I just finished reading The Bottom Billion, and one argument stood out above all the others. It was not Collier’s analysis of the conflict trap, the disadvantages of being landlocked, or the resource curse. It was his claim that foreign aid indirectly funds military spending.
Collier’s argument rests on a simple principle of public finance: money is fungible. Governments do not keep separate bank accounts for schools, roads, and rocket launchers. When donors pay for a primary school or a health clinic, they free up the recipient government's own revenues. Once money enters a national budget, it is interchangeable.
Based on his modelling, Collier estimated that around 11% of aid found its way into military budgets. Because many low-income countries at the time were heavily dependent on aid, this implied that almost 40% of their military spending was being indirectly underwritten by foreign assistance.
The implication is deeply unsettling: well-intentioned Western donors, believing they were financing human development, were in fact helping to fund standing armies.
Economists, unsurprisingly, challenged the precision of the figures. Critics argued that a fixed 40% estimate oversimplified highly volatile national budgets and that measuring fungibility with any degree of accuracy is notoriously difficult.
What is truly remarkable, however, is how this debate has disappeared from mainstream development discourse. Twenty years after The Bottom Billion sent shockwaves through aid ministries and development agencies, today's discussions are dominated by sanitised technocratic language: "debt sustainability", "institutional capacity" and "governance metrics". The central question, whether billions in humanitarian and development assistance might ultimately be strengthening military establishments, has all but vanished from the public debate.
This collective amnesia does not prove that Collier was right. An uncomfortable empirical claim should be rigorously tested, refined, or conclusively disproved, not quietly forgotten.
Admittedly, the world has changed since 2006. Direct budget support has often given way to more tightly controlled project funding, while non-Western donors, most notably China, have introduced very different financing models. Yet none of this removes the problem of fungibility; it merely changes its form. If a foreign power finances a country's national railway, the government still finds itself with millions of its own dollars freed up to spend on arms.
Fungibility is not an abstract economic theory. It is an accounting reality.
The significance of Collier’s argument does not depend on whether the true leakage rate is 11%, 5% or 20%. Its importance lies in the ethical blind spot it exposes. By avoiding any serious discussion of fungibility, the development industry preserves its moral comfort. Yet ignoring the plumbing of public finance does not alter where the money ultimately flows.
The question donors should be asking is as uncomfortable today as it was twenty years ago: In our efforts to help countries develop, are we, indirectly, helping to finance war?
One need not go so far as to estimate the extent to which aid effectively subsidizes a country's military spending.
ReplyDeleteThe fungibility of money alone should be enough to challenge donors' and aid agencies' claims that it is their specific contributions that save lives. A government's budget encompasses a wide range of expenditures—health care, education, road construction, agricultural subsidies, and perhaps even a new airport. Western donors typically seek to finance what they regard as "good" spending, such as life-saving medicines. This makes for a compelling justification to taxpayers at home. Host governments, in turn, understand that a request for funding essential medicines is far more likely to be approved than one for a new airport.
Yet this does not mean that, in the absence of external assistance, the government would forgo purchasing the medicines. It might instead finance the drugs itself and postpone the airport.
The broader consequence of donors' insistence on funding only "good" projects is to weaken accountability and responsible statehood in recipient countries. As development agencies take over the management of aid funds, they create a parallel administrative structure that becomes dependent on the continued flow of external assistance.
Therefore, it is reasonable to argue that the future of international assistance to developing countries should focus primarily on technical advice and capacity development, particularly in the area of public finance management (PFM). UNICEF’s emphasis on managing Direct Cash Transfers further exacerbates the problem by shifting the focus away from effective development to prioritising “liquidation”. Meeting financial deadlines and donor reporting becomes the real goal. The long-term improvements in child protection and development in the recipient States can easily be lost in this model. While UNICEF has dabbled in integrating PFM for Children into programmes, it has usually been with the expectation that staff with completely different skill sets will become experts in the complex field after completing a short training programme. In UNICEF’s case, by evolving a focused (and competent) approach to PFM, there is a greater likelihood that funds will be used for their intended purposes rather than offset by shifts in budget allocations. Improved PFM practices can help mitigate challenges related to aid fungibility and ensure that donor contributions (whether technical or financial) lead to meaningful improvements in children’s welfare.
