Foreign aid is a problem, not a solution

Last week a United Nations conference convened in Monterrey, Mexico, to discuss the need to sharply increase foreign aid. However, more foreign aid may not be the answer. Indeed, says Bruce Bartlett of the National Centre for Policy Analysis, a strong case can be made that foreign aid has been the problem for many developing countries.

Instead of reforming themselves, poor countries have sabotaged development in many ways.

Industries were nationalised and private enterprise snuffed out by high taxes, regulations and corruption.

Price controls are pervasive in the agricultural sector, leading to lower output and famine.

Much foreign aid is simply stolen by elites and almost all the rest has been wasted on projects that yielded no economic benefits whatsoever.

Economist William Easterly, formerly of the World Bank and now with the Centre for Global Development in Washington, D.C., has written some of the most influential academic studies on the failure of foreign aid. In a new paper, he presents overwhelming evidence that it is almost impossible for foreign aid to succeed because the bureaucratic nature of the aid system virtually guarantees failure.

In response, the World Bank has tried to prove that aid can work if the right conditions are present – but there is no evidence that the Bank has ever figured out how to create those conditions.

Indeed, aid creates a perverse incentive not to adopt meaningful reform, because true reform would cause a country to grow so rapidly that it would no longer qualify for aid.

Not only is there no case for doubling foreign aid, as the U.N. conference hopes to accomplish, there is no case for existing aid. The U.S. would do far more to help the world's poor by cutting off the subsidies that enable them to avoid adopting sensible policies.

Source: Bruce Bartlett, senior fellow, National Centre for Policy Analysis, March 18, 2002; see also William Easterly, The Cartel of Good Intentions: Bureaucracy Versus Markets in Foreign Aid, March 2002, Centre for Global Development.

For Bartlett text http://www.ncpa.org/edo/bb/2002/bb031802.html
For study text http://www.cgdev.org/wp/wp004.pdf
For more on Foreign Aid http://www.ncpa.org/iss/int

FMF Policy Bulletin\26 March 2002