Why International Assistance Does Not Alleviate Poverty

From the Charter Cities blog:

In reviewing Dambisa Moyo’s Dead Aid in Foreign Affairs, Jagdish Bhagwati takes an interesting look at the history of development aid. He traces the changes in the way economists viewed aid as well as changes in the tactics used by aid advocates. He goes on to note that while many development debates are still aid-related, the most recent development success stories, such as those in India and China, have a very different relation to aid—almost none at all.

[From Jagdish Bhagwati on Development Aid]

Here’s a representative excerpt from Bhagwati:

(…) Moyo’s sense of outrage derives partly from her distress over how rock stars, such as Bono, have dominated the public discussion of aid and development in recent years, to the exclusion of Africans with experience and expertise. “Scarcely does one see Africa’s (elected) officials or those African policymakers charged with a country’s development portfolio offer an opinion on what should be done,” she writes, “or what might actually work to save the continent from its regression. . . . One disastrous consequence of this has been that honest, critical and serious dialogue and debate on the merits and demerits of aid have atrophied.” She also distances herself from academic proponents of aid, virtually disowning her former Harvard professor Jeffrey Sachs, whose technocratic advocacy of aid and moralistic denunciations of aid skeptics cut no ice with her. Instead, she dedicates her book to a prominent and prescient early critic of aid, the development economist Peter Bauer.

Moyo’s analysis begins with the frustrating fact that in economic terms, Africa has actually regressed, rather than progressed, since shedding colonial rule several decades ago. She notes that the special factors customarily cited to account for this tragic situation — geography, history, social cleavages, and civil wars — are not as compelling as they appear. Indeed, there are many places where these constraints have been overcome. Moyo is less convincing, however, when she tries to argue that aid itself has been the crucial factor holding Africa back, and she verges on deliberate provocation when she proposes terminating all aid within five years — a proposal that is both impractical (given existing long-term commitments) and unhelpful (since an abrupt withdrawal of aid would leave chaos in its wake).

Moyo’s indictment of aid, however, is serious business, going beyond Africa to draw on cross-sectional studies and anecdotes from across the globe. Before buying her indictment, however, it is necessary to explore why the hopes of donors have so often been dashed.

(…) although aid was predicated on increased domestic savings, in practice it led to reduced domestic savings. Many aid recipients were smart enough to realize that once wealthy nations had made a commitment to support them, shortfalls in their domestic efforts would be compensated by increased, not diminished, aid flows. Besides, as Moyo notes, the World Bank — which provided much of the multilateral aid flows — faced a moral hazard: unlike the International Monetary Fund, which lends on a temporary basis and has a “good year” when it lends nothing, the World Bank was then judged by how much money it disbursed, not by how well that money was spent — and the recipients knew this.

After countries such as China and India changed course and adopted liberal (or, if you prefer, “neoliberal”) reforms in the last decades of the century, their growth rates soared and half a billion people managed to move above the poverty line — without question, the greatest and quickest progress in fighting poverty in history.

Neither China nor India, Moyo points out, owed their progress to aid inflows at all. True, India had used aid well, but for decades its growth was inhibited by bad policies, and it was only when aid had become negligible and its economic policies improved in the early 1990s that its economy boomed. The same goes for China.