ReplyDeleteThanks for this. Indeed in my last decade at UNICEF I often debated this with Social Policy colleagues and others. That we focus too much on work processes for DCT that bog down government rather than maybe giving them sound technical advise on best investments to maximize outcomes for children with their own budget. However, I doubt UNICEF is fit for purpose to play this role of "adviser". Why? We have very few staff that are cutting edge experts in any of the technical fields - they may have been at one point in their careers - but after a short time in UNICEF we grind that out of them by filling their head and time with tedious work processes and acronyms and gibberish and clumsy rotation systems.. The average 4 year stint at a country level - we barely give an IP time to be productive for maybe half of that time. Why? As they spend maybe a year ahead of their 4th year searching for the next posting - a very convoluted and drawn out process to search, go through layers of assessments (even for a lateral move), possibly dozens of these and then rejections, hand wringing, and planning our lives around this uncertainty. Likewise when one arrives new at a duty station - one may spend up to a year "settling in" - that could be anything related to : poor or no handover notes from predecessor (I have NONE in my 32 years from any predecessor), very poor orientation on arrival regarding the office, the duty station and our partners, and being flung out there to find housing, get kids in new schools, and get our private lives settled. How would a person with so little space left in their brain or calendar be a good "value for money" technical expert that governments would listen to or PAY to listen to? Out of 4 years we have 2 solid productive years if it all goes well. Add to that the time we spend search and arriving - we also take time for R&R (some duty stations this is every 8 weeks), home leave, taking mandatory courses, learning courses, management excellence courses, staff retreats, all staff meetings, CMTs, contract review committees, time spent on our clumsy dashboards and reporting modules, working in UN working groups...where is the uninterrupted time to be very sharp in our field and available to our counterparts WHEN they need that advise - provided our advise is even what they need? If I was a government and needed an expert in anything - I am not sure a UNICEF/UN person would be my first go to for all the above reasons. To play this role we would have to re-think completely what we ask our staff to spend time on and free them up to play this role. I think we have some great technical staff that could do this very well - but we would have to free them up to do this. To me that is the future challenge of UNICEF and the UN - how to remain relevant and how to cut through all our work processes and inefficiencies so that can happen.
ReplyDeleteInteresting - but is aid helping to finance the war? That was the question Collier raised.
DeleteOf course aid is freeing up budget that could be directed to war. Nothing prevents a government from doing that.
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ReplyDeleteDoug and Rob raise important issues about public financial management, technical assistance, and UNICEF's role. Those are worthwhile discussions, but they are not quite the question Collier posed.
His argument rests on a simple fact: money is fungible. When donors finance expenditures that governments would otherwise have had to meet themselves, they release domestic resources that can be spent elsewhere—including, if governments so choose, on their military.
The precise percentages are open to debate. They always were. But the principle is not.
What surprises me is that, over the past twenty years, the development community has largely stopped discussing this issue. Rather than testing, refining, or refuting Collier's argument, it appears simply to have moved on.
That matters because the stakes are enormous. After more than six decades of unprecedented aid flows to Africa, the continent has not experienced the economic transformation that aid was expected to help deliver. If aid has largely failed to generate sustained development, and if part of it has also had the unintended effect of freeing resources for military spending and conflict, it represents a very serious policy failure.
Surely this is a question that deserves far more attention than it currently receives.
My point was that since government budgets ate fungible, we should be advising them rather than drip feeding them with tiny aid and all the attached strings. If we were to play this role - we are not well placed. So we can keep putting small grants into the abyss- but need to review this as it for sure frees up government budget (albeit small ) so their budget can do other things - including make war.
ReplyDeleteCollier's point about fungibility was not simply that aid could free up domestic resources for military spending—that observation is fairly obvious. His argument was considerably stronger. Based on his empirical research, he estimated that 11% of all aid effectively leaked into military expenditure, representing roughly 40% of total military spending in Africa.
ReplyDeleteIf, as several estimates suggest, Africa has received the equivalent of US$6–7 trillion (in today's money) in aid and concessional loans over the past six decades, then US$700–800 billion may ultimately have found its way into military establishments. In too many cases, those military budgets financed wars, prolonged conflicts, or sustained authoritarian regimes.
If, as is widely estimated, some nine million people have died in armed conflicts in Africa over the same period, Collier's findings deserve far more attention than they have received. They raise profound questions about the unintended consequences of aid and about the assumptions that have underpinned development policy for decades.
The deep thinkers on this blog may wish to comment on the plausibility of these figures and, more importantly, on whether this issue warrants far more serious reflection and rigorous research.
I think 10% leakage in aid is quite an underestimate. I have not seen a donor or agency that could absolutely know that 90% went for the exact purpose. In Tanzania, the government forced all UN agencies to use the central bank to “channel” all grants. We had working group of donors with ministry of finance on this system - routinely aid funds were lost for a year or more before they turned up. How do we know it was not borrowed to fund arms flow payments due and then later replaced or hidden in a donor report ? We would never know?
