Does Aid Hurt or Help Business?

Is aid bad for business? It can be, argues Nancy Birdsall in her recent paper on aid and institutions in Africa. For example,

Rajan and Subramanian (2005) present evidence that sectors in aid-dependent countries that are more reliant on skilled workers do less well the larger are aid inflows. They suggest that aid inflows increase demand, including by NGOs and government and donors themselves, for local talent that then has fewer incentives to engage in entrepreneurial, private sector activity more likely to be in tradable sectors, especially manufacturing.

That’s the problem. So, what’s the solution?

The bottom line is that donors should minimize “poaching” of skilled workers, including by NGOs they finance. That means paying closer attention to their collective impact on local salaries (and housing and other costs); putting more donor resources into adequate compensation for government staff; and ensuring they are funding local competitive contracting whenever possible.

This is a tough one – as an organization you want to be able to hire the best person to do the job. As a person accepting the job, you want to be able to make a decision that you deem best addresses your needs and wants. While its true that some organizations are ‘stealing’ talent from other industries, they are also providing new opportunities to people and satisfying their needs and wants.

The unpredictable nature of aid also has a negative effect on investor confidence:

Aid inflows that are volatile and unpredictable further complicate management and coordination of fiscal and monetary policy, and reduce whatever fragile confidence of small private investors in future relative prices responsible governments are trying to achieve.

But can aid help business? Or is it all hopeless? Its not – aid can work if it goes towards programs that improve the business climate, reduce overregulation, and provide opportunities for growth. In the modern world, business does not operate in a vacuum, and donor money can go to efforts that create a framework within which people’s entrepreneurial potential allows for the rise of the middle class and reduction of poverty. The U.N.’s report on Unleashing Entrepreneurship has some pointers on how to achieve just that.

Published Date: March 20, 2007