The Effectiveness of Foreign Aid

The Council on Foreign Relations is featuring a debate between Steven Radelet and Bill Easterly on the effectiveness of foreign aid.  Says Steven Radelet:

…while the record on aid is not a huge success, it is not a complete failure, either. Millions of people were lifted out of poverty in large aid recipients such as [South] Korea, Taiwan, Botswana, Indonesia, and more recently, Mozambique and Tanzania, and (since Bill goes back fifty years) through aid investments in the “Green Revolution” that massively increased agricultural productivity. Bill rightly laments that millions still die from disease, but the fact is that millions now live because of routine child immunizations, the spread of oral rehydration therapy, and other interventions documented in the book Millions Saved.

Bill Easterly responds by questioning the whole top-down, “Big Push” approach of aid organizations:

The right response is to demand accountability from aid agencies for whether aid money actually reaches the poor. The right response is to demand independent evaluation of aid agencies. The right response is to shift the paradigm and the money away from top-down plans by “experts” to bottom-up searchers—like Nobel Peace Prize winner and microcredit pioneer Mohammad Yunus—who keep experimenting until they find something that works for the poor on the ground. The right response is to get tough on foreign aid, not to eliminate it, but to see that more of the next $2.3 trillion does reach the poor.

While this and all other debates on the effectiveness of aid are certainly interesting and virtually anyone has his/her own opinion on the subject, it is also useful to look at the main issue at hand – lifting people out of poverty and improving standards of living.  After all, concerns with poverty alleviation underlie all debates on aid.

In that regard, the Monterrey Consensus is an insightful and useful document to look at.  While it calls for increase in global aid flows, it clearly shows that providing aid is not enough.  By focusing on building up the economic potential of countries, combating corruption, improving governance, promoting trade, and attracting investment the Monterrey Consensus suggests that aid must be complemented with reforms that essentially increase the potential of countries to move forward on their own.  

It must be noted that while the Consensus says what should be done to combat poverty, it does not provide enough details on how it should be done.  This could be the issue to tackle for Heads of State and Government who signed the document in 2002 and anyone else concerned with poverty alleviation.

Going back to the effectiveness of aid, I think the real key here is not to lump all different programs and approaches under one rubric – “aid.”  We have to recognize different programs for what they are, and once we look at those programs, rather than aid in general, it is much easier to see that some programs are more effective than others.

In breaking down aid into its different components, we will undoubtedly see that while some aid programs can actually lead to the build up of economic and democratic institutions that Monterrey Consensus talks about and subsequent growth and poverty alleviation long after foreign aid flows dry up, other aid programs may be a waste of resources and lead to the fact that, as Easterly puts it:

30 percent to 70 percent of government-provided medicines [disappear] before reaching patients.

Thus, I would probably lean towards Easterly in suggesting that rather than increasing the total amount of aid we should be concerned with supporting working approaches that create conditions for people to lift themselves out of poverty through economic growth and social development; and improving the distribution so that “money actually reaches the poor.”