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ReplyDeleteOn a related issue, debt does not Impoverish nations. Bad governments do. Debt has acquired a mythical status in development debates. When rich countries borrow, it is called fiscal policy. When poor countries borrow, it is called a "debt trap".
Debt is neither a curse nor a blessing. It is simply a financial instrument. Used wisely, it finances investment that raises future incomes. Used badly, it finances waste, corruption and consumption that leave nothing but repayment obligations.
History is full of examples of countries that borrowed heavily to become rich. The United States financed canals, railways and industry with borrowed capital. Japan, South Korea and many European countries relied on debt to accelerate development. Their borrowing succeeded because it financed productive assets under governments capable of managing public finances.
The same principle applies in Africa.
Many commentators discuss African debt as though governments were passive victims of predatory lenders. They were not. Sovereign governments negotiated the loans, signed the contracts, accepted the money and decided how to spend it. To deny them that responsibility is to deny them agency.
The problem has never been borrowing itself. It has been what the money bought.
Too much has disappeared into corruption, prestige projects, bloated bureaucracies and subsidies that generated no economic return. Borrowing to finance consumption rather than investment inevitably leaves a country poorer, because tomorrow's taxpayers inherit liabilities without inheriting productive assets.
This is hardly unique to Africa. The United States is itself accumulating debt at an extraordinary pace, much of it financing current consumption rather than future growth. Eventually, even the issuer of the world's reserve currency will discover that debt cannot grow faster than the economy indefinitely. Fiscal arithmetic eventually catches up with everyone.
Yet there is an important difference. Rich countries typically collect between 35 and 45 per cent of GDP in tax revenue. Most low-income African countries collect only 10 to 15 per cent. That makes one of the most widely used measures of indebtedness, the debt-to-GDP ratio, a poor guide to their fiscal capacity.
For countries with very low tax collection, the more revealing indicator is debt relative to government revenue. A country may appear moderately indebted relative to GDP, yet face an impossible repayment burden because its government captures only a small fraction of national income. In several African countries, debt service absorbs an exceptionally large share of tax revenues, leaving little room to finance education, health care or infrastructure.
This is why governance matters so much. Debt becomes productive only when governments can select sound projects, control corruption, collect taxes efficiently and maintain fiscal discipline. Without those institutions, borrowing merely postpones the consequences of poor governance.
The fashionable language of "debt traps" obscures this reality. Certainly, lenders should assess risks and avoid financing obviously unsustainable projects. But the primary responsibility for how borrowed money is spent rests with those who borrow it.
Countries are not impoverished because they have debt. They are impoverished because debt has too often financed political patronage instead of economic development.
The lesson is straightforward. The route out of debt is not simply debt relief or another round of concessional lending. It is better governance. Borrowed money can create prosperity, but only in the hands of governments capable of turning loans into productive assets rather than political liabilities.
Interestingly, these two issues have generated remarkably little discussion.
ReplyDeleteFirst, Paul Collier's empirical claim that aid, through the fungibility of public finance, indirectly financed a substantial share of military expenditure. Second, the widespread tendency to treat debt itself as the problem, rather than the quality of governance that determines whether borrowed money creates productive assets or merely finances consumption, corruption and patronage.
Neither argument is particularly comfortable, but both go to the heart of development policy. If Collier's estimates are broadly correct, the unintended consequences of aid have been far more serious than most donors have been willing to acknowledge. If the governance argument is correct, then much of today's debate about debt relief risks treating the symptom rather than the disease.
Perhaps there are compelling counterarguments. If so, they deserve to be made. But these are not peripheral questions; they concern trillions of dollars of aid and lending, decades of development policy, and millions of lives.
What I find surprising is not that people disagree, but that there appears to be so little interest in testing these propositions. Ideas that challenge long-established assumptions should be examined critically, either to confirm them or to refute them. Simply allowing them to disappear from the debate seems intellectually unsatisfactory.
Surely these are precisely the kinds of questions that experienced development professionals should find worth debating.
Park benches, football, and trees are more interesting.
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DeleteFor decades, the global aid complex operated on a secret: foreign aid to Africa does not work. It smothers local enterprise, bankrolls corrupt elites, and traps sovereign nations in dependency. Yet, the multi-billion-dollar development industry rolled on despite its track record.
Donors got the memo, but they chose to ignore it because the system was designed to serve the giver more than the receiver. That illusion has started to shatter. Confronted by fiscal crises, shifting domestic priorities, and budget rollbacks—highlighted by the abrupt dismantlement of USAID and deep UK funding cuts—the traditional development financing model is rupturing. The aid industry is not failing by accident. It was doomed to fail.
