Is There a Case for Foreign Aid? BECKER

My answer is essentially "no", with a few small qualifications. Posner gives the main arguments against aid, so I will not go over them. William Easterly among others has written several articles that examine the empirical evidence on the relation between foreign aid and economic growth-see for example, chapter 2 of his book The Elusive Quest for Economic Growth. He and others have discussed foreign government aid to countries in Africa, Pakistan and other Asian countries, and typically have not been able to find any noticeable positive effects of aid on a country's economic growth In this book Easterly discusses in detail aid to Ghana in the early 1960's that helped it build a huge dam and the largest man made lake in the world. This project was at the time supported by some economists with extravagant claims about what it would accomplish: create a new fishing industry, generate electricity, encourage a new aluminum smelting plant, and other benefits. At a huge cost, it accomplished few of these goals-there is a smelting plant run by a private multinational that has had slow growth in its output- but little else that is positive. Indeed, the lake had some serious negative consequences, such as destruction of considerable agricultural land because of the wide area flooded, and the importing to those living near the lake of water-borne diseases, such as malaria, river blindness, and hookworm. India is my favorite example to illustrate the failure of government foreign aid. From the fifties until the end of the 1980's more private and government aid went to India than to any other country. Yet during that same time period, India had a very modest growth in per capita income of about 1 percent per year-sometimes resignedly called in those days the "Hindu rate of growth". I am not claiming that foreign aid was the main source of India's mediocre performance, but it clearly did not overcome the bad economic policies of its government. In fact, aid may well have encouraged these policies as the India government could always count on foreign aid to help it out of the worst aspects of any mess caused by its restrictions on foreign trade, severe controls over private investment even by Indian companies, and neglect of basic education, roads, and agriculture. Fortunately, in the early 1990's, the Indian government recognized that the real cause of its economic problems was not insufficient aid, but its own policies. Reforms at that time include opening up more investments to the private sector, greatly lowering tariffs, quotas, and other barriers to foreign trade, and changes in its thinking about relying on rich countries to help its development. Indeed, India can legitimately claim that now one important obstacle to its growth comes from the very same rich countries which had been important donors because of their import restrictions that hinder the access of Indian farmers and manufacturers to their markets. Foreign aid programs other than of a humanitarian nature are destined to fail because they involve transfers of resources from one government to another. No economist who has closely examined the evidence concludes that the reason why some poor countries fail to have significant economic growth is because their governments have insufficient resources. The complaint is typically that governments do the wrong things with the resources they have, including their regulatory powers. They discourage entrepreneurship, give cronies special advantages in investments or in rights to import and export, over-regulate labor markets, spend too much on public prestige projects, such as domestic airlines and large dams that of little use and yet drain valuable resources, neglect basic education in order to create expensive universities, and so on. Foreign aid only makes it easier to continue to promote projects and policies that are not merely neutral with respect to growth, but hinder any take off into rapid growth. Donor nations are also subject to political pressures that influence the form their aid takes. They attach various strings to the aid that help powerful interest groups in their own countries at the expense sometimes of the aid having any chance of helping recipient countries grow faster. Given the distortions away from effectiveness on both sides of the donor-recipient equation, it is no surprise then most foreign aid has been at best ineffective, and at worst negatively affects the growth prospects of recipients. Does my discussion mean that I oppose all foreign aid except sometimes for military assistance, and for humanitarian purposes? My answer, to repeat, is yes. However, I include in humanitarian assistance aid to combat some of the major diseases in poor countries, although I prefer such aid to be from private foundations and other groups since they tend to be more effective than governments -see my January 1 post on private charities. However, if governments of rich countries do give resources to help fight diseases in poor countries, they should give to private groups in these countries. If they have to give to government agencies, they should stipulate in the grants that recipient governments have to match their own tax revenues in specified proportions to the amounts received in aid.

Comments

[Mycroft]

I think it may be good for a government to maintain a generalized foreign aid program, since non-military, non-humanitarian aid is an excellent channel for political-influence operations -- although we seem to do precious little of that these days.

