Does Foreign Aid Work Very Well?

[Economist]

It seems to me that foreign aid actually doesn't do a very good job at accomplishing it's stated objectives. Now I am not saying that we should stop giving foreign aid, but rather that many people think foreign aid can do a lot of good for poor countries, and I am skeptical about that and believe that most prosperity will come from within a country (as opposed to outsiders rushing in and helping). I am not alone in this view, and I'd like to quote some people and provide some links that really made me think about the limitations of foreign aid, at least as it is currently implemented.

Exhibit 1:

William Easterly states (http://www.cato-unbound.org/2006/04/03/william-easterly/why-doesnt-aid-work/)

THE TWO TRAGEDIES

UK Chancellor of the Exchequer Gordon Brown recently gave a compassionate speech about the tragedy of extreme poverty afflicting billions of people, with millions of children dying from easily preventable diseases. He called for a doubling of foreign aid, a Marshall Plan for the world’s poor. He offered hope by pointing out how easy it is to do good. Medicine that would prevent half of malaria deaths costs only 12 cents a dose. A bed net to prevent a child from getting malaria costs only $4. Preventing 5 million child deaths over the next 10 years would cost just $3 for each new mother. A program to get Amaretch into school would cost little.

However, Gordon Brown was silent about the other tragedy of the world’s poor. This is the tragedy in which the West already spent $2.3 trillion on foreign aid over the last 5 decades and still had not managed to get 12-cent medicines to children to prevent half of all malaria deaths. The West spent $2.3 trillion and still had not managed to get $4 bed nets to poor families. The West spent $2.3 trillion and still had not managed to get $3 to each new mother to prevent 5 million child deaths. The West spent $2.3 trillion and Amaretch is still carrying firewood. It’s a tragedy that so much well-meaning compassion did not bring these results for needy people.

The West’s efforts to aid the Rest have been even less successful at goals such as promoting rapid economic growth, changes in government economic policy to facilitate markets, or promotion of honest and democratic government. The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country no richer today than 40 years ago. Dozens of “structural adjustment” loans (aid loans conditional on policy reforms) made to Africa, the former Soviet Union, and Latin America, only to see the failure of both policy reform and economic growth. The evidence suggests that aid results in less democratic and honest government, not more. Yet, unchastened by this experience, we still have such absurdities as the grandiose plans by Jeffrey Sachs and the United Nations to do 449 separate interventions to reach 54 separate goals by the year 2015 (the Millennium Development Goals), accompanied by urgent pleas to double aid money.

Economic development happens, not through aid, but through the homegrown efforts of entrepreneurs and social and political reformers. While the West was agonizing over a few tens of billion dollars in aid, the citizens of India and China raised their own incomes by $715 billion by their own efforts in free markets. Once aid agencies realize that aid CANNOT achieve general economic and political development, they could start concentrating on fixing the system that fails to get 12-cent medicines to malaria victims.

Exhibit 2:

Karol Boudreaux and Paul Dragos just published a document titled "Paths to Property" which can be downloaded here http://www.iea.org.uk/record.jsp?type=release&ID=134 .

An Institute of Economic Affairs research report published today argues that the creation of a sound framework of property rights, and not development aid, is the key to economic progress in Africa. The economic data are very clear, argue authors Karol Boudreaux and Paul Dragos Aligica, from George Mason University, that sub-Saharan Africa is poor because it lacks the legal and economic framework that business and enterprise needs to thrive.

Hopefully for the millions of poor souls still struggling in conditions of severe poverty the international development policy community will listen to Boudreaux and Aligica, and learn how to find the most effective path to property for each of the countries the agencies are seeking to help. It is not foreign aid which will help these countries; and foreign aid will be redundant if they find the way to private property, freedom of contract and promise-keeping, because the opportunities for mutually beneficial exchange and wealth creation will be plentiful. Poverty willfinally become a thing of the past rather than a trap from which they cannot seem to escape.

Much recent work in economics and political science focuses on the role institutions play in creating social order and promoting or hindering economic development. A significant part of this interest was triggered by a startling reality: despite the transfer of more than a trillion dollars in development aid from the developed to the developing world over the last several decades, absolute poverty persists. Many countries, particularly in Africa, are still desperately poor – indeed, some are poorer today than they were in the 1970s. The traditional approaches to international development have failed. While a host of notable voices, under the spell of old thinking, still issue loud calls for increases in aid to the developing world, others, drawing on recent advances in economic and political theory, look to the institutional environment and alternative strategies of institutional change for more robust and constructive answers to the riddle of international development.

Exhibit 3:

Hernando De Soto

De Soto tells these heads of state that their poor citizens are lacking formal legal title to their property and are unable to use their assets as collateral. They cannot get bank loans to expand their businesses or improve their properties. He and his colleagues calculate the amount of "dead capital" in untitled assets held by the world's poor as "at least $9.3 trillion"—a sum that dwarfs the amount of foreign aid given to the developing world since 1945.

Exhibit 4:

George Ayittey

On NPR's morning edition (http://www.npr.org/templates/story/story.php?storyId=4731168) he stated:

Well, we all know that in the past, giving aid to African government simply didn't help.

