Aid, like all complex endeavours, suffers from a range of problems that can and often do make it ineffective, or sometimes worse than ineffective (see Assessing Aid or Aid Has Failed the Pacific). Although I will not argue the case here I will briefly cover two of the main problems with aid.
The first core problem is its use as a short-term foreign policy tool. Long-term development objectives of aid policy tend always to be (intentionally or otherwise) secondary to short term foreign policy objectives even when the latter undermines the former. This common societal problem of short-term thinking is the 'bete noir' of development assistance. The result is donors state long-term objective (development) but generally work towards short-term gains (national interest). This conflict of interest is at the heart of development assistance.
When the PNG government wanted to hire mercenaries to quell the Bouganville revolt, Australia essentially vetoed the decision by threatening the withdrawal of aid and military support. (See Making Australian Foreign Policy). It's not clear that using Sandline would have been a good thing for PNG's development, but it may well have been. Australia and PNG will never know because Australia removed PNG's opportunity to make that particular mistake, or what might have been a decisive and sound move in the long run. The point is that, as a society, PNG was disallowed an opportunity to act, learn and perhaps take a small step towards development. The move was politically unpalatable to Australia. Development benefits that might have accrued to PNG were secondary. As Sir Michael Somare put it at the recent Pacific Islands forum meeting in Auckland "why don't you allow us to do our own thing, learn from our own mistakes as we go along and improve upon our mistakes?"
The second core problem with aid is that it is administered almost solely by donor bureaucracies, which suffer from normal bureaucratic problems. The greatest concern is an aid bureaucracy's inability to know the development needs of developing countries, and to serve the needs of a people other than its own.
Aid bureaucracies decide on development priorities based on imperfect knowledge. Development assistance bureaucracies, like AusAID, understand the development needs of PNG the same way Soviet central planners understood the economic needs of their society - through bureaucratic decisions rather than individuals' needs and wants conveyed through an impartial mechanism, like a price mechanism.
This simplifies a complex problem. Both market mechanisms and bureaucratic decisions have their strengths and weaknesses. Developed countries rely heavily on both. But in development assistance, there is only one type of strategic decision making – bureaucratic. Hence the Soviet comparison. Donor bureaucracies implicitly purport to be the best judges of development needs.
The second factor is of course the power relationship between donor and recipient. Can a beggar for food request mustard instead of tomato sauce? As with these examples the power relationship between donor and recipient is such that the party holding the money holds sway. The tendency of national donors to effectively tie aid to their country's goods and services is the clearest evidence of this power dynamic. All evidence suggests tied aid is less effective than untied aid (see Human Development Report 2003) but donors persist with it none the less. Development is clearly not on the top of the donor priority list.
Why do we allow our aid to be ineffective?
The simple answer to this question is that we allow our aid to be ineffective because sometimes we don't really mind it that way.
Donors give aid while being unsure if it has a positive or negative effect (see Assessing aid: what works, what doesn't and why) unlike, say, the effect of water on plants or giving food to starving children. This is a curse because it means donors can't just pour dollars into the types of assistance which clearly work. Interestingly for donors, it's also a blessing. Donors can pursue a range of objectives through their development assistance and no one can say whether they are actually helping or hindering development.
It is impossible to prove whether the Solomon Islands, for example, would have been better or worse off without aid. Donors simply don't know for sure. Aid has clearly provided some valuable goods and services, but it has also provided opportunities for local corruption, discouraged commercial activity, disturbed natural social arrangements, imposed unwelcome values on the population etc.
What is clear, is that money spent in the past has not clearly succeeded in its stated goal of development, however difficult that goal is to achieve. Even if you believe PNG and the Solomons are a lot better off than they would have been without aid, development is not how you would describe what has been going on there. Yet development assistance continues, and will now (at least to the Solomons) grow dramatically.
In the Pacific the failure of Australian aid has been constant through the Pacific's decline. Its continuation throughout the decline without radical overhaul suggests Australia gets something else out of aid: short-term foreign-policy muscle, a subsidy for Australia's development industry, a salve for the the wealthy's conscience, a good global image – to name a few.
Previously these other gains have outweighed the cost of aid failing. However, state failure in the Solomons is now judged to be a potentially costlier threat than the previous gains from Australian aid. I can't quantify the future dollar cost for Australia of PNG continuing on its current trajectory, but the impending cost of aid failure in the Solomons dwarfs the gains from aid over recent decades. In the past five years Australia has spent $145 million, and in the current financial year is expected to spend $200-300 million, and $200 million per annum for several years thereafter. Did the short-term gains from aid over the last five years outweigh the current and future costs?
Potential remedy - the democratisation of development assistance
Two crucial shifts in aid delivery could reduce the conflict of interest and improve aid's chances of success. Each is dramatic and would hurt Australia's short term interests as currently configured, but the long term gains (better chances of development) would outweigh the short term costs (loss of regional influence and diminished industry subsidies etc). The two shifts are: insulating development efforts from short-term foreign policy objectives and donor country influence (insulation), and shifting some aid decision making from bureaucracies - donor and recipient - to individuals (decentralization and democratisation).
Recall Australia's more volatile monetary policy before the Reserve Bank's move to greater independence in the early 1990s. Stability is a universally acknowledged prerequisite for economic prosperity. Yet at certain times for certain expedient reasons governments were happy to destabilize the economy to achieve certain short term ends. Good government intentions were undermined by short-term political realities.
In development assistance, donor organizations like AusAID aim to help Australia's neighbours develop economically, an honourable pursuit which is mutually beneficial. Unfortunately aid policy is not insulated from short-term foreign policy. In the political wash up Australia's foreign policy ultimately prevails even if it is at the expense of nurturing development. Why does Australia tie its aid (PNG $333 million), formally and informally, when it is clear that tied aid substantially diminishes aid effectiveness? (See One Clear Objective). Because without tied aid Australia would be left to use normal foreign policy measures to influence the PNG government, like ones it might use with the Philippines, New Zealand or Italy.