The Trade-and-Aid Myth

Trade and aid have become international buzzwords. More aid (including debt relief) and greater access to rich countries’ markets for poor countries’ products now appears to be at the top of the global agenda. Indeed, the debate nowadays is not about what to do, but howmuch to do, and how fast.

Lost in all this are the clear lessons of the last five decades of economic development. Foremost among these is that economic development is largely in the hands of poor nations themselves. Countries that have done well in the recent past have done so through their own efforts. Aid and market access have rarely played a critical role.

Consider a developing country that has free and preferential market access to its largest neighbor, which also happens to be the world’s most powerful economy. Suppose, in addition, that this country is able to send millions of its citizens to work across the border, receives a huge volume of inward investment, and is totally integrated into international production chains. Moreover, the country’s banking system is supported by its rich neighbor’s demonstrated willingness to act as a lender of last resort. Globalization does not get much better than this, right?

Now consider a second country. This one faces a trade embargo in the world’s largest market, receives neither foreign aid nor any other kind of assistance from the West, is excluded from international organizations like the WTO, and is prevented from borrowing from the IMF and the World Bank. If these external disadvantages are not debilitating enough, this economy also maintains its own high barriers on international trade (in the form of state trading, import tariffs, and quantitative restrictions).