William Easterly vs. Jeff Sachs - A question of treatment threshold and dose response

Professor Sachs is well known for his advocacy to increase federal aid to poor countries, while also canceling debt in many areas. Furthermore, Sachs advocates meeting the funding goals outlined in the Monterrey Consensus that calls for rich countries to give 0.7% of GNP. If the countries involved were to meet this funding level, Sachs argues that the Millennium Development Goals to end poverty by 2015 would be met. Unfortunately, only a small number of countries have reached the 0.7% level and the U.S. and UK are not among those.

While the U.S. did pledge to meet the 0.7% bar, the country is currently no where near this level of giving. However, the U.S. has expanded - nearly tripled - it's international aid donation during the Bush administration compared to the 1990s. However, at 0.23%, that still puts the U.S. well below the 0.7% benchmark. Jeff Sachs points out that this is only $0.23 of every $100 of income and only $0.70 is needed.

Easterly, an economist at NYU, is a long-time intellectual opponent of Prof. Sachs. In numerous articles and books, Easterly has criticized Sachs for his support of foreign aid, the Millennium Development Goals and the current state of international aid organizations. One of Easterly's comment critiques is that international aid has not been effective -- over the past 50 years, aid has increased exponentially but rates of poverty have also gone up throughout the world - specifically in those areas that receive the most aid. He makes many good observations for why this might be and also outlines important ways to improve the delivery and efficacy of foreign aid. However, his call to stop increasing foreign aid because it doesn't work is completely misguided.

In medicine, drugs have a window of efficient action called the Therapeutic Index. This window is the range of doses that - at minimum - allow the drug to affect the given pathology and -- at the top of the range -- the maximum dose that will not produce increased morbidity/mortality due to adverse reactions or drug side effects.

In terms of international aid, we are under the therapeutic index. Thus, Easterly is perfectly correct in his claims that increases in aid have not let to reduction in poverty. However, it is a fallacy to assume that further increases in aid will not lead to a dose-response once we surpass some threshold (namely 0.7% of collective GNP from donor countries). Until that benchmark is met, Easterly's argument is moot.

Finally, Easterly does have two ideas that should be integrated into the arena of development economics. Namely, incentives and accountability. People work harder and produce more when they have incentives - usually monetary gain. The distributors of international aid need incentives to optimize the results of every donated dollar. Finally, we do need accountability as well. Both Easterly and Sachs note that the majority of aid, in the past, has not reached the appropriate people due to corruption by top-level officials in aid countries. This has to stop if we are going to get a return on our aid dollars. But the approaches of Easterly and Sachs do not need to remain mutually exclusive.

Easterly seems nervous that Sachs is calling for a top-down, centralized approach to government when the truth is that Sachs is actually in support of a market economy within the framework of appropriate wealth distribution in the vein of - as he calls them - Nordic economies (namely Finland, Denmark, and Sweden).