Why so much aid for the poor has made so little difference
Is poverty cultural or technical? Such debates shouldn't impede progress.
Is poverty a problem of policy or destiny? Experts tend to pull in one of two directions. Some focus on the social fundamentals for prosperity. Others, on the technical and financial requirements for sustainable growth.
In this view, policy is beside the point. Harvard political scientist Robert Putnam says that "social capital" – how closely people in a community are connected – supports the basis for trust essential to commerce. Economist Gregory Clark of the University of California argues that prosperous societies grow their economies through Industrial Revolution values such as patience, hard work, innovation, and education. Some cultures support such values, some don't, and they certainly can't be imported or master-planned. Implication: Some poverty is permanent.
Others say the developed world has the policy tools poor countries need and the obligation to show them how to use them. While specific proposals vary, development economists such as Paul Collier, Jeffrey Sachs, and Joseph Stiglitz argue that wealthy nations know how to create the conditions for accountable governance, open markets, capital formation, low taxes, reliable institutions, and regulatory frameworks with courts to enforce them. Implication: The right combination of solutions is (almost) within reach.
Whichever side of this debate you're drawn to, it is clear that decades of effort and at least $2 trillion spent by rich countries since 1945 to bring development "to" the world's poorest have delivered, at best, mixed results. A World Bank study by Craig Burnside and David Dollar found a positive impact in countries with good fiscal, monetary, and trade policies. Later analysis by William Easterly, and Raghuram Rajan at the International Monetary Fund, indicates zero impact from Western aid on growth in poor nations – with or without sound policies. Possibly these countries would have done worse without aid. Certainly, we can do better.
The first place to push – for both cultural and technical reinvention – is not in the poor nations' ethics or economies, but in the developed world's institutions. The West's efforts to help the last billion still resound with echoes of the Marshall Plan, a top-down approach that worked wonders after World War II in educated, formerly wealthy societies, where centralized planning and imported capital made the critical difference. This approach is ineffective now – not to mention damaging to the morale of committed people in these troubled countries.
Aid institutions too often pursue disconnected agendas. For every development success story, there's another about exporting plans and resources irrelevant to needs. Excelling at raising money, uncertain about results. Struggling to coordinate 21 US agencies and 50 operating units that deliver aid. Subsidizing (through clenched teeth) shameless kleptocracies and grotesque dictators. Funding fiascoes, such as $5 billion spent since 1979 on Nigeria's Ajaokuta steel mill, which has yet to produce any steel.
Humanitarian aid budgets aren't focused on the last billion, where the average person has an income one-fifth of those in mid-tier developing countries. Seventy percent of the last billion live in Africa, yet in 2008 only a third of all US government direct aid will go there. (This is progress: In 2001 it was only 8 percent.) Instead, Israel and Egypt together get 10 times the US direct aid that Darfur does. Russia gets as much as 20 sub-Saharan nations combined. Ireland gets 167 times what the Central African Republic does. These may be rational political transfers – but they're not life-saving assistance.
Development agencies around the world can't find staff to serve in places such as Chad. The World Bank has offices in every middle-income country, but only one staff member in the Central African Republic. The aid posts with the most people from most rich governments are in places such as China and Brazil, which don't need the help. And when the help is there, too many of the rich world's best efforts have unintended consequences. Malawi agriculture, for instance, withered under a prohibition against subsidizing fertilizer and seed. Finally, in 2005, Malawi defied the World Bank – and after decades of dependence, became a net grain exporter.
Some aid efforts hurt even as they help. Take food aid: First-world farmers get subsidies to grow crops. Surplus food stocks are then bought (with more tax dollars) and shipped to a struggling nation, where they're distributed or converted into currency to fund (hopefully peaceful) projects. But here's the problem: Local farmers can't compete with "free" produce. No indigenous capacity ever develops. So aid reinforces a tragic cycle of dependency.
While wealthy nations underwrite this diffuse agenda, the last billion continue to pay for it with their lives, and instability spreads. To eradicate abject poverty in one lifetime, the developed world's approach must change – in some ways subtly, in others significantly. (Tomorrow we'll take a look, through the eyes of experts, at the best levers for helping the last billion help themselves.)
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