Should the World Cut Off Egypt's Foreign Aid?
Maybe not, says the World Bank's former head number cruncher.
Every hour it seems like Egypt's military could step between faltering Egyptian leader Mohamed Morsi and the 2011-esque crowds calling for his resignation, if not his head. If there's a coup this week in Cairo, should the world cut off aid to Egypt?
Devex tracked down economist Martin Ravallion, who used to run the World Bank's research department—that would be the bank's number crunchers—and is currently teaching at Georgetown and a fellow at the Center for Global Development. Ravallion looked at the economic incentives behind various approaches to political crisis in countries where foreign aid is an important part of the government's budget. He found that the common, seemingly intuitive move to use aid as a carrot to encourage democratic reforms—and as a stick when those reforms disappear—may cause more instability than it prevents.
By all means be willing to reward positive political shocks, but be careful about punishing negative ones. Given the instability, this response may well help put longer term institutional development in the country back even further. A more prudent approach may well be to maintain the baseline of assistance, stay engaged on the planned development path and remind all of the benefits of doing so. This path should include support for better political institutions. But be wary of cutting aid in poor and fragile economies when there is a negative political shock.
Ravallion looked at Madagascar in 2009, when the Indian Ocean nation of 20 million underwent a political crisis that saw its leadership fall to military rule. Following the coup, the international community broke most ties with the new government, refusing to grant the coup legitimacy. This was "No doubt seen as providing an incentive for a rapid rebound to democracy, and a favorable continuing trajectory of development," writes Ravallion. Foreign aid that many Malagasy institutions relied upon lost about half their foreign aid support, and tourism, which was a large part of the country's income, crashed. "[A]n already poor country got poorer," according to Ravallion. "Unlike much of the developing world, Madagascar has made no progress against absolute poverty for many years, and by some measures things have got worse. The political crisis continues."
Of course, there's aid and there's aid. Guns or butter, as the saying goes. And Egypt is not Madagascar (which is not Libya which is not Mali which is not Kosovo which is not…).
But as ministers resign in Cairo, the world's leaders and institutions will have to consider what to say on the first phone call with whomever comes next. Even if it's another dictator. Ravallion's analysis suggests that doing business with thugs is at times the best of the possible choices: Faustian in the short term, but the quicker route to stability in the medium term. It's hard to know what aid can be cut and replaced, without doing too much damage to a country. "Do the donors know best?" he asks (rhetorically, by the tone of it). "Are rich-country political institutions the ideal for poor countries? How much of the incentive is felt by coup leaders, or are the costs borne largely by innocent citizens, including the poor?"