Monday, June 05, 2006

Can it be ALL bottom-up?

People often ask me if bottom-up systems like GlobalGiving can totally replace top-down systems like the World Bank and USAID. Here is a response that I posted in a related discussion on

The short answer is that it takes both types of system. The analogy I often use is that of a well functioning economy. The healthiest economies around the world are market-oriented, but they also have significant public sectors.

The numbers vary, but a rule of thumb is that about 2/3 of the resources of an economy are allocated through the private sector, and about 1/3 through the public sector. The private sector is comprised of millions of small and large companies that listen to consumers and try to produce goods and services that consumers want. To flourish, private companies and consumers all need a well run public sector to provide public goods such as policies, laws, large infrastructure, basic social goods (including some education), etc.

Currently the aid sector is dominated by public sector institutions. Broadly, public aid to developing countries is about $80 billion, and private aid (ie regular people, companies, and organizations) is about $20 billion. The ratios are reversed compared to a well functioning market economy. (I worked in Russia for five years, so I saw first hand how badly the public sector functions in a situation like this!)

So I think the goal should be to change this balance and make it 2/3 private and 1/3 public over time. The goal should not be to get rid of the public sector institutions, but rather to have them focus on the policy framework, infrastructure, and other public goods. The private aid sector would focus on the millions of small-scale projects out there, driven by the demands and needs of the people on the ground.

Some ask whether the private aid sector has the resources to redress the current imbalance. The answer is yes, over time - and even faster if public institutions were willing to deeply innovate. Last year, individuals in the US gave away about $200 billion. So there is a lot of leeway to increase the amount of private aid going overseas from its current level of $20 billion.

Our own experience at GlobalGiving is that once people find out that they can find, fund, and follow up on overseas projects, they are very happy to be able to do so. And although it is early days, the fact that a few million dollars have flowed to several hundred projects through our site makes us optimistic that private aid overseas can increase steadily.

In terms of innovating in the public sector, in the year 2000, we did a little experiment at the World Bank called the Development Marketplace. It allowed community groups to submit projects directly, and then allowed non-profit and other private sector people to help make allocation decisions. This program has allocated tens of millions of dollars over the past few years - and has surfaced many superb ideas and backed outstanding community leaders. What if we upped that program to tens of billions of dollars?

Bill Easterly has taken these ideas a step further and suggested that public agencies should be required to give out aid vouchers to community groups around the world. The community groups could then use the voucher to "shop" at different aid agencies for the programs they wanted. Now THAT would shake things up! (And what would happen if private agencies could compete with public agencies for those vouchers?)