Thomas conducted an evaluation of DIV-backed programs and found a social rate of return of 17:1, which is excellent. Unfortunately, the money allocated to this program is a pretty small share of the overall foreign aid pie. DIV’s current grant tier structure looks like this:

• Stage 1 Grants: Pilot (Up to $200,000)

• Stage 2 Grants: Test and Position for Scale (Up to $1,500,000)

• Stage 3 Grants: Transition to Scale (Up to $15,000,000)

• Evidence Generation Grants (Up to $1,500,000)

What ought to happen is that more of USAID’s larger funding streams should be invested as a kind of Phase 4 of this process, with solid evidence-backed programs brought up to the largest possible scale. Reps. Joaquin Castro and Young Kim have a bipartisan bill in the House to do this, and it would be great to see a vote if Congress could get itself out of partisan crisis mode.

It’s also worth giving cash transfers stronger consideration. There’s solid research showing that plenty of programs are more cost-effective than direct cash transfers. But the reality is that there are also lots of programs that are less cost-effective than direct cash transfers. And cash really is very effective. Once upon a time, people had a lot of worries about perverse consequences or negative impacts, but none of that checks out. Poor people in poor countries just have very, very few economic opportunities, and giving them money reliably raises living standards and in some cases allows people to start accumulating capital and move to sustainably higher incomes.

I think there is naturally some reluctance among people who support foreign aid generally to talk about the fact that a lot of aid money is poorly spent.

At the end of the day, this money does still do a lot of good and it’s perpetually vulnerable in politics. The electorate is always eager to “cut spending,” but foreign aid is infamously the only specific category where spending cuts reliably poll well. Too much discussion of wasteful practices could be seen as just opening the door to cuts. At the same time, the reality is that the amount of money currently being spent on aid, while not large compared to rich countries’ capacity, is actually very large compared to the budgets of the most cost-effective aid programs. Redirecting the money that’s currently being spent toward better programs could do a lot of good in the world. And my general inclination about a lot of categories of spending — from aid to mass transit and beyond — is that if the money was delivering more visible results, that would improve the politics. There are huge opportunities here to save lives and lift people out of poverty if we think more rigorously about it, and we really ought to try.