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A Turning Point for Development Aid

China's development lending to already-indebted countries has provoked accusations that it is engaging in “debt-trap diplomacy." This reflects a narrow understanding of development assistance that has hampered progress in low-income countries for far too long.

BEIJING – Since the 1960s, more than $4.6 trillion (in constant 2007 dollars) in gross bilateral and multilateral official development assistance (ODA) has been transferred to low-income countries. Yet extreme poverty and stagnant growth remain widespread. The message is clear: traditional North-South aid is not nearly as effective as it could be and should be.

A major problem is that, for the last two decades, Western donors and bilateral and multilateral development institutions have paid far too little attention to meeting the demands of structural transformation and industrialization, such as removing infrastructure bottlenecks in the countries receiving development aid. For example, developed-country donors have failed to invest sufficiently in Africa’s power sector since the 1990s. This failure has led to deindustrialization in many countries.

Far from designing aid programs that give developing countries the guidance they need to develop their manufacturing sectors and advance technologically, Western governments and development institutions have treated industrial policies as taboo. Compounding the problem, the standard ODA model separates aid from trade and private investment, hampering countries’ ability to exploit their comparative advantages.