Wall Street Journal
Thursday, January 27, 2005

The Aid Flood

By KEITH MARSDEN

The horrific scenes of the impact and aftermath of the killer waves shocked the world and induced a surge of international solidarity. Pledges of assistance top $3 billion. Scores of well-motivated aid agencies, official and private, are on the ground providing emergency relief. And the navies of India and the leading powers are lending a valuable hand.

But once the immediate needs of the victims are met, the long-term impact of foreign aid must be considered. More is not necessarily better.

Aid agencies have a duty -- to recipients, donors and taxpayers alike -- to use the funds as effectively as possible. They should prevent resources being siphoned off by corrupt officials and aid contractors. They should avoid creating "backwash" effects on survivors and their fellow citizens when the flood of foreign aid crowds out potential domestic suppliers. They should strengthen, not undermine, development mechanisms and institutions. And aid agencies should not exaggerate the problems faced, or the benefits resulting from their own efforts, just to ensure a piece of the action and a continued flow of funds.

Without diminishing the scale of the tragedy, the number of persons affected should be rigorously checked. There are already reports that the number of refugees in Aceh camps has been significantly inflated by local officials seeking more aid.

Lessons must be learned from experience. That's particularly true for the EU, the world's biggest aid donor. This is not the first time that distant nations and peoples have opened their hearts and wallets after seeing distressing images of starving and mutilated children in Africa or stone-throwing youths in Palestine. Large volumes of foreign aid have been disbursed to these countries. Net aid as a percentage of gross national income has topped 47% in Sierra Leone, 42% in the Palestinian territories and 30% in Eritrea during the last decade. Yet according to the World Bank, per capita household consumption has fallen by 7.3%, 5.1%, and 2.9% a year in these three countries respectively since 1990.

If housing, food, health and education services are supplied free or below cost to refugees for prolonged periods, they may lose the motivation to return to their former jobs or seek new activities. The recently exposed abuses associated with the U.N.'s refugee program in the Palestinian territories and its Oil for Food program in Iraq should be taken as a salutary warning.

Net aid flows to sub-Saharan Africa have reached nearly $20 billion annually. Foreign aid topped 10% of national income in 31 countries around the world in 2002. But the results are generally disappointing. African consumption levels have risen by a paltry 0.1% annually. Millions more are struggling to get by on less than $1 a day. Aid has hindered rather than helped the development process in some countries.

Donors should recognize that the five hardest-hit countries -- Indonesia, India, Thailand, Sri Lanka, and Malaysia -- have vigorous economies. They have all performed well historically, despite temporary setbacks in the late 1990s due to misguided financial policies (and, in Indonesia's case, a high level of corruption as reported by Transparency International). Their national incomes have risen at average annual rates ranging from 3.6% to 6.2% since 1990. Real consumption per head has grown by 2.4% to 4.3% a year since 1990. Yet foreign aid averaged only 0.5% of their total income in 2002, or less than $3 per head of their combined population (1.4 billion). It was highest in Sri Lanka at just $18, or 2.1% of its gross national income in 2002.

Economic growth has generated far more resources, public and private, to pay for substantial improvements in social indicators than has foreign aid. But in a press release dated Jan. 25, Unicef reported the creation of a "Tsunami Water and Sanitation Fund," and appealed for a further $763 million. In justification, Unicef says: "Many of the children affected by the tsunami lacked access to safe water and sanitation before the waves hit. Across South Asia, only 35% of people have access to a basic toilet."

The World Bank paints a different picture. It reports that toilet access rates were much higher in the three most affected countries -- 96% in Thailand, 94% in Sri Lanka and 55% in Indonesia in 2000 -- and they have all seen substantial improvements since 1990. Access to safe drinking water has jumped to 84% in India, 78% in Indonesia and 77% in Sri Lanka.

Yet Unicef claims that "many children in the region -- particularly girls -- are denied their right to education because they are busy fetching water or are deterred by the lack of separate and decent sanitation in schools." Again, other sources describe a different reality. World Bank/Unesco data show that 100% of girls in the relevant age group completed primary school in Sri Lanka and Indonesia in 2000-2003.

Other aspects of tsunami aid programs are equally dubious. Does it make sense for donors to buy high-priced European- or American-made clothing, tents, bottled water, purification plants, medicines, earth-moving equipment, transport vehicles and basic foodstuffs -- and send them by expensive air freight to the disaster zones?

Most of these essential supplies are produced at lower cost within Indian Ocean Rim countries, and are readily available in dispersed outlets throughout the region. For example, India is a major producer and exporter of medicines and construction machinery. Thailand exported $15 billion worth of agricultural products in 2003, including basic foods like rice and fish. Indonesia's textile and clothing exports were valued at more than $10 billion.

Malaysia has the civil-engineering experience on site to build the world's second-highest skyscraper and a modern highway network. Sri Lanka has 8,000 qualified physicians. The human skills, management capacities and equipment required to reopen roads and other communication channels, and to organize and execute reconstruction projects, are available within each country or the region as a whole.

The free goods and services given by foreign donors reduce the demand for domestic producers and distributors. They pre-empt the opportunities for indigenous enterprises to move into new markets. Incomes generated by national responses to disasters are retained domestically. And they are eventually diffused through local communities, stimulating higher employment and consumption levels. When aid programs are based largely on inputs from outside the region, many of the secondary and tertiary benefits remain overseas.

Wouldn't it be better to transfer a significant proportion of emergency aid funds directly to the families of disaster victims in the form of cash payments? They are in the best position to determine their priorities, and to select the appropriate suppliers. For major public works projects, donor funds should be earmarked for local civil engineering contractors. Investment credits should be channeled through domestic banks for the reconstruction of houses, hotels and other buildings.

Receipts from international tourism totaled $22 billion in the five most severely affected nations, and contributed as much as 7.9% of national income in Malaysia and 6.4% in Thailand in 2002. It is important that foreign tourists continue to visit as the money that visitors bring will speed up reconstruction and help preserve jobs.

Rich nations should also boost their imports of goods and services from the tsunami-hit countries as well as other developing nations. A tripling of exports from Asian developing countries since 1990 has been a force behind their rapid progress.

It is not too late to reconsider aid disbursement plans and strategies. There should be a thorough discussion of the options in parliaments and the media. The track record of aid agencies shows they do not have all the answers. Without a reform of aid practices, raising aid levels will simply generate further waste and weaken proven development processes.

Mr. Marsden has worked as an economist for the World Bank and the U.N. in nine Indian Ocean Rim countries.