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.
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