Re-thinking Foreign Aid

CAMBRIDGE: Rich countries of the world give a considerable amount of foreign assistance to poorer countries every year, around $60 billion in net assistance. While this is not a particularly generous proportion of rich-country income (roughly one-fourth of one percent of their combined gross national products), it is a lot of money just the same. We might expect to get more results for this money, but in fact, most aid recipients are doing poorly in economic performance, and several studies have shown only weak links between foreign aid and improvements in living standards in the recipient countries.

The World Bank has recently offered one reason for this weak linkage: many aid recipients have poor economic policies, such as excessive state intervention in the economy, high levels of corruption, macroeconomic instability, and the like. The Bank rightly stresses that aid cannot work in an otherwise inappropriate economic environment. The Bank's solution is therefore clear: aid should be better targeted to those countries undertaking economic reforms and aid should be cut off when governments are mis-using aid or are otherwise highly corrupt.

This advice is fine, and to be supported, but it does not really go very far. There are at least two additional reasons why the assistance process is failing. The first is that most aid recipients are drowning in foreign indebtedness, with the money often owed to the very same governments and international agencies providing the "aid." Much aid, in fact, is simply the delivery of dollars for recycling to repay debts owed to the IMF and World Bank and rich-country governments. The "donors" do not cut off aid flows because they know that their past loans would fall into default if new money is not delivered to the countries to repay the old debts!

The second reason is that the aid delivery is itself highly flawed and poorly designed. For example, a considerable amount of aid is simply payments to domestic firms in the rich countries to sell unneeded products to the poorer countries. Thus "aid" is often a marketing device for low-priority goods from the rich-countries. And since a lot of the aid is in the form of loans rather than grants, the poor countries get even deeper into debt as they are encouraged to purchase supplies, products, and technical assistance from the rich countries.

At the same time, some of the forms of aid that are desperately needed by the poor countries are almost not forthcoming at all. Recent studies at the Harvard Institute for International Development (which can be found on http://www.hiid.harvard.edu) have shown that much of the problem of global poverty can be traced to severe geographical problems of the poorer countries, such as endemic diseases that are prevalent in the tropics, such as malaria, schistosomiasis, and hookworm. These diseases often lack effective preventative or curative vaccines or medicines, or the treatments that are available are too costly for the impoverished populations. And yet foreign assistance is barely available to meet such challenges.

These medical challenges are scientific and technological, and thus cannot be solved by IMF-World Bank "structural adjustment loans," which focus on policy reforms rather than scientific and technological innovations. In the case of malaria, for example, a recent study by the Wellcome Trust in the United Kingdom estimated that total malaria research worldwide runs at about $80 million per year. Since malaria kills between 1 and 2 million people per year, this amounts to around $40 - $80 of research spending per malaria death per year. This level of spending (per death) is a tiny fraction of the research spending on "rich-country" diseases, such as asthma.

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We could make the same point concerning agricultural productivity. Poor countries often have extremely low agricultural productivity, not mainly because of poor policies, but because of poor soils and difficult climatic conditions. Again, the amount of scientific research to study tropical agricultural is a tiny fraction of the research expenditures to study "rich-country" agriculture in the temperate climate. One estimate has shown that the combined agriculture research spending by state governments in California, New York, and Florida exceeds the total of the worldwide system of international agricultural research centers for tropical countries.

We need a complete re-thinking of the global assistance strategy. $60 billion of foreign aid per year could stimulate a lot of new medicines, vaccines, hybrid seeds, and the like. Without such aid, these scientific advances will not be forthcoming, since the needed scientific resources are almost all concentrated in the advanced economies, and normal market forces will not lead to their mobilization.

In summary, a future aid strategy will need at least three components. For aid delivered to particular countries, better targeting along the lines suggested by the World Bank. For the poorest countries in the world, a bold cancellation of debts, so that new aid is not simply recycled for debt repayments. And for all of the developing world, a re-orientation of the aid effort to mobilize the scientific and technological knowledge needed to conquer unsolved problems of tropical health, agriculture, environment, energy use, and other areas that will not be overcome by economic reforms alone.

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