Overcoming the Outsider’s Dilemma: Can Philanthropists Help the Developing World?

First Published: 2018-01-26

by Matt Warner

Posted with the kind permission of the Atlas Network.

Executive Summary
Today’s top-down, economic development aid model is unavoidably flawed. The nature of economic development requires idiosyncratic solutions that can’t be successfully designed or administered by outsiders. Instead, locally grown solutions aimed at transforming the institutional environment in favor of market growth, primarily through securing economic rights for the poor, represent the best chance for accelerating the pace of poverty alleviation throughout the world.

For outsiders, this represents a serious dilemma. Is there a way to help without interfering? A new strategy offered by Atlas Network successfully combines the resources of philanthropy with the locally grown research and advocacy agenda of independent, market-oriented think tanks working to strengthen the institutions that foster growth for the world’s poor. Benchmarking their efforts to global indices like the “Doing Business” report published by the World Bank, those think tanks are making measurable progress. The results are significant. According to new research commissioned by Atlas Network, a five percent increase on the “Doing Business” scale represents a 1-percentage point reduction in poverty.

Alex Georges co-founded ENERSA, a renewable energy company in Haiti, to help ease the transition from kerosene lamps to electricity. In the aftermath of the 2007 earthquake, solar power offered a quick and convenient way to provide power to mobile devices, relief workers and those trying to rebuild their homes. His business was up and running, poised to meet the new demand. But a humanitarian-inspired dump of foreign solar panels flooded the local market, forcing layoffs at ENERSA and leaving Georges near bankruptcy.

Free stuff isn’t always bad, especially in the immediate aftermath of a crisis. But for fragile economies, the unpredictable nature of humanitarian aid means it can reverse hard-won economic progress. What’s more, there is little distinction any more between short-term emergency aid, which can be helpful, and long-term development programming, which is not. Today they operate as a blurred permanent model that many experts claim is doing more harm than good. The good news is that there is now a better way, but it requires a completely new philanthropic strategy.

Aid Isn’t Working
Oxford-trained economist Dambisa Moyo, who grew up in Zambia, writes in her book “Dead Aid: Why Aid is Not Working and How There Is a Better Way for Africa,” “Donors, development agencies, and policymakers have, by and large, chosen to ignore the blatant alarm signals, and have continued to pursue the aid-based model even when it has become apparent that aid, under whatever guise, is not working.” She reports that study after study demonstrate the failure of aid as a strategy for achieving real growth. While aid might deliver relief in a crisis, she concludes, “The idea that aid aimed at economic development helps to alleviate systemic poverty is a myth.”

Simon Bland, head of Britain’s department for international development in Kenya, told journalist Nina Munk, “I know that if you spend enough money on each person in a village, you will change their lives. … The problem is, when you walk away, what happens?” Bland has witnessed the precarious state of aid-dependent communities. Not only does aid contribute to the problems of instability, aid delays and distorts the path for the kind of sustainable development those communities need for long-term growth and independence.

Munk, a contributing editor at Vanity Fair magazine, spent six years shadowing Jeffrey Sachs, perhaps the most famous development expert in favor of more aid. Munk started the project thinking that her reporting might help raise awareness about Sachs’ $120 million Millennium Villages Project, an all-of-the-above strategy designed to help poor villages make the great leap forward to economic development. In the end, she published an unflattering appraisal titled, “The Idealist: Jeffrey Sachs and the Quest to End Poverty,” which details how his approach is having a devastating effect on economic development.

She writes, “Jeffrey Sachs’ observations on the ground were necessarily limited — by the pressures of time, by language, culture, education, background, preconceptions and ingrained models of thought.” She adds, “In effect, [Sachs] wanted us to trust him, to accept without question his approach to ending poverty, to participate in a kind of collective magical thinking.”

