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The Poverty of Good Intentions

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The Poverty of Good Intentions: The Failure of Foreign Aid

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The former Secretary of the Treasury, Paul O’Neil, was lambasted as a myopic rube when he suggested that “trillions of dollars of aid” have had “precious little” impact on developing nations. His argument certainly fell on deaf ears; organizations from the World Bank to the UN continue to plead for more aid, and President Bush, showing the compassionate side of his conservatism, promises to increase American aid by $5 billion a year. Amid this avalanche of good intentions, we should ask ourselves if foreign-aid profligacy actually leads to positive results—namely, poverty reduction and economic development. Unfortunately, the answer is no.

The massive post-World War II edifice of international foreign aid has manifestly failed to lead to selfsustaining economic growth in most of the Third World. As a 1993 Clinton administration task force put it,“despite decades of foreign assistance, most of Africa and parts of Latin America, Asia, and the Middle East are economically worse off today than they were 20 years ago.” Meanwhile, the few countries that have achieved dramatic economic growth did so without the benefit of generous foreign aid. In the 1960s, per-capita GDP in East Asia was lower than in sub-Saharan Africa, but now–although it never received much foreign aid–East Asia is fast approaching Western levels of GDP per capita. Similarly, China and India are rapidly escaping poverty, and both countries have received negligible amounts of aid relative to GDP. In successful developing nations, economic progress has been the result of domestic policies and institutions, not outside aid interventions.

The ineffectiveness of aid is partly a result of aid agencies’ bureaucratic structure. They use a classic central-planning framework: vast information requirements, arbitrary benchmarks, weak feedback, and total disregard for cost-benefit ratios. As the Soviet Union’s failure showed, this is not a recipe for success. Furthermore, the political nature of aid leads agencies to focus on big round-number aid pledges and glamorous new capital investments, neglecting the unceremonious needs of post-project maintenance. The result is the rapid depreciation, disuse, and waste of aid investments. Under the guiding lights of bureaucracy and political preferences, aid agencies dot developing nations with white elephant infrastructures that go misused, unused, and abused.

Donors’ good intentions notwithstanding, foreign aid actually keeps people trapped in poverty, because it sustains governments’ poor economic policies. U.S. aid currently supports governments with protectionist tariffs and quotas, import-substitution schemes, heavily subsidized boondoggles, exchange-rate controls, nationalized industries, price and wage controls, severe budgetary imbalances, and inflationary monetary policies. In these countries, aid props up the very governments that are enforcing policies that condemn their citizens to poverty. Thus, the World Bank study “Assessing Aid: What Works, What Doesn’t, and Why” found that a 1-percent-of-GDP aid allotment to a country with bad policies appears to slow growth by 0.3 percent per annum.

Furthermore, by directing money into government hands, aid enshrines corrupt ruling elites and enables lavish patronage. Because most aid to governments is stolen by corrupt elites, aid tends to increase consumption rather than investment and to expand the size of government without conferring benefits for the poor (as indicated in a 1997 study of over 95 countries by Peter Boone of the London School of Economics). In Peter Bauer’s words, aid amounts to a wealth transfer “from poor people in rich countries to rich people in poor countries.” In the process, aid sustains the harsh rule of repressive governments; nearly half the countries ranked“repressed” or mostly unfree” in the Heritage Foundation “Index of Economic Freedom” are recipients of U.S. foreign aid.

Instead of seeking succor from richer nations, developing countries should try to stop strangling themselves with red tape. As the World Bank report “Doing Business in 2005” shows, businesses in developing nations face triple the administrative costs and double the bureaucratic regulations as businesses in rich countries. Although well-meaning, these strands of red tape have perverse effects. For example, minimum-wage laws, intended to raise living standards, actually create unemployment by requiring employers to choose between firing a worker—or never hiring him—on the one hand, or, on the other hand, paying him a legally mandated wage that is higher than the revenue the worker brings in. Not a difficult choice.

In the aggregate, the layers of such well-meaning regulations have astoundingly bad effects. In Angola, it takes about 146 days to deal with the regulations necessary to open a business; in Haiti, 203 days. In Burkina Faso, it takes 150 percent of the average person’s earnings to pay for complying with business-opening regulations, and in Chad more than 300 percent.

Poor countries can help themselves simply by abolishing such regulations. The “Doing Business in 2005” report estimates that a country’s jump from the most- to the least-regulated quartile would boost its annual growth by 2.2 percent. The aforementioned Economic Freedom Index reveals that there is a clear association between economic freedom and GDP per capita; across the board, the more a country improved its economic freedom score from 1997 to 2004, the more economic growth it experienced.

On their part, instead of pledging more foreign aid, developed nations should cut trade barriers. According to OECD reports, freeing trade would open opportunities for poorer nations worth twice as much as all foreign aid combined. Oxfam estimates that a 1 percent increase in Africa’s share of world exports would produce in income more than five times the continent’s foreign-aid receipts. Rich countries can also liberalize immigration laws, reducing population pressures in underdeveloped nations and increasing remittances sent home.

If poor countries wish to emulate the success of Singapore, Hong Kong, and Taiwan, they must establish pro-growth economic policies; without the right conditions for economic development, no amount of aid will magically produce economic growth. But in foreign aid, it seems that intentions count for far more than results. There is little evidence that, after 50 years without success, developed nations have recognized foreign aid as the ineffective and often-pernicious failure that it is.

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Piotr Brzezinski is a second-year Social Studies concentrator at Harvard.




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