Source: http://www.flickr.com/photos/imfphoto/7176494253/

Peter Bauer, a prominent developmental economist, argued “there would be no concept of the Third World at all were it not for the invention of foreign aid” (The Economist). He opposed the idea that development aid could provide the capital needed to kick-start economic growth and fight poverty (Kristof). Aid, he argued, politicized economies and more often than not ended up in the hands of government officials. Contrary to Bauer’s beliefs, foreign aid is not fundamentally ineffective. While in its current form it has little effect on economic growth and may even hamper a country, foreign aid can be effective in certain situations if reformed and managed correctly.

Recent studies suggest that foreign aid may hamper a recipient nation in the long run by weakening local institutions and adversely affecting the country’s competitiveness. In a paper published in 2005, Raghuram G. Rajan, former chief economist at the International Monetary Fund (IMF), and Arvind Subramanian, a former IMF researcher, offer compelling evidence that aid appreciates the real exchange rate of a country thereby decreasing competiveness (Rajan and Subramanian). This appreciation has two root causes. Aid increases the price of resources in short supply such as skilled labor and land, raising costs for local business owners and increasing unemployment (Ibid). An inflow of foreign capital appreciates the nominal exchange rate, making the currency (and in turn the nation’s exports) more expensive. The appreciation of the real exchange rate pushes countries away from “export oriented labor intensive manufacturing.” An export oriented economy encourages sensible government policy by providing the incentive of significant economic growth; foreign aid could potentially eliminate this incentive (Rajan and Subramanian). Therefore, governments must spend foreign aid very effectively in order to offset the fall in competitiveness.

In the case of countries like Somalia, current foreign aid provides temporary relief but does not tackle the root causes of the country’s problems: establishing security, providing food and encouraging business (The Economist). The government must limit the influence of jihadists and secure the Kenya-Somalia border, the site of much terrorist activity. Somalia is a hungry country; according to the U.N., 80,000 Somalis may have perished in last year’s famine (Ibid). Efforts must be made to stabilize food production by making it safe again for displaced farmers to return to their farms. In order to encourage local businesses, foreign donors must invest in industrial equipment, telecommunications, and livestock by supplying capital for loans to medium sized companies. Only then does Somalia have a good shot at success.

While most of academia has concluded that development aid is usually ineffective, there remains much discussion over humanitarian aid. In an editorial published in the New York Times, Carol Giacomo, a member of the Council of Foreign Relations, argues that humanitarian aid helps advance stability abroad by providing food and medicine (Giacomo). For example, U.S. foreign aid was cut by $6 billion, or roughly 11%, in 2011, with further cuts looming due to recent efforts by Republicans to trim our budget (Ibid). Giacomo warns that such budget cuts, which represent a tiny portion of our multi-trillion dollar federal budget, would be “hugely damaging.” Indeed, there is evidence that humanitarian aid has had an effect: in the past 50 years, the number of children who die annually has gone down by 60% (Gates). Furthermore in the last decade the cost of fighting HIV and AIDS has gone down significantly (Emanuel). Nicholas Kristof, a Pulitzer Prize winning columnist for the New York Times, tentatively concluded that one-time interventions such as bed-nets and vaccinations are more likely to be effective than sustained efforts (Kristof). Rajan and Subramanian, however, challenge the notion that humanitarian aid is as beneficial as it is purported to be (Raghuram and Subramanian). In fact, it’s just as ineffective as bilateral or multilateral aid because governments “seem to view all forms of aid as going to a common pot and act accordingly” (Ibid).

Perhaps the way foreign aid is administered is at fault. The Center for Global Development, a Washington think tank, put forth a scheme called “Cash on Delivery” (Rosenberg). The idea is simple: donor countries only pay for projects when something good comes out. For example, the United States and Malawi would draw up a five-year plan to improve primary schooling that specifies a set of payments and what must happen for Malawi to get them (Ibid). After the contract is drawn up, the funder takes a “hands-off approach” which allows the recipient nation the freedom to accomplish the requirements on its own (Center for Global Development). Theoretically, “Cash on Delivery” should garner more political support at home for foreign aid than traditional aid would and also create a sense of accountability in aid-dependent countries (Rosenburg). This method is still untried so we cannot know how successful it can be. And, at the risk of sounding cynical, the entire premise of the “Cash on Delivery” is contingent upon the fact that the foreign government (organization, business, etc) is organized enough to accomplish the set goals in a legitimate manner. Back to the Malawi example, if test scores were used to determine the effectiveness of an education program, it would not be impossible for interested parties to alter test scores and escape the scrutiny of foreign auditors. Yet despite skepticism about the effectiveness of “Cash on Delivery” and foreign aid in general, it’s encouraging to know that we have not abandoned the desire to alleviate poverty worldwide.

Assistant Secretary of State Jose Fernandex ’77

Nominated by President Obama in 2009, Jose W. Fernandez ’77 serves as the Assistant Secretary of State for Economic and Business Affairs. Fernandez oversees the bureau, which handles international trade, finance, policy, development, as well as economic sanctions and support for U.S. business abroad.

