In his review of Dambisa Moyo’s opinionated book Dead Aid, economist Jagdish Bhagwati describes the history of aid policy over the last half century and explains why, despite good intentions, it has probably done more harm than good:

Many activists today think that development economists in the past neglected poverty in their quest for growth. But what they miss is that the latter was seen as the most effective weapon against the former. Poverty rates in the developing countries did indeed rise during the postwar decades, but this was because growth was sporadic and uncommon. And that was because the policy framework developing countries embraced was excessively dirigiste, with knee-jerk government intervention across the economy and fears of excessive openness to trade and foreign direct investment. After countries such as China and India changed course and adopted liberal (or, if you prefer, “neoliberal”) reforms in the last decades of the century, their growth rates soared and half a billion people managed to move above the poverty line — without question, the greatest and quickest progress in fighting poverty in history.

Absolute poverty in China since the country embraced capitalist reforms

Neither China nor India, Moyo points out, owed their progress to aid inflows at all. True, India had used aid well, but for decades its growth was inhibited by bad policies, and it was only when aid had become negligible and its economic policies improved in the early 1990s that its economy boomed. The same goes for China.

If history is any guide, therefore, the chief weapon in the “war on poverty” should be not aid but liberal policy reforms. Aid may assist poor nations if it is effectively tied to the adoption of sound development policies and carefully channeled to countries that are prepared to use it properly (as President George W. Bush’s Millennium Challenge program recently sought to do). Political reform is important, too, as has been recognized by the enlightened African leaders who have put their energies into the New Partnership for Africa’s Development (NEPAD), which aims to check the continent’s worst political abuses.

But unfortunately, despite all these good intentions, if the conditions for aid’s proper use do not prevail, that aid is more likely to harm than help the world’s poorest nations. This has been true in the past, it is true now, and it will continue to be true in the future — especially if some activists get their wishes and major new flows of aid reach the developing world simply because it makes Western donors feel good.

Categories: Development Economics

Josh

"Josh Weinstein is a visionary. I read his blog every day." - Bono

3 thoughts on “The Aid Paradox Explained”

John Galt · August 15, 2010 at 8:27 pm

This sounds like it is correct. You don’t give your opinion on this (the whole concept does not seem “black and white”). It seems like this is exactly what Ayn Rand would say in Atlas Shrugged and from prior posts, you seem to disagree with her views and with objectivism.

Develop Economies · August 16, 2010 at 4:55 am

Mr. Galt,

I don’t give my opinion because it is not black and white. Only your Ms. Rand views things in black and white. I don’t know what Ms. Rand would say on this matter, though she would probably favor re-colonizing the countries, taking their natural resources, and running factories with imported labor, rather than investing in them. You’re a Rand stooge, old man.

Josh · August 16, 2010 at 5:33 am

Also, that picture is of Ronald Reagan and Mobutu Sese Seko, who is the most notorious aid-squandering kleptocrat. He was the president of the Congo (Zaire) and famously stole $5 billion in aid money, asked for debt relief from the U.S., and immediately after chartered a Concorde jet to send his daughter to her wedding. During the Cold war, Russian and the US were propping up dictators to fight ideological proxy wars in Africa. Reagan, the objectivist president, was giving him aid money because he was a supporter of Rand-style free-market capitalism. So take your Atlas Shrugged bullshit and shove it up your ass.

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