NCPA - National Center for Policy Analysis


June 20, 2006

Foreign aid often doesn't work very well, says William Easterly, a former World Bank official who is now an economics professor at New York University, in his provocative new book, "The White Man's Burden."

According to Nicholas Kristof of the New York Times, Easterly's argument is right: helping people can be much harder than it looks. For example:

  • When people are chronically hungry, for example, shipping in food can actually make things worse, because the imported food lowers prices and thus discourages farmers from planting in the next season. That's why the United Nations, when spending aid money, tries to buy food in the region rather than import it.
  • International agencies are also more successful at maintaining SUVs than clinics. One reason is that budgeting is often done annually, and one of the ways to spend a grant in a single year is to buy a vehicle.

It's well-known that the countries that have succeeded best in lifting people out of poverty (China, Singapore, Malaysia) have received minimal aid, while many that have been flooded with aid (Niger, Togo, Zambia) have ended up poorer.  Thus many economists accept that aid doesn't generally help poor countries grow, but argue that it does stimulate growth in poor countries with good governance.  That was the conclusion of a study in 2000 by Craig Burnside and David Dollar.

Easterly repeated that study, using a larger pool of data, and -- alas -- found no improvement even in countries with good governance, says Kristof.

Saddest of all, Raghuram Rajan and Arvind Subramanian of the International Monetary Fund have found that "aid inflows have systematic adverse effects on a country's competitiveness." 

Source: Nicholas Kristof, "Foreign Aid Has Flaws. So What?" New York Times, June 13, 2006.

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