Tag Archives: risk

Amoral hazards

In the last post we saw that humanitarian aid agencies are not gathering data on the outcomes of their work (such as years of life saved, average weight increases etc).  Not doing so has some dangerous ramifications, but before looking at these I want to characterize the interplay of motivations that leads to this situation.

Lord Ashdown is clear: donors are as allergic to measuring outcomes as the aid agencies themselves.  In fact, once a contract is determined there is no reason to distinguish between the two tiers; agencies are putting DFID priorities into action.  The distinction between the two tiers should be important when DFID or AusAID or USAID are choosing which agency to fund during a particular crisis.  How do they choose?  They use the process evaluations that the agencies are using to monitor themselves.  For example, who can shift the most food? Who can buy the most tents?

Donors like these types of ‘outcome’ because they are easy to interpret and sell to the public.  They don’t offer budgets for proper monitoring and evaluation and so the agency doesn’t have a choice but to continue with the status quo.  Maybe that’s all, but these agencies have clout (Oxfam, Save the Children) and the British public rarely scrutinize DFID reports to see how that money is being spent.  And yet the agencies don’t say anything, and they don’t put sufficient pressure on DFID to think differently. It is a closed loop: agency and donor benefit when costs are not compared to returns.  The risk of a poor strategy, like wasted food or worse, is borne by the recipients of aid.

This is a moral hazard.  A moral hazard is an economics term for when an agent (person or company etc) behaves differently because they do not bear the consequence of risk taking.

The situation is a bit like the banking crisis.  Aid agencies are ‘too big to fail’, inasmuch as we need them for when the next crisis comes along.  In the banking crisis, it was tax-payers’ money that went via the government to the banks.  With aid agencies, the aid recipients do not themselves contribute money (they’re normally too poor after all) but money is spent on their behalf by governments so that that aid can be given to them (the ‘process’ output often measured).  In both cases there is very little thought to whether or not the bearer of the ultimate risk (tax-payer in the UK, aid recipient in Somalia) is getting a good deal, that couldn’t be better supplied by someone else.  The life-blood of these agencies is recipients in their camps, they need them, but all of the risk is pushed onto the  same recipients.  For example, Oxfam won’t be outcompeted by Save the Children even if Save the Children could actually help 3 times as many people per pound spent in a crisis; we wouldn’t know.  All we know is what they are spending: how many tents? How much food? How many aid workers?  It is the people in Oxfam’s camps (who else!?) will bear the brunt of this inefficiency, alone.

So, no-one in the system need care about the quality/efficiency of services because the risk is passed on to the recipients of aid.  And, like the banks, they probably are too big to fail, indicating the need for tight, independent regulation.  Otherwise there is a run-away feedback of motivation: DFID spend more and the agencies spend more.  Perhaps the ‘good-will’ of the agency members is expected to stop this but, as Lord Ashdown says, the not insubstantial costs of doing so are not covered by DFID grants.  We cannot blame the aid workers themselves because the system has closed in.  However, if they felt the true risk of bad aid delivery then perhaps they’d be complaining with a louder voice.

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