Can foreign aid buy growth?

Governments in the Western world deliver foreign aid to promote economic development and welfare in the poorest countries. But how effective is the current system? Nobel Laureates discuss.

15 Mar 2019 Sir Angus S. Deaton, Finance, Robert M. Solow

When Angel Gurría, Secretary General of the Organization for Economic Co-operation and Development (OECD), presented the numbers on development aid for 2017, he emphasized that the fastest route to spread stability and inclusive growth would be to keep up the global aid efforts. A total of USD 146.6 billion had been spent by donor countries, with a bigger chunk than in previous years flowing to the poorest countries.

While development aid has been relatively stable in recent years, the world is also seeing a 25-year peak in violent conflicts, rising world hunger and more than 65 million people displaced globally. Gurría stressed that in order to meet the United Nation’s ambitious 2030 Agenda for Sustainable Development, now is not the time to rest on one’s laurels.

Many economists agree, most notably, Angus Deaton. As an expert on development economics, the Nobel Laureate in Economics of 2015 has frequently pointed to data that shows that there’s no apparent correlation between the foreign aid a country receives and its level of economic growth. “It’s very difficult to overcome the simplistic view that if you’re poor and I’m rich and I give you money, that’ll make you better off,” explains Deaton. “It does not really work for nations.”

If you pour enormous sums of money into other countries, that changes the way government functions in a very negative way.

– Deaton

But it’s not only that aid isn’t helping the way it’s supposed to. Deaton did research for the World Bank for decades and his conclusion is straight forward; some types of foreign aid can help countries, but it can also hurt poor countries, by corrupting their governments. “If you pour enormous sums of money into other countries, that changes the way government functions in a very negative way,” he says. “If the government is not responsive to its people but is responsive to donors, this makes development impossible.”

Deaton’s colleague and fellow Nobel economist, Robert Solow, agrees. “Africa is not a resource-poor place, it has resources,” says Solow. “The biggest obstacle to any improvement in Africa is the corruption of the government.” Solow points to research that shows how African countries that have a lot of natural resources often tend to be less developed, and Deaton believes that there’s an easy explanation for this. It’s the wealth from natural resources that can corrupt governments.

You can’t make other people’s countries grow from the outside.

– Deaton

Is it then in our power to stop corruption in developing countries? Deaton thinks it is an impossible task. “You can’t make other people’s countries grow from the outside,” he says. “There are many people you could list and you think the world would be a better place if they were not running their countries, but you have to ask what’s feasible and what’s ethically desirable.”

Instead of purely financial aid, Deaton is more interested on focusing on the most effective and efficient ways of delivering aid. Addressing severe health situations in many developing countries should, in his opinion, be one of the first targets. “We could do a lot more to research diseases that don’t afflict people in rich countries,” says Deaton. “The US doesn’t spend a huge amount of money on malaria research compared to what it does for cancer or heart disease, which are the things that are really afflicting Americans.”

Not directly profiting off of foreign wars would also lead to economic growth. “Countries like Sweden are among the vociferous in giving aid and they are also the countries that are the readiest to sell arms,” he says. “Maybe we should think about why we’re doing that.”

While globalization has provided many benefits to several countries, there have been serious failures as well. “Both the European Community and the United States have rules on tariffs and trade that make it very difficult for many African farmers to do well by themselves,” says Deaton. This means that countries serious about helping may need to reevaluate trade-related constraints and promote inclusiveness.

Deaton’s work has convinced him that there’s only so much you can do from the outside and that the focus must be on how to deliver effective aid instead of destabilizing governance in developing countries with money. According to Deaton, sustainable economic growth and setting up the right institutions will only be possible without the interference of donor countries.

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