“Economics is a critical part of foreign policy, just as important as politics,” Fernandez said in an interview with the Dartmouth Business Journal.

A major focus during his tenure has been “economic statecraft,” a term coined by Secretary Clinton, which involves using economic policy to strengthen diplomacy abroad and in turn, using diplomacy to strengthen the U.S. domestic economy.

A key component of “economic statecraft” has been finding ways to get U.S. companies more involved abroad, according to Fernandez. “The U.S. benefits when our companies do well, and our companies are an extension of American power,” Fernandez said.

In addition to “economic statecraft,” Fernandez’s tenure has also been focused on dealing with “swing state countries,” which are also referred to as “multipliers.” These are typically emerging countries and markets with which the United States can potentially partner to benefit our economies, like Indonesia, Turkey, and Brazil.

In the realm of “economic statecraft,” Fernandez spoke about the need for countries in North Africa and the Middle East to follow positive economic polices which create jobs and promote growth. Fernandez cites countries like Algeria, which has staggering unemployment figures, and Tunisia that had an unemployment rate of 20-30 percent, and even higher for young citizens. “If you put it in the context of many other issues, you realize it is a revolution waiting to happen,” Fernandez said.

The solution, Fernandez said, is regional integration. Middle Eastern and African countries have the lowest interregional trade in the world at around 5-6 percent, however if they engaged in trade their GDP could grow 6-8 percent.

“They need to pursue economic polices that create jobs, foster innovation, and have Arab countries trading more and opening their borders,” Fernandez said.

Fernandez also focuses on areas where economics and development converge, and U.S. companies can, for example, build roads and power plants to contribute to infrastructure. “It is a great example of doing well by doing good: companies that can profit, but can also benefit societies they operate in and by extension help American foreign policy,” Fernandez explained.

The North Africa Partnership for Economic Opportunity (NAPEO) has been a key joint project between the Aspen Institute and the U.S. Department of State. The Aspen Institute is a nonprofit international organization focused on fostering leadership and dialogue through various programs. A main objective of NAPEO has been to build networks between the public and private sectors, encourage American business in the Maghreb region, and foster entrepreneurship and a positive business climate.

The Maghreb region of Northern Africa: an area of focus for Jose Fernandez

Another key project has been Domestic Finance for Development that creates partnerships to help countries mobilize their resources, improve transparency, and battle corruption. “Developing countries have to ultimately own their own development by collecting their own taxes and fund themselves,” Fernandez said.

When failed states cannot support their state apparatus, expected services like police and medical help cannot exist, according to Fernandez.

Tax administration and collection is critical and in many countries people do not pay taxes because “they think it will end up in a Miami bank account,” Fernandez said. This issue ties into corruption and in order to deal with corruption people need to be shown budgets, and there needs to be transparency, according to Fernandez.

Today, the pressing issues the bureau faces include intellectual property rights, treatment of US businesses abroad, state-owned enterprises, and sanctions.

Intellectual property is an issue that goes across borders and affects U.S. companies. The bureau tries to get countries to enforce their intellectual property rights laws, Fernandez said.

The equitable treatment of US businesses in foreign countries and competing with countries with “national champions,” or state owned enterprises, have recently rose as pressing issues.

“We are making sure we are getting a fair shake when [American] investors go to India or China, that [U.S. businesses] are getting an even playing field,” Fernandez said.

Fernandez also indicates Brazil as a well-known emerging market, highlighting the nation’s discovery of “enormous petroleum deposits,” and hosting the Olympics. Within Latin America, Fernandez also calls attention to Colombia, which is “growing by leaps and bounds,” and Peru, which has cut its poverty rate.

“Peru has managed to cut their poverty rates in half, from 54 to 28 percent,” Fernandez said. “In 15 years, that is a great achievement.”

Prior to his service at the State Department, Fernandez was a partner at Latham & Watkins in New York and was the Global Chair of its Latin American practice. After earning his J.D. from Columbia University School of Law, Fernandez worked across European countries and in the EU as it was consolidating. His later concentration in Latin America veered off into Africa, involving mostly corporate work in buying and selling, financing and restructuring companies. He said his experience at his varied practice best prepared him for his work at the State Department.

Fernandez finds the “intellectual aspect” of his work at the State Department to be his favorite but most challenging part.

“The intellectual aspect is fascinating; the ability to learn new things and go from a meeting on agriculture to a meeting on telecommunications, and talk about Algeria and move on to Russia,” Fernandez said. “The intellectual diversity is what makes it interesting and challenging.”

At Dartmouth, Fernandez was a history major with a concentration in Latin history and Russian history. Prior to his appointment at the State Department, Fernandez served on the Board of Trustees of the College.

Fernandez encourages students interested in international business, economics, and development to travel and study abroad. He advises students to be “willing to immerse yourself in other countries and cultures…and being able to put yourself in their shoes.”