Tanzania is a good example; its blueprint was perfected decades ago. One does not need much data to see the wreckage of state-engineered development. Fifty years ago, it was already blindingly obvious to all but a few young and naive, and ignorant Westerners, that Tanzania’s experiment with Ujamaa—Julius Nyerere’s brand of African socialism—was a guaranteed failure. Under the banner of progress, millions of rural Tanzanians were forcibly relocated into collective villages. Private agricultural markets were abolished, and an incompetent central bureaucracy fixed crop prices. The result was immediate and catastrophic: domestic agricultural output plummeted, local production structures were decimated, and a nation that should have been an economic powerhouse was forced onto life support, dependent on aid. Despite the obvious, aid until very recently kept flowing.
Because for the people holding the purse strings, aid is highly lucrative. It thrives on a well-entrenched system of institutionalized blindness. First, aid is rarely about altruism; it is diplomatic currency. When Western powers attempt to structure funding packages, they frequently arrive with strings attached that compromise local sovereignty. Second, a massive chunk of international aid money never actually touches African soil. Instead, it operates as a domestic recycling scheme, instantly funneled back to Western consultants, contractors, and politically connected NGOs. Third, foreign aid shields bad actors from accountability. When donors assume financial responsibility for public health and education, autocratic regimes are freed up to weaponize state resources for self-enrichment. International aid acts as a buffer that protects corrupt governance from the wrath of its own taxpayers.
The African Development Bank recently warned nations to pivot sharply away from external aid. The bank’s directive is clear: focus on domestic resource mobilization, transparent tax structures, and local production to cushion against foreign volatility. The sudden global aid squeeze has forced a long-overdue reckoning. While donor pullouts initially triggered fiscal strain, the predicted continent-wide collapse did not happen. Instead, the data reveals an unexpected trend: several nations are demonstrating remarkable structural resilience, with the International Monetary Fund noting that the majority of the world's fastest-growing economies are currently located in Africa.
African leaders and policy experts are increasingly pushing for full health and economic sovereignty. True development cannot be imported or dictated by a Western boardroom. Sustainable growth requires financial discipline, robust local commercial enterprise, and trade-based economic frameworks where governments are accountable to their citizens—not to international donors. The end of the traditional aid model is not a tragedy. It is the removal of a structural barrier that has stifled genuine African self-reliance for generations.
The anonymous author undoubtedly overstates parts of the case. To claim that foreign aid has achieved nothing is simply wrong. Millions of lives have been saved through vaccinations, disease control and emergency relief. That should be acknowledged.
DeleteHowever, I fear the anonymous author is much closer to the truth than many in the development community are prepared to admit.
The uncomfortable fact is that after roughly sixty years of aid, and transfers amounting to many trillions of dollars in today's money, much of sub-Saharan Africa remains poorer relative to the rest of the world than when the modern aid era began. East Asia, with far less dependence on aid, has transformed itself. Africa, with far more aid, has largely not. That does not prove that aid caused Africa's disappointing performance, but it certainly destroys the presumption that aid has been the engine of development.
What is perhaps most striking is not the disappointing results themselves, but the development industry's reluctance to confront them honestly. Every decade has brought a new slogan—basic needs, structural adjustment, poverty reduction, the Millennium Development Goals, the Sustainable Development Goals, resilience—yet the fundamental question is rarely asked: where is the sustained economic transformation?
The Tanzanian example is particularly telling. It was evident to many economists long before Ujamaa collapsed that administered prices and state control of agriculture were economically unsound. Yet aid continued to flow with remarkably little willingness to challenge policies that were visibly impoverishing the population.
Nor should we ignore the incentives. Aid has evolved into an industry employing hundreds of thousands of people worldwide. Governments use it to pursue foreign policy objectives. International organisations depend upon it for their existence. NGOs depend upon it for survival. Consultants earn their livelihoods from it. Under such circumstances, it should surprise no one that institutional incentives favour defending the system rather than asking whether it has fundamentally failed.
Perhaps the anonymous author's greatest service is not in every factual assertion, but in asking a question that too many of us have avoided for decades. If sixty years, trillions of dollars, and countless projects have failed to produce broad-based, self-sustaining economic development across much of Africa, at what point do we stop arguing about how to improve the aid model and begin asking whether the model itself is fundamentally flawed?
That is not an extremist question. It is a perfectly legitimate one. The remarkable thing is how rarely it is asked.