Chris Blattman’s blog recently critiqued an article by Dan Pallotta arguing that earmarking funds for programs with proven impact is actually less impactful than using the money for further fund-raising efforts. Pallotta makes an argument that spending on fund-raising allows you to, in essence, leverage your funds and get a much higher return on investment than you would if you’d spent that money directly on programs.
Blattman makes two counter points:
1. The effectiveness of the programs you are funding feeds back into your ability to use your money to raise more funds.
2. It’s not clear that lack of funds is the binding constraint in aid.
I’m a bit skeptical of Blattman’s second point—I thought I was out here getting malaria to make sure that scarce development resources were spent on programs with the highest impact. I think it is more correct to think of funds and good practice as being similar to labor and capital—in most circumstances you can add more of one or the other and improve outcomes, but are most effective when increased together.
I think Blattman’s first point is completely correct. Pallotta is right that fund-raising can increase impact, but program impact is fundamental to fund-raising effectiveness and meaning. Donors should be attracted by good programs. In a rational world with perfect information, donors would know exactly how much money they wanted to spend, and they would choose the program with the highest impact-per-dollar. This is how these institutional funders Pallotta is complaining about behave. However, in the real world, human behavior is less rational and more suggestible. If fund-raising can actually increase the number of dollars out there to be used on development, it can indeed be highly impactful. Note that fund-raising that just diverts funding from one project to another from a fixed pool of resources doesn’t get to claim this—unless the program it diverts money to is more impactful that the program it diverts money from.
Which brings us to the next point-- if your programs don’t have impact, it doesn’t matter how much you leverage your dollars- you are just using more money badly. Palotta’s proposal to use seed money to fundraise is similar to the concept of hedge funds. Hedge funds can’t make huge returns without leveraging their initial funds with loans, but if they don’t put the leveraged funds in investments with good returns, they are just wasting everyone’s money.
Palotta also argues that you often can’t know what is going to be impactful ex ante. That may be true, but that doesn’t mean you should throw in the towel and give up on trying to target impactful programs. Market investors often can’t know which stocks will take off, but no investor would throw money at one without trying to make an educated assessment of its future value. If funding truly is a scarce resource, you have to have some standard for choosing which programs to fund and which not to.
Polatta may be right to encourage donors to allow their funds to be used for further fundraising, but this only makes sense in concert with an emphasis on evaluation. After all, what is the point of all that fundraising if you aren’t going to do anything good with it? And for fundraising to matter, Blattman must be wrong about money not being a binding constraint. If money is a binding constraint, then you can’t fund everything, and it becomes all the more crucial to have some way of assessing the best programs.
I have worked in economic policy and research in Washington, D.C. and Ghana. My husband and I recently moved to Guyana, where I am working for the Ministry of Finance. I like riding motorcycle, outdoor sports, foreign currencies, capybaras, and having opinions.