[The Emperor]

How broad a meaning would you give the term "humanitarian aid"? I assume it would cover items like malaria bed nets. But would it include building a hospital or primary school? How about training doctors, nurse and teachers?

And what do you think about building "green" energy sources like offshore wind farms? Or new airports and roads?

[john]

Private charities may be effective at delivering the aid services needed by various countries--but probably not so much as Pf. Becker may believe. The information market for charities is still in its nascency and as yet (other than perhaps a few ambitious websites) there is no truly effective way of verifying charitable effectiveness the way a shareholder may, for example, research into a public company. The net effect is that most charities are run abysmally, with unaccountable management who is more likely to waste money (and thereby contribute to the aid problem described herein) than to add any value.

Partly due to this effect, charities tend to flock towards those causes which have most effectively been "marketed" (witness the incredible number of charities devoted to AIDS prevention in South Africa). This too poses a dilemma--for if the recipient has several competing suppliers of charity to choose from, there is also no guarantee that they will put any charitable aid to good use. Add to that the fact that the combined actions of many charities can simply undermine the effectiveness of gov't/business policies as well as prove to be yet one more source of guaranteed "welfare" payments and the case is far from certain that private charities are any more affective at instituting growth than govt-sponsored aid.

[William Tanksley]

I'm surprised that no commenter has pointed out that the avowed purpose of government foreign aid, at least in the US, is to further US foreign policy. In general there's no motive for massive, unified "charity" except influencing another government -- and in general it's hard to justify foreign aid constitutionally except in terms of how it helps foreign policy.

So discussing only whether foreign aid helps or hurts the people to whom it's given is (perhaps bizzarely) beside the point; the real question is whether it efficiently accomplishes the purpose for which it is intended, whether there are more efficient means to that end, and (of course) whether the foreign policy being enforced is worth enforcing by ANY means.

[Political Umpire]

Africa's plight stems from two main sources, one internal and one external: (i) corrupt governance, and (ii) trade barriers. Aid doesn't help either, and in fact as Posner argued may in fact further both.

Then again, civilised people do not stand by and watch others starve, even if they are starving by their own government's hand. I therefore would not object to _direct_ aid, namely that such as Oxfam which does not deal with governments but rather has its own operations on the ground, as it were.

Secondly, aid in the form of education (funding of schools, supply of teachers, etc) can only help all of Africa's problems including overpopulation (by education concerning contraception), poverty (by enabling Africans to gain marketable skills) and corruption (a better educated populace is harder for corrupt leaders to deceive).

As to the interests of the US, I would have thought that a more prosperous, less corrupt and less warring Africa would certainly be in the interests of the US - and everyone else.

[Dweep]

As pointed out previously, foreign aid is only nominally for 'development' purposes, but really used as a foreign policy tool. Given that purpose, we have to take it as a given and banning it is not an option. The alternative is for recipients to refuse all foreign aid or for them to attach conditionalities to accepting IDA. This is what India as moved to, accepting aid only from 4-5 donors.

In such a case, perhaps someone should be developing guidelines on effectiveness from the recipients perspective, not the donors. For instance, the WB may add real value to development issues by advising poor countries on what conditionalities to impose on donor countries - rather than the other way around?

[Political Umpire]

Without wishing to be pedantic, I am left wondering what "conditionalities" might be. Presumably "conditions", unless the redundant "ities" is a term of art. Rather like saying "burglarise" rather than "burgle".

[Alex Forshaw]

Foreign aid is nothing more than a safety net for kleptocratic dictators, unless it is accompanied by force to ensure that the aid is distributed in the intended way.

Even a kleptocrat wants tax revenues, and if you choke your tax base to death, there's no more kleptocracy.

And if the foreign aid is effective, it just forestalls necessary change. Face it, desperation is by far the most effective catalyst for change. It's terrible to watch, but the alternative is perpetuating an even less "civilized" status quo.

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