The delusion that rich countries can pull poor countries out of poverty if they so choose is on public display as the month of July begins.
Bob Geldof organized rock concerts in cities around the world to push that idea, while the G8 meeting in Scotland will largely focus on debt relief and massive increases in foreign aid to save the world’s poor.
Already, the United States and Great Britain have agreed to write off the debt of 18 heavily indebted countries, and President Bush has pledged to double U.S. aid to Africa. The British are calling for new Marshall Plan for Africa.
If history is any guide, the G8 initiatives will do little to reduce poverty in Africa, the world’s poorest region and the focus of rich country efforts. Debt relief itself has not proved effective in the past. Since the 1980s, heavily indebted poor countries, most of them in Africa, have received more than $30 billion in debt forgiveness. Yet the debt problem has worsened. In practice, countries have been rewarded for poor economic policies and foreign aid has encouraged their continuance.
Indeed, the G8’s debt relief initiative is really about the failure of past foreign aid. According to Carnegie-Mellon University economist Adam Lerrick, 94 percent of the external debt of heavily indebted poor countries is due to official loans from creditors such as the World Bank or the International Monetary Fund. Since the 1960s, sub-Saharan Africa has received nearly $500 billion in aid, yet the region has become poorer in the last several decades.
It is difficult to conclude from this damning record that the solution is more debt relief and more foreign aid. Calls for a new Marshall Plan are misplaced. In today’s dollars, that aid initiative disbursed roughly $100 billion over the course of four years after World War II. Africa thus has already received the equivalent of about five Marshall Plans. Moreover, aid to Africa has been rising and is at historic highs. Net development assistance to Africa was about $24 billion in 2003, so the region is now receiving Marshall Plan levels of aid.
Why has aid performed so poorly and why should we not expect better results in the future? By the 1990s, a long-delayed consensus emerged among development experts that putting aid into poor policy environments does not work. Overall, there is no correlation between aid and growth, but in Africa aid has harmed development by supporting governments whose policies have actually impoverished people.
Even when aid is supposed to promote policy change, it fails. Countries promise reform, receive donor largess, then introduce half-hearted reforms or fail to do so altogether. A recent World Bank study looked at the record of aid from 1980 to 2000 and found “aid on balance significantly retards rather than encourages market-oriented policy reform.” That finding is consistent with a previous Bank study that “reform is more likely to be preceded by a decline in aid than an increase in aid.”
One reason aid does not promote good policies is that aid agencies have an institutional incentive to lend. When borrowers know donors will lend irrespective of their actions, the conditions attached lose credibility.
Despite the probability that massive increases in aid would only worsen the credibility of donor conditions, proponents of more aid to Africa claim things will be different in the future.
Lending will somehow have teeth. Aid will be directed on a “selective” basis to countries with good governance that have shown a willingness to reform on their own. Aid will support health and education, without which growth is undermined.
In fact, there is no reason to believe aid effectiveness will noticeably improve. Lending agencies will still have no enforcement mechanism, and rich countries will still rely on such agencies, which have a proven record of poor judgment, to determine which countries deserve aid and when.
The World Bank now claims to be shifting loans toward governments with better policies and institutions. But a recent Bank self-evaluation found, “So far, there is little evidence that governance is improving or that corruption is decreasing.”
A new International Monetary Fund study provides even less reason for optimism. IMF found aid not only does not boost growth, but there is “no evidence that aid works better in better policy or geographical environments.”
Moreover, the IMF found “no sub-categories [of aid] have any significant impact … on growth.” The development effect of social, economic, or food aid, in other words, is the same.