That Nobel Thing Again, and the Question of Foreign Aid

by Neil H. Buchanan

It is Nobel season, and "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel" has been awarded to Angus Deaton, an economist at Princeton.  My areas of study in economics do not significantly overlap with Deaton's expertise, which means that although I probably was supposed to read one or two of his papers for a required course while I was in graduate school (Who can remember this many years down the road?), my only familiarity with his work at this point comes through a handful of second-hand sources who have rushed articles into publication over the last day or so.

I will have a comment or two to make about the substance of Deaton's work in a moment, but I must first note that there is finally something new to say about the annual "not really a Nobel" debate.  Long-time readers of Dorf on Law know that, almost every year when the economics award is announced, I say something snarky about the "fake Nobel Prize," or something along those lines.  For example, in 2013, I wrote "A Faux Nobel for Darth Vader and Obi-Wan Kenobi?"

For readers who would prefer not to take my word for it, there is a full account of the case against the notion of an "economics Nobel" here, but the basic idea is that the Nobel Prizes were all created at the same time and are called "Nobel Prizes," whereas the economics prize was created decades later after lobbying by some influential American economists, that it is funded by a different organization (a central bank), and that it was only able to get the name Nobel into the title through the back door.  The prize is essentially a way for economists at the top departments to fete themselves, and to provide an aura of knowledge and authority to their field that turns narrow technicians into Philosopher Kings in the eyes of the press and public.

When the stakes are this high, the lengths to which some people will go to win the award become embarrassing.  Famously, one man won the prize after he moved to Stockholm to spend time with the committee, supposedly as a matter of scholarly interaction.  Even short of such naked self-promotion, however, Deaton himself gave away the insiders' game when he said of the phone call announcing the award, "I was surprised and delighted.  It was wonderful to hear the voices of my friends on the committee."

To be honest, I did not think that anyone really cared enough to argue that the economics prize is "real."  It seemed that the people who wanted the positive PR were happy enough to ignore the people who disparage the award, given that such criticism has never slowed down the breathless coverage in the mainstream press.  Much to my surprise, however, Paul Krugman -- whose work I almost always praise, and who won the award a few years back (yet seemed not to take it all that seriously) -- took the bait.  Here is his comment on his blog yesterday: "Oh, and cue the usual complaints that this isn’t a 'real' Nobel. Hey, this is just a prize given by a bunch of Swedes, as opposed to the other prizes, which are given out by, um, bunches of Swedes."

Where to begin?!  My friends and I might start a movie awards ceremony called "the Movie Awards in Memory of Oscar Meyer," which we would call "the Oscars" for short, and which would just be a prize given by a bunch of people who watch a lot of movies, as opposed to the other Oscars, which are given out by, um, bunches of people who watch a lot of movies.  Rand Paul's certification as an ophthalmologist was issued by an organization that he created, which means that his license was issued by a bunch of Americans, as opposed to real ophthalmologists who are certified by, um, other bunches of Americans.  Congressional Medals of Honor, anyone?

OK, so much for that foolishness, which has the virtue of not really being about policy in any direct sense.  (It is, of course, very much about policy in the sense of determining who is allowed into the policy conversation in the first place.)  On the substance, none of the coverage of Deaton's award suggests foolishness, but some of it is puzzling.  A New York Times business writer noted yesterday (in an article that, of course, was titled "What Angus Deaton, the Latest Nobel Winner, Says About Foreign Aid") that Deaton has criticized foreign aid.  That is certainly provocative.

I am more than willing to imagine that Deaton's body of work covers all of the bases that obviously cannot be covered in a newspaper article, but if the article captures the essence of the argument at all, the anti-foreign aid conclusion seems rather difficult to take seriously as an important insight.  The Times reporter states that "[Deaton] argues that foreign aid is not a good answer to the needs of the poor in developing countries and says that, in fact, aid can grievously hurt the countries that receive it," and then notes that China and India (both of which have made serious strides in development over the last generation or so) received relatively little foreign aid, whereas Zimbabwe (adjusted for population size) has received a lot of aid even as it continues to lag.

These examples do offer a nice contrast, but what exactly do they prove -- especially given the radically different resource endowments of the countries, their differing experiences with colonialism, and so on?  Apparently, these examples are meant to show that foreign aid is neither necessary nor sufficient to make a poor country less poor, which does count as an insight, if not necessarily an earth-shattering one.  The article then quotes from one of Deaton's books: "Political and legal institutions play a central role in setting the environment that can nurture prosperity and economic growth. Foreign aid, especially when there is a lot of it, affects how institutions function and how they change."

This tells us that there are ways in which foreign aid can make matters worse, evidently by entrenching whoever happens to have seized power immediately before the aid arrived.  At a minimum, this claim would amount to something like this: "Foreign aid can be done badly."  Maybe that, too, counts as an insight, but I am not sure why.  At most, however, the claim could really be saying this: "Foreign aid cannot be done well."  If that is the claim, however, then there really is something to argue about.  In the same block quote, Deaton seems to make that latter, stronger claim: "[L]arge inflows of foreign aid change local politics for the worse and undercut the institutions needed to foster long-run growth. Aid also undermines democracy and civic participation, a direct loss over and above the losses that come from undermining economic development."  He does not directly say that aid inevitably and automatically harms local politics and institutional stability, but it is difficult not to draw that inference.

The block quote then ends with this classic economics-is-all-about-tradeoffs moment: "These harms of aid need to be balanced against the good that aid does, whether educating children who would not otherwise have gone to school or saving the lives of those who would otherwise have died."  And the Times reporter ends the article by noting that "the U.N. is calling on industrialized nations to provide more aid to poorer countries," ending with this admonition: "But while aid can help alleviate the worst catastrophes and deprivation, as Mr. Deaton notes, the best way to eliminate poverty is for developing countries to pursue faster and more inclusive economic development on their own."

But what could this possibly mean, if one wants to use it to guide policy choices?  The best way for poverty to end is for countries to accomplish it on their own?  Sure, why not.  That is not exactly a decision rule, however.  When the U.N. calls on industrialized nations to provide more aid to poorer countries, what are the richer countries supposed to say?  "Deaton says that some countries can do this on their own, so we should only help alleviate the worst catastrophes and deprivation."  Like, for example, Zimbabwe?

Surely it is helpful to know that aid can be diverted by warlords and used to make matters worse.  Maybe the reason that this assertion seems so pedestrian is that Deaton has been working behind the scenes for years, and his now-obvious comments were so revolutionary that they displaced a received wisdom that it is possible to throw money at poor countries and assume that the best results will follow inevitably.  Even if all of that is true, however, it seems that the most one can say now is that foreign aid is a complicated topic and that attention needs to be paid to collateral consequences and institutional design.  It is not an argument against giving foreign aid, and it most definitely does not support the claim attributed to Deaton "that foreign aid is not a good answer to the needs of the poor in developing countries."