She observed first hand the costs of that “magical thinking,” the belief that an outsider with limited knowledge can solve other people’s economic problems for them. The result is example after example of major investments in new crops that found no customers, new trade centers that found no traders and new jobs that could not be sustained. Even when efforts had positive outcomes, they could not continue without further aid, a result completely at odds with the purpose and pitch behind Sachs’ development strategy.

Most practitioners are well aware of these problems and for more than a decade have tried to overcome them through better program design. Those efforts have successfully underscored the need to do development differently but because they fail to fully account for the undermining influence of the outsider, they fall short of achieving lasting prosperity for those in need.

Institutions Matter
When it comes to achieving prosperity, we have learned that institutions such as property rights, rule of law and free markets are paramount. For decades, international organizations and governments have pushed some version of these kinds of consensus reforms from the top-down as conditions for trade, aid and credit — often with tragic results.

We’ve learned the hard way that institutions such as property rights systems are unlikely to “stick” if imported. Instead, they have to be developed from within, locally grown, both to ensure buy-in and — more importantly — as a means to discover the unique cultural mechanisms necessary for informal norms to transition smoothly to well-functioning formal systems.

In South Africa, for example, land titling increased for post-Apartheid government housing tenants only after the Free Market Foundation, a local nongovernmental organization that champions property rights for the poor, led a community reform effort that relied on voluntary participation. This approach succeeded in strengthening the institution of property rights because it was driven primarily by the individual decisions of its beneficiaries.

In their book “Why Nations Fail,” authors Daron Acemoglu and James Robinson point to the importance of getting institutions right, but at the same time offer the crucial insight that, “No two societies create the same institutions.” Successful institutions might hold many things in common, but their design — and the process for achieving that design — is necessarily idiosyncratic and very likely to fail if planned by an outside mind or organization. As the Nobel prize-winning economist James Buchanan once explained, order is defined in the process of its emergence.

Foreign Governments: The Ultimate Outsider
Consider this uncomfortable truth: While there might be differences in motivation and intention, today’s intellectual hubris about economic development follows closely on the heels of a long and disturbing history of paternalism between the world’s rich countries and those less developed. The prevailing philosophy of aid has its roots in a colonial past. In their book, Acemoglu and Robinson describe that past in all its brutality and pin some of the blame for the state of today’s most dysfunctional governments on that legacy. Even then, early motivations had the veneer of helping. Biographer Adam Hochschild explained how the monstrous Belgian King Leopold II, who infamously ruled over the Congo in the late 19th century with near complete disregard for human suffering, enlisted the world’s best explorers by describing the mission in only altruistic terms, promising to abolish the slave trade and, as a means to improve their legal institutions, “procuring them just and impartial arbitration.”

This legacy shows up in the bias held today in favor of technical expertise and centrally-planned solutions. It blinds the outsider to the faulty premise that one can and should solve economic problems on behalf of the poor.

William Easterly, professor of economics at New York University and co-director of its Development Research Institute, in his latest book, “The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor,” traces the historical progression of state-led, authoritarian bias inherent in international economic development and warns that “the exhortation that all development discussions must lead … to a recommended philanthropic action inhibits clear thinking.”

It’s an important point because the stakes are high. Economist Chris Coyne is the author of “Doing Bad by Doing Good: Why Humanitarian Action Fails.” He observes, “[H]umanitarian action has over time become increasingly intertwined with the broader military and foreign policy objectives of governments,” making the dilemma that much more intractable for well-intentioned philanthropists in the economic development space.

Coyne’s research confirms the problems created by the outsider’s hubris. It painstakingly demonstrates how the dominant and rapidly expanding state-led approach “neglects or downplays the complex economic, legal and political systems underpinning the effectiveness of designed organizations and institutions.” The unfortunate result is not just failed economic development, but a geopolitical system even more vulnerable to conflict of interest and corruption.

