Why hasn't foreign aid worked?

By Brian Carnell

The World Bank recently released an extensive report analyzing the effectiveness of foreign aid programs that have given over $1 trillion to developing countries over the last 50 years and which, with a few exceptions, have generally failed to make the slightest dent in the standard of living of the general population in the poorest countries of the world. With well over a billion people living on incomes of less than $1 a day, figuring out how to more effectively direct aid dollars is an important policy problem.

The conclusions of the World Bank report shouldn't surprise anyone with even a passing knowledge of such programs. They have generally failed because billions and billions of dollars were given to corrupt governments that used the money to enrich their own pockets as often as to help their people.

According to the World Bank, government aid to developing countries peaked in 1991 at $69 billion, but since then has steadily declined. That might not necessarily be such a bad thing, given the extremely poor record of such aid.

The classic example of wasteful aid is Zambia, which from the mid-1960s to the late 1980s received massive amounts of foreign aid. By the early 1990s, foreign aid from the International Monetary Fund accounted for 11 percent of Zambia's real gross domestic product. If it had been managed properly, the increased investment allowed by the aid could have boosted per capita income close to the $20,000 mark, but instead Zambia's per capita income hovers around $600. Much of the aid was diverted to corrupt politicians and transferred into wasteful government programs. Zambia's first democratically elected government created a one-party socialist state, nationalized almost the entire country (including such critical industries as dry cleaning), and set strict production quotas, subsidies and price ceilings on all sorts of goods.

As the World Bank report puts it, "The evidence suggests that rapid development is possible, and should be based on markets and on effective states playing an economically important facilitating, but not dominant, role."

Whether or not the World Bank and other aid organizations will follow the sound advice to avoid giving to corrupt governments remains to be seen. The recent record of the World Bank and the International Monetary Fund indicate both organizations are still unwilling to bite the bullet and withhold aid from corrupt governments; in fact their actions seem to create a moral hazard that actually encourages such corruption by rewarding it.

The IMF, for example, recently loaned $4 billion to Russia so that country could turn around and make a multi-billion interest payment on its IMF debt. Such monetary machinations are typical of how far aid organizations are willing to go to bail out debtor nations, regardless of the level of corruption.

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Copyright 1996-2000 by Brian Carnell. All rights reserved.

Overpopulation.Com, Population News
July 12, 1999 Vol. 3, No. 9