The Nobel Prize in Economics aspires to reward scientific achievement, just like the prizes in physics, chemistry, and medicine. But given how politically divided economics is as a field, it's normal for prize selections to be interpreted in ideological terms.
Indeed, commentators are already interpreting this year's award to Princeton professor Angus Deaton as a victory for skeptics of foreign aid, of which Deaton has been relentlessly critical:
The Deaton choice will not make the aid industry happy. He is a vocal critic of foreign aid.— Dani Rodrik (@rodrikdani) October 12, 2015
Prepare for an onslaught of anti-foreign aid pieces invoking Deaton. NB: this is only tangentially related to work that won him Nobel.— Justin Sandefur (@JustinSandefur) October 12, 2015
But Deaton's views are more subtle than "aid is bad" — and the reality is more subtle, and more auspicious for foreign aid, than even Deaton's nuanced take suggests.
Deaton: We can give the poor medicine, we just can't give them growth
In his popular op-ed writings and his book The Great Escape, Deaton argues that foreign aid can't solve the big problem that's keeping poor countries poor: weak governments that make it impossible to grow. In fact, he argues that aid designed to address that problem only makes it worse. "If poverty is not a result of lack of resources or opportunities, but of poor institutions, poor government, and toxic politics, giving money to poor countries — particularly giving money to the governments of poor countries — is likely to perpetuate and prolong poverty, not eliminate it," he writes in The Great Escape.
But Deaton's claim is rather weaker than "all foreign aid in all contexts will fail." For one thing, he thinks a major reason aid has had lackluster results is that it's often given not out of a desire to alleviate poverty but out of a need to court countries' leaders for political purposes. The US gives Israel billions in aid not because Israel is particularly poor — it's the richest country in its region — but because it considers Israel an important ally. Critiquing that kind of aid doesn't necessarily indict aid that is explicitly geared toward helping poor people.
Deaton also allows that health aid can, in some cases, help.
He cites examples like the international efforts to eliminate smallpox, river blindness, and polio, programs that spread vaccinations and HIV antiretroviral therapy, and the provision of antimalarial bednets and oral rehydration therapy.
"External aid," he concludes, "has saved millions of lives in poor countries." His take on health aid isn't entirely positive — he thinks that it has in some ways made it harder for poor countries to develop their own health systems — but he allows at least one very important exception to his general aid skepticism.
He has also expressed sympathy for another common kind of aid that's become more popular in recent years: cash. In 1998, well before cash became trendy in foreign aid circles, Deaton and his wife, fellow Princeton economist Anne Case, released a positive evaluation of a cash pension program in South Africa. While he still thinks cash isn't enough to build government capacity in poor countries, he has argued it beats other kinds of aid: "Certainly, the immediate effects are likely to be better, especially in countries where little government-to-government aid actually reaches the poor."
Deaton is probably too pessimistic about aid
Those caveats aside, it's definitely true that Deaton doesn't think aid can effect the fundamental changes needed for poor countries to become rich. There's a weak claim here and a strong claim here. The weak claim is that aid alone won't lift a country out of poverty or build meaningful state capacity; the strong claim is that aid will actually hurt that effort.
The strong claim doesn't really hold up. The most natural way that aid could undermine states' abilities to operate would be by replacing domestic sources of funds — that is, by substituting for, rather than supplementing, taxes. And indeed, some studies find a correlation between higher aid levels and lower tax collection (others don't). But it's hard to say that more aid causes less tax collection. "This could simply reflect the fact that aid favors poorer countries, with less state capacity generally," development economist Martin Ravallion wrote in a review of Deaton's book. "The numerous studies using controls have not come up with conclusive evidence that aid has a causal effect in diminishing tax levels."
Indeed, more recent studies suggest that one-for-one substitution only happens in countries with very weak institutions. Countries that start out with better ones are able to use the aid to supplement taxes. "In the average recipient country, a dollar of extra aid reduces taxes collected by the government by only nine cents," the Center for Global Development's Charles Kenny writes. That result sure doesn't look like aid undermining local institutions. The evidence here is murky, and we can't definitely say that aid has no deleterious impact. But Deaton also can't definitively say that we'd be making poor people better off by denying them aid.
The claim that aid can't build up institutions in the first place is more defensible. Building institutions is very difficult. But even here, there are some aid success stories. After invading Afghanistan in late 2001, the US teamed up with the World Bank and European nations to fund a new, comprehensive public health system for the country, run through its own Ministry of Public Health. The system emerged, and it worked: It reached 90 percent of the country, and sharply reduced infant mortality, contributing to a spike in life expectancy from 42 to 62 years from 2004 to 2010. Not every aid project will be a glowing success story like that. But the fact that such successes are possible should chasten critics like Deaton who argue that huge categories of aid should be ended, rather than reformed.
Deaton's a useful skeptic. But he doesn't give the whole picture.
I'm actually glad Deaton is voicing skepticism on aid. A lot of aid really hasn't worked. A lot of it really is politically motivated. And his criticism of randomized controlled trials (RCTs) as the be-all and end-all of program evaluations has helped make the aid community's approach to evidence more sophisticated. It's true an RCT showing that an anti-malaria program worked in one village in Kenya doesn't necessarily imply that such a program will work in a totally different village in Nepal. Deaton is doing a service by banging that drum.
But his aid criticism betrays a fatalism that isn't warranted. Not all aid is about building state capacity, and the evidence that such aid actually hurts poor countries trying to build functioning governments is weak. And there are cases when aid arguably has helped poor governments develop their institutions. The lesson isn't to give up. It's to make aid better.