Foreign Aid: Good or Bad?

Supporters tout positive health, investment outcomes from aid

No link between aid and growth, say opponents

Efficiently invested aid provides benefits to population, suggest supporters

Some call for a massive stepping up of overseas assistance; while opponents say it does more harm than good. In this podcast, two economists pit their radically different views against eachother on this hotly contested subject.

Just 10 short years ago, the 189 member states of the United Nations signed a declaration in which they said “we will spare no effort to free our fellow men, women, and children from the abject and dehumanizing conditions of extreme poverty to which more than a billion of them are currently subjected.” In that same document they promised “to grant more generous development assistance, especially to countries that are genuinely making an effort to apply their resources to poverty reduction.”

Underlying that commitment is the assumption that foreign aid is a positive thing, that aid promotes economic development and from that many good things will follow. But are the benefits of aid so positive and straightforward?

IMF Survey Online: To unpick this question I’m joined by two economists: Andrew Berg is with the IMF’s Research Department and has been doing work on the likely results of scaling up aid to Africa; and we welcome back our second contributor, Arvind Subramanian, formerly with the Fund and now with the Peterson Institute in Washington, D.C., and the Center for Global Development.

Let me start with you, Mr. Subramanian. It would seem intuitive that if you pour money into an economy, let’s say in the form of foreign aid; that you’re going to have an increase in output and growth. Is that not the case?

Subramanian: As you say, it’s very intuitive. More resources means more money for investment and, therefore, more growth. But it turns out that you cannot find strong evidence that aid promotes growth. There’s a whole debate on this. Some claim that it works under some conditions; some like me claim that it doesn’t produce positive results under any conditions. So that’s contested. But I think certainly one can say that there is no compelling evidence that aid actually does promote growth.

IMF Survey Online: Mr. Berg, let me turn to you now. You’ve come to a slightly different conclusion. You’ve done some research at the request of the Group of Eight leading industrial economies. They asked you to look at what would...