Pulling in Multiple Directions

We've mentioned this before, but government to government aid is about much more than just poverty reduction. The latest example of this is the cybersecurity bill that is winding its way through Congress. From the new new internet:

A broader proposal that is gaining political momentum would create a cyber post at the State Department and establish cybersecurity attachés at U.S. embassies. It would also mandate that the State Department identify countries that are havens for cybercrime and which ones are doing little to combat it. The findings, updated annually, would be used to prioritize foreign-aid programs to combat cybercrime, but countries that fail to make progress fighting cybercrime could also face U.S. penalties. The president would have a variety of options to sanction noncompliant nations—from limiting new foreign aid to restricting financing from the Overseas Private Investment Corp., a U.S. agency that helps U.S. businesses invest overseas.

When we tie foreign aid to specific reforms, we are using a carrot and stick approach. But there are limits to how many reforms we might request. We might give money conditional on fiscal policy reforms, or changes to a country's regulatory structure - and sometimes we lend with no conditions. By tying foreign aid to cybersecurity we are affirming our belief in this important goal, but at the same time tying our hands in other areas. We are, in a very real sense, trading off economic reforms for security. This may be optimal, but we should account for these changes when looking at the effectiveness of foreign aid in alleviating poverty. Simply put, foreign aid isn't, and hasn't been for a very long time, simply about improving living standards. For that, we need entrepreneurs.