Foreign Aid & Civil Society

Development Aid: Critical Views by Becker-Posner and Friedman

Becker and Richard Posner have two wonderful critiques of International Development Assistance. They are long and worth every moment needed to read them, with a simple conclusion (Posner):

The focus of my discussion has been on the question whether the recipient nations benefit at all. My guess is that they do not. It is just a guess, but it has support in empirical research.

As pointed by Mankiw, Posner takes a dramatically different view from mainstream development experts (esp. Sachs).

My own, unfashionable view is that charitable giving, both governmental and private, is more likely to increase than to alleviate the poverty, ill health, and other miseries of the recipient populations. That is a familiar proposition with regard to antipoverty policy on the national rather than international scene.

In that, Posner uncovers an exceptionally illuminating contradiction of IDA. The very countries that decry welfare at a national level have no qualms about applying welfare at an international level. He also mentions other problems and limitations of IDA, in particular dependency and incentives of recipient countries, the resource/aid curse, and the true value of charity.

Becker takes the argument further, suggesting the problem of poverty is not resource scarcity, but the domestic policies of poor governments:

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…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.

India as a Basket Case for IDA

Becker uses India to support this conclusion:

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”.

He would be glad to know that this was pointed out by Milton Friedman in a 1955 paper written after visiting India as a consultant for the Ministry of Finance (via Sepia Mutiny). While the paper spoke largely of the economic policies, it points out clearly that India’s growth decelerated after independence, when it should have accelerated:

…the years after independence saw a great inflow of resources from abroad. External assistance during the decade spanning the first two Five Year Plans averaged about 11/2 per cent of national income, which means that it provided something like a fifth of net investment; and external assistance was disproportionately concentrated in the Second Five Year Plan period, when it amounted to about 2 1/2 per cent of national income or to over a fourth of net investment. On that score alone, growth should have accelerated during the Second Five Year Plan rather than apparently slowing down a bit.

This means India received twice as much money over the 2nd five year plan, and converted it into half the growth of the first five year plan. Clearly, more foreign aid was not the solution.

IDA: Distracting from the Essential
In the final analysis, however, there is a deeper reason for why IDA is – on the whole – counterproductive:

The chalice is poisoned in still another way. The “generous” gifts from wealthy countries–pluming themselves on their greater (apparent) generosity than the United States–enable those countries to hide, perhaps even from themselves, the extent to which their tariff policies immiserate poor countries.

That summarizes everything that is wrong with IDA. There are too many “distortions away from effectiveness on both sides of the donor-recipient equation”, that ensure foreign aid does no good, and may well do harm.