Aid alone will not help poor countries grow out of poverty

AuthorPrakash Loungani
PositionIMF External Relations Department
Pages345-346

Page 345

There is renewed interest among the industrial countries in stepping up aid to developing countries to bolster growth. But in a new book, The Elusive Quest for Growth: Economists'Adventures and Misadventures in the Tropics (MIT Press, 2001), the World Bank's William Easterly cautions that the results of such aid may be disappointing. In an IMF Institute seminar on October 10, Easterly discussed why aid has failed in the past and how things could be done differently in the future.

The developed world has poured a trillion dollars of aid into the developing world since the 1960s.What do we have to show for all the foreign aid and advice? Not much, according to Easterly, a senior advisor at the World Bank.Much of sub-Saharan Africa remains mired in poverty, growth in Latin America has been erratic, and countries in the Middle East have failed to convert oil riches into sustainable development.

Countries that could be called economic "miracles" remain the exception rather than the rule.

Aid mislaid

In the 1960s, the mere provision of money was considered enough to boost growth in developing countries, which were considered to have a "financing gap."Bridging this gap with foreign aid would lead to an increase in investment and, thereby, growth. That was the theory.

But in practice, Easterly said, two major problems have made aid unproductive.

First,much aid money has ended up in the pockets of corrupt politicians and vested interests rather than in investment. Second, even the part that has gone into investment has not helped to the extent that was anticipated because machines cannot generate growth in environments where the institutions are poorly developed and the work force has inadequate skills.

Take Zambia, for example. Easterly calculates that the amount of aid Zambia has received over the past 40 years should, according to development economists, have propelled the country into the ranks of the industrial countries. Instead, average income in Zambia is no higher today than it was in 1960. Such failure is pervasive: the per capita growth rate of the typical developing country between 1980 and 1998 was zero.

Page 346

IFI response: iffy, at best

The international financial institutions (IFIs) have attempted to fix both of the problems but with limited success, according to Easterly. Their efforts to tie aid to countries' progress in...

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