Like Easterly, Coyne doesn’t offer much of a philanthropic alternative, but in his concluding chapter he writes, “[F]ocusing on ways to … remov[e] barriers to economic freedom will yield benefits significantly greater than those from the best spent foreign assistance.” This observation echoes Easterly’s emphasis on restoring economic rights for the poor but, as outsiders, it still leaves us in the same dilemma. How can we help the world’s poor if the intervention itself is part of the problem?

The outsider’s dilemma is woefully underappreciated, even ignored. Foreign governments continue to spend large sums on development projects. In fact, 2016 was a record year in total dollars spent. Ignoring the dilemma instead of confronting it head-on is distracting us from finding a solution and, instead, leading us into strange territory, indeed.

Short-Term Vs. Long-Term Solutions
Consider that in 2017 one of the most prominent debates happening in economic development pits Bill Gates against development expert Chris Blattman on whether to give poor people chickens or cash. Both cases are no doubt borne of noble motives, but neither is a proven method for achieving prosperity and both completely sidestep what has proven to be the most consequential problem: The institutions governing where poor people live.

Research shows when poor people relocate to countries with economic rights for the poor they thrive. As Harvard development expert Lant Pritchett explains it, “There are no poor people. There are people living in poor places.” Giving someone a chicken or a tidy sum of cash will do little in a country that makes it nearly impossible for them to be productive because there are too many barriers to enterprise and too few legally secured economic rights.

That gets us back to our dilemma. If we don’t figure out a way to remove barriers to the free exercise of economic rights, every other approach will fail. As 2015 Nobel Prize winner Angus Deaton explains in “The Great Escape: Health, Wealth, and the Origins of Inequality,”. “When the conditions for development are present, aid is not required. When local conditions are hostile to development, aid is not useful, and it will do harm if it perpetuates those conditions.”

Of course, we should exercise great care before dismissing as insignificant what a modest cash gift or a chicken might do for an individual or a family. At the same time, though, some of us should focus on the larger problem that, if solved, could have much more far-reaching impact. Coyne cites political theorist and moral philosopher Michael Walzer, who writes, “It is, of course, immediately necessary to feed the hungry, to stop the killing. Relief comes before repair, but repair, despite the risks it brings with it, should always be the long-term goal — so that crises do not become recurrent and routine.”. You can accept that challenge while preserving a healthy respect for the outsider’s dilemma, but taken together they require a radically different approach to helping the world’s poor. As it turns out, such an approach is emerging already.

A New Strategy For Outsiders
In India, last year, the Centre for Civil Society successfully pushed for the elimination of minimum capital requirements for new businesses, a practice that disproportionately burdened the poor. The Centre correctly anticipated that this reform would impact India’s score on the World Bank’s “Doing Business” report, an annual assessment of 190 countries measuring how easy their governments make it to exercise economic rights.

Atlas Network supported new research this year showing the relationship between those kinds of reforms, as measured by the “Doing Business” report, and changes in poverty. In the forthcoming 2018 edition, the report will include the finding that for every five-unit score increase, poverty is reduced 1 percentage point.

Applying those findings to what the Centre for Civil Society achieved, that translates to the equivalent of 321,000 people lifting themselves out of poverty in India. More encouraging, India wasn’t the only country that saw reforms last year. In fact, just in the past two years Atlas Network has supported reform projects in 29 countries with poverty alleviating victories in 10 and counting.

The global network includes more than 480 independent think tanks, such as the Centre for Civil Society, in 96 countries. Each advocates their own unique reform agenda based on the principles of the free society and the economic rights necessary for all people to achieve financial well-being.

Those organizations represent the missing link between the need to remove barriers to the free exercise of economic rights on the one hand and the necessity of cultivating locally grown solutions to bridge today’s informal norms with tomorrow’s strong institutions on the other.

This represents a new strategy, one that overcomes the outsider’s dilemma, while building on the wisdom and warnings of Deaton, Moyo, Munk, Acemoglu, Robinson, Easterly, Coyne and others, and it is working.

