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Foreign aid in the '80s: economists rethink what works best

Since the end of World War II, the United States has lent or given away more than $321 billion in various types of foreign aid. Has it been worthwhile? Has anything been learned about the development process? Why, for example, has Taiwan taken off economically while Bangladesh lags behind?

Some conservatives figure foreign aid is money down the drain. In a new collection of papers published by the Heritage Foundation, Doug Bandow, a senior fellow at the Cato Institute, holds that ``many Third World leaders have yet to learn anything from the economic experience of the past decade.''

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Most economists, however, maintain that foreign aid has usually helped speed up economic development and that policy lessons have become clearer during the past 30 or so years.

Indeed, Helen Hughes, an Australian economist, maintains that it is possible for other developing countries to replicate the high growth rates of such nations as Taiwan, South Korea, and Singapore.

``The opportunities for catching up [on] the industrial countries by using existing `technology' both in the sense of economic management and production techniques make it possible to achieve real growth rates of 7 percent or more over the long'' term, writes Ms. Hughes, executive director of the Development Studies Center at the Australian National University.

Another economist studying the development process, John P. Lewis of Princeton University, comments: ``We have learned a lot about how one does aid economic development effectively. The development process is a lot more complicated than we thought back in the 1950s. It is not just a matter of pumping in capital.''

In each of the recent decades, a different economic thesis tended to dominate thinking about the best route to development.

In the 1960s, the emphasis was on economic growth, with foreign aid as a stimulus. By the latter part of that decade, the great gap between the poor and the elite in many developing countries became highly visible and, to many observers, obnoxious. So in the 1970s, the high theme in development economics was equity. Foreign-aid programs were often aimed at providing the world's poor with ``basic needs'' -- such as food, clean water, clothing, and shelter.

In these 1980s, the economists, finance ministers, and other government officials -- at least those in the industrial countries -- talk a lot about a need for ``adjustment.'' By that they mean developing countries must make domestic policies more economically rational and realistic. A country, for example, should not run too large a budget deficit and high inflation. It shouldn't have a bloated governmental bureaucracy or inappropriate consumer subsidies -- and so on.

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``The policies in place in most countries . . . are not supportive of . . . `catching up,' '' writes Hughes in a paper for the Group of Thirty, a body that studies international finance and economics.

Now development economists and others are trying to sort through the experience of the past decades and come up with some sort of useful policy synthesis to guide developing nations. The process remains stormy, but here, possibly, are some of the lessons learned:

Domestic economic policies usually dominate development far more than external aid. ``If they are screwy, they can foil any input of foreign resources,'' noted Mr. Lewis in a telephone interview. ``You might as well take your money elsewhere.''

Economic efficiency is terribly important.

Many economists hold that private enterprise is more efficient than state-owned companies or other government activities. So they advocate ``privatization'' of government companies and a general reduction in the size of government compared with the private sector.

``The countries that grew rapidly recognized, while other developing countries did not, that uncertainty is the normal, pervasive state of the economic environment . . . ,'' writes Hughes. ``Economic policies, therefore, have to ensure that economic units are flexible so that they can handle uncertainty. Because uncertainty entails risks, individuals have to be encouraged to take initiatives. . . . Decentralized decision-making through market mechanisms offsets mistakes, whereas a centrally planned system tends to multiply them.''

John W. Sewell, president of the Overseas Development Council in Washington, cautions that in some instances what is needed is more efficient and more capable government and state-owned enterprises.

Policy should aim primarily at growth -- getting the economic pie larger. But a good dose of equity often encourages growth.

Mr. Sewell recalls how land reform helped set the stage for rapid economic development in Japan, Taiwan, and South Korea.

Education and training are key to development in such poverty-stricken areas as much of Africa. ``In areas like that, development is going to be slow,'' warns Princeton's Lewis.

Rapid growth in exports has been key to the success of some developing countries, such as those in the East or Southeast Asia.

``Few Western policies do more damage to Third World economies than trade protectionism -- whether it be through tariffs, quotas, or nontariff barriers,'' states Bandow. ``Increased impediments to world trade stunt Third World nations' domestic growth and reduce their ability to earn foreign exchange.''

In such large nations as India or China, however, internal markets are also highly important, and, Lewis argues, a mixture of inward and outward-oriented economic policies is best.

Foreign aid must be carried out with good manners. ``You are telling people how to run their lives,'' notes Lewis. ``You have to avoid Big Brother approaches.''

He concludes: ``One must not get too pessimistic about development.''