Doubling Aid Will Not Help World’s Poor
January 31, 2005
The United Nations’ goals include reducing the number of people living in extreme poverty by 50 percent. Unfortunately, the U.N.’s recently released report calls for a doubling of foreign aid to achieve this goal. But increased aid is unlikely to promote economic progress and may actually impede it.
The report calls for increasing aid to poor countries to $195 billion by 2015. That would require industrialized nations to increase their foreign aid from one-quarter to one-half of one percent of their GDP. The report claims that this increased level of aid is “utterly affordable.” Affordable or not, what the aid won’t do is help these countries grow their economies out of poverty.
The best way to lift the world’s poor masses out of poverty is for their economies to grow and develop. But aid has a horrible track record of promoting development. Numerous economic studies find that increased aid has not fostered better economic performance. African countries now have over 50 years of official development aid with little to show for it. Because aid does nothing to improve economic performance, doubling aid will only double the money wasted on an ineffective program.
Poor impoverished countries lack the market institutions and economic freedom necessary for an economy to grow. The Fraser Institute’s latest economic freedom index finds that the 20 percent of countries that score lowest in economic freedom also have the lowest per capita incomes, worst growth rates, least access to safe water, shortest life expectancies, and worst scores on the U.N.’s own human development index. In fact, life expectancies are over 20 years longer in the countries scoring in the top fifth on the economic freedom index compared to countries scoring in the bottom fifth.
The question the U.N. and others concerned with third world poverty need to ask is how to improve economic freedom in these countries. Unfortunately, aid not only fails to improve economic freedom, it may even retard it. The late eminent development economist P. T. Bauer long contended that aid to third world countries was, on balance, an anti-market force.
Aid may actually decrease economic freedom in recipient countries because the assistance is often given to governments, increasing their size and power relative to the private sector. Since governments often reward their political supporters, aid can also delay reform by keeping corrupt governments and their bad policies in power. Aid can also teach impoverished citizens and would-be entrepreneurs that the way to get ahead is to seek government handouts rather than expanding consumer markets.
The U.N. report did contain one pro-market recommendation: the easing of trade barriers. Encouraging third world countries to lower trade barriers and reducing our own barriers would help impoverished countries raise incomes, employment, and living conditions by expanding the industries to which they are best suited. Getting poor countries to reform is the challenge.
Creating an environment of economic freedom is not a policy the U.S. or international agencies can impose on less-developed countries at will. Even using aid as a reward for countries that do reform has drawbacks, such as misdirecting entrepreneurship, and possibly delaying more truly productive reform by helping bad leaders buy support to stay in power.
Creating economic freedom in impoverished nations requires citizens in those countries to discipline leaders who infringe on property rights, freedom, and markets. The best we in the U.S. can do is to stop giving bad advice, stop aid flows that accomplish little and delay reform, and set an example by improving our own economic freedom and prospering here at home. Doubling aid will do nothing to promote growth and will only distract impoverished countries from the necessary reforms.