Small Reforms, Big Impact
The statistical results are encouraging, but we can also look to broader insights about the nature of growth and development to know that this strategy is the best way forward. Entrepreneurship and economic development experts William Baumol, Carl Schramm and Robert Litan in their book, “Good Capitalism, Bad Capitalism,” emphasize the importance of economic freedom in achieving growth, particularly in countries with high levels of poverty. Recognizing the political realities many countries face, they concluded that significant results still could be gained even from achieving reform “policies at the margin (emphasis in the original).”

How do we identify such marginal policies? In essence, by their association with affirmative answers to the following questions:

  1. Is it easy to start, grow and close a business?
  2. Is it easy to realize the rewards of productive behavior? (i.e., rule of law, freedom of contract, property rights, simple taxes?)
  3. Is it hard to realize the rewards of unproductive behavior (fraud, theft, rent-seeking)?
  4. Is it hard to stop competitors, except by competing? (i.e., barriers to trade and investment?)

Those are the kind of policies measured by the “Doing Business” report. Of those policy changes, Baumol, et al., later write, “These are no small matters.” They continue, “Taking some or all of these steps can quickly lead to results.” In fact, they cite the “Doing Business” report where it “documents sharp jumps in the numbers of businesses registered and increases in business investments in countries that have streamlined their business registration systems.”

One such example comes from Nepal where the local nongovernmental organization Samriddhi Foundation led a research and advocacy campaign designed to give low-income entrepreneurs an easier go at starting a business. As a result, new microenterprises pay no fees to register and income taxes are waived for the first five years of operation, a crucial period for a new business. Furthermore, government ministries can no longer keep productive Nepalese in bureaucratic limbo. New rules require that business applications be approved within 30 hours of submission – a small change likely to have a big impact.

Doing Development Differently
Taken together, this means the outsider’s dilemma may be overcome with a new strategy for economic development that first recognizes that outsiders cannot effectively design the solutions. Local independent think tanks with the knowledge, the capacity and the ambition to remove barriers to economic freedom and restore economic rights are the best qualified to do that.

The new strategy also recognizes that the most practical way forward in many countries is simply to chip away at those barriers to economic freedom that prevent entrepreneurs and everyday people from being productive. Those reforms are significant. At the conclusion of his latest book, Easterly clarifies that he is hopeful about the future because even “an incremental positive change in freedom will yield a positive change in well-being for the world’s poor.”

Moreover, the new strategy recognizes there is a role for outsiders. Philanthropists can fuel locally-grown research and advocacy projects around the world. They can fund independent organizations that are committed to the reforms that build and strengthen the institutions necessary for economic development. With current resources, think tanks around the world are consistently achieving significant reforms. Each of those reforms has a measurable impact on key indices and positive and measurable consequences for the poor.

With more help, they can achieve even more.

The world’s poor need better places to live and work where their productive efforts will not be blocked or punished. The think tanks that champion their cause at home have proven they can achieve results and, in so doing, they have earned the trust of philanthropists who are ready to overcome the outsider’s dilemma by putting their support in places where it can truly make a difference.

Today’s aid programs will never achieve the big results we truly desire — the end of poverty worldwide. Our best chance at nearing this goal is to advance a strategy that recognizes, at its core, the crucial knowledge and leadership that only local people can provide for their own exodus from poverty. With humility, outsiders can help by supporting independent, non-governmental organizations who are advancing institutional reforms shown to improve economic rights for the poor and economic prosperity for all. Then individuals acting for themselves will take care of the rest.

A different approach is needed. A different approach is working. Let’s start doing development differently today.

September 6, 2017

Matt Warner portrait

Matt Warner is Chief Operating Officer of Atlas Network. He holds a bachelor’s degree in political science from Florida State University and a master’s degree in economics from George Mason University. He is also certified by Georgetown University in organizational consulting and change leadership. Learn More about Matt Warner >
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