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Failure is acceptable

The Shell Foundation has recently published 'Aid industry reform and the role of enterprise'. (Disclosure: I once worked for Shell.) The report - really an extended op-ed - offers an interesting contrast between what an entrepreneur has to do to get a loan, and what the aid industry needs to do.

There's now a pretty strong consensus that official development assistance not only failed to boost economic growth in poor countries, but on the whole appears to have reduced it.

Really? The report neglects to mention any dissenting voices (with one notable exception) but that's not the same as a consensus. The real complaint should be not that aid doesn't work, but that the aid industry hasn't tried hard enough to show which aid works and which aid doesn't.

But now here's an interesting point, about World Bank projects in Africa in the 1990s:

Between 65 and 70% of these projects failed...what board would allow the existing management to continue running the show when 65% of the projects they were responsible for were judged to have failed!

100% success rates are usually a sign that someone is using his own, convenient definition of success. Some of the corporate governance scandals of recent years have resulted from obsessively hiding failures.

In fact, 100% success is not really desirable. In the United States itself (leave aside Africa), about 60% of all new businesses fail to make a profit. Venture capital firms would expect to fund a large majority of failures, yet still achieve spectacular returns.

The truth is that failure is part of dynamic economic growth. The market does a great job of weeding out failures and rewarding successes, quickly. Large public and private sector institutions, including the World Bank, naturally struggle to do that. We shouldn't be looking at the percentage of projects that fail: what matters is that we learn from failures and don't allow them to bleed away cash, while building quickly on successes. Michael Klein and I have described one way in which this might be done, even in a bureaucratic setting.

Comments

Aid to South Korea and Taiwan were in the single digits of percent of GDP, whereas many sub-saharan African countries now have nearly 50% of GDP. William Easterly has a new paper which compares the effect of aid with the effect of pro-market policies in development. The result is that aid doesn't help, good pro-market policies do help. http://www.cgdev.org/content/publications/detail/3486/

Submitted by Peter McB. on
Failed according to whose objectives? Statement such as "65% of projects failed" appear to not recognize that foreign aid is an ecosystem of diverse, interacting stakeholders having different goals and motivations. Many of the stakeholders may have objectives which were met by the failing projects. Likewise, I have seen start-ups created in the western world with the express intention of failing, in order to achieve some larger objective of the founders or investors (eg, to scare competitors away from that arena).

The latest issue of Finance and Development summarizes the evidence pretty well. The average dollar ODA for early-impact growth gets decent returns. The cited "failure rate" is no way to argue against ODA, without clearer definition of terms. Virtually everyone thinks there remains a big room for improvement. I would like to see a lot more impact assessment studies, directed towards identifying lessons for future aid decisions.

Here is the link to the latest F&D that Roehl mentions above, http://www.imf.org/external/pubs/ft/fandd/2005/09/index.htm. We have also discussed this latest issue here, http://psdblog.worldbank.org/psdblog/2005/08/how_to_increase.html, and here, http://psdblog.worldbank.org/psdblog/2005/09/governments_tur.html.

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