June 10, 2005
Over the past 50 years, foreign aid has largely been counterproductive: it has crowded out private sector investments, undermined democracy, and enabled despots to continue with oppressive policies, perpetuating poverty, says the International Policy Network (IPN).
The reason countries are poor is not that they lack infrastructure -- be it roads, railways, dams, pylons, schools or health clinics. Rather, it is because they lack the institutions of a free society: property rights, the rule of law, free markets and limited government, says IPN:
- In a majority of poor countries, the average poor person is typically unable to own and transfer property; courts of law are slow, expensive and corrupt.
- Government plays a large role in the economy and government policies undermine incentives to engage in mutually beneficial economic activities.
A review of the evidence suggests that when money is given to the governments of countries that do not have these institutions, it is not spent wisely, says IPN:
- Very often, aid is spent on projects that benefit political leaders at the expense of the citizens.
- Almost always, the money crowds out investment by the private sector and -- because government is not good at making investment decisions -- it undermines economic development.
- Often it has bolstered corrupt regimes that would otherwise have been thrown out.
It would be more sensible to scale back levels of aid, provide aid only to governments that are already reforming, and make aid available for a strictly limited period of time. Other reforms, such as removing trade barriers and eliminating trade-distorting agricultural subsidies, would yield far more benefits than increasing aid, concludes IPN.
Source: Fredrik Erixon, "Aid and development: Will it work this time?" International Policy Network, June 2005.
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