Africa's salvation doesn't lie in asking for more aid.

LINKS, RESOURCES, ETC.

I realize that I usually post some links/resources and that nobody tends to read them because there are too many and they are too long. This is why I decided to only post two this time, with a description about the following videos:

PLEASE TAKE THE TIME TO WATCH THIS VIDEO

http://video.google.com/videoplay?docid=-6633251930563362545&q=william+easterly&total=30&start=0&num=10&so=0&type=search&plindex=0
(William Easterly discusses his new book on foreign aid in this thought provoking presentation. It is one hour long, but only about the first 40 minutes are the presentation, with a follow up Q & A session, so if you only watch the presentation (which is the informative part) it will only take 40 minutes.)

IF YOU HAVE A LITTLE EXTRA TIME, THEN THIS VIDEO IS INTERESTING AS WELL

http://video.google.com/videoplay?docid=7383556057291139592&q=george+ayittey&total=20&start=0&num=10&so=0&type=search&plindex=0
(George Ayittey speech that is less than 20 minutes long.)

 

[mheslep]

http://video.google.com/videoplay?docid=-6633251930563362545&q=william+easterly&total=30&start=0&num=10&so=0&type=search&plindex=0
(William Easterly discusses his new book on foreign aid in this thought provoking presentation. It is one hour long, but only about the first 40 minutes are the presentation, with a follow up Q & A session, so if you only watch the presentation (which is the informative part) it will only take 40 minutes.)

I see here J. Sachs popping up again, as Easterly goes head to head against.

Sachs and Friedman were out there advising countries migrating to market economies, they must have had a conversation along the way. I hope that turns up somewhere; I can't find it.

 

[Gokul43201]

I think foreign aid works pretty well to alleviate many specialized/localized problems, but is extremely inefficient at bringing about broad ranging development in the third world.

Off the top of my head, the following come to mind: Japan (post WWII), Europe (post WWII), eradication (or nearly) of polio and small-pox globally, family planning education and the resulting decline in global fertility rates (and all the benefits that came out of that), several cases of disaster relief.

As far as broad development of recipient countries go, the effectiveness of the received aid is in direct proportion to the effectiveness of the local government. Pump any amount of aid into countries ruled by corrupt or inept government, and it'll mostly come to naught, as far as overall development is concerned.

 

[Economist]

I think foreign aid works pretty well to alleviate many specialized/localized problems, but is extremely inefficient at bringing about broad ranging development in the third world.

Off the top of my head, the following come to mind: Japan (post WWII), Europe (post WWII), eradication (or nearly) of polio and small-pox globally, family planning education and the resulting decline in global fertility rates (and all the benefits that came out of that), several cases of disaster relief.

But bed nets and malaria medication are pretty specific. So why haven't those worked out well?

Here's one of the quotes I posted above:

This is the tragedy in which the West already spent $2.3 trillion on foreign aid over the last 5 decades and still had not managed to get 12-cent medicines to children to prevent half of all malaria deaths. The West spent $2.3 trillion and still had not managed to get $4 bed nets to poor families. The West spent $2.3 trillion and still had not managed to get $3 to each new mother to prevent 5 million child deaths. The West spent $2.3 trillion and Amaretch is still carrying firewood. It’s a tragedy that so much well-meaning compassion did not bring these results for needy people.

 

[Contrapositive]

Africa needs governmental and agricultural reforms, and debt relief. Not free money/food that dictators are just going to use to fuel their regime.

 

[mheslep]

I think foreign aid works pretty well to alleviate many specialized/localized problems, but is extremely inefficient at bringing about broad ranging development in the third world.

Off the top of my head, the following come to mind: Japan (post WWII), Europe (post WWII), eradication (or nearly) of polio and small-pox globally, family planning education and the resulting decline in global fertility rates (and all the benefits that came out of that), several cases of disaster relief.

As far as broad development of recipient countries go, the effectiveness of the received aid is in direct proportion to the effectiveness of the local government. Pump any amount of aid into countries ruled by corrupt or inept government, and it'll mostly come to naught, as far as overall development is concerned.

Agreed. From the video and reviews from Easterly's book it appears worse than naught in the case of bad governments as the aid props them up. Edit: The reviews of 'White Man's Burden' (Times/Foreign Affairs) hold it in high regard.

But bed nets and malaria medication are pretty specific. So why haven't those worked out well?

Here's one of the quotes I posted above:

This is the tragedy in which the West already spent $2.3 trillion on foreign aid over the last 5 decades and still had not managed to get 12-cent medicines to children to prevent half of all malaria deaths. The West spent $2.3 trillion and still had not managed to get $4 bed nets to poor families. The West spent $2.3 trillion and still had not managed to get $3 to each new mother to prevent 5 million child deaths. The West spent $2.3 trillion and Amaretch is still carrying firewood. It’s a tragedy that so much well-meaning compassion did not bring these results for needy people.

I think you missed Gokul's point. Some money appears to have had good effects (Marshall plan, etc) and much of if not. The $2.3 trillion is obviously an aggregate aid sum. The relevant question then is how much was spent on nets and meds, and how much was big loan checks to 3rd world finance ministers.