Thursday, May 24, 2012

Why Foreign Aid Fails

I think at this stage in history, there’s not really much question that foreign aid has been a colossal failure. Shovelling money and goods from first world taxpayers to third world tyrants has definitively failed to improve the standard of living in third world countries. By some measures, it’s made the problem worse – foreign aid is easy to seize, and selectively distributing it to one’s political allies is a great way to shore up political loyalty for corrupt kleptocrats.

The question is, how surprised should we be that didn’t the experiment work? 

My answer is ‘not very’. And here’s why.

The reality is that the principle of foreign aid has embedded in it an important assumption about development. This assumption is so insidious that I doubt that most of the proponents of aid even realize that it’s the basis on which their whole program is built.

The assumption being made sounds almost comically simple, and it is this: poor countries are poor because they don’t have enough stuff. Hence if we give them the stuff, they’ll stop being poor.

Sounds almost too obvious to state, right?

The ‘stuff’ takes on a variety of different forms – food aid, infrastructure spending, bed nets to combat malaria, vaccines, laptops for children, cash transfers, etc.

And that’s exactly what we’ve provided. So why hasn’t this worked?

Because there’s an alternative possibility. It may be that the lack of stuff is not the problem, but is just the symptom of the problem. The real wealth of society is its ability to produce stuff. Rich countries are defined by their ability to produce all of their own bed nets, etc. And when you take the stuff away from a wealthy country, it gets replenished. Haiti, Biloxi and Fukushima all got destroyed by natural disasters. But local production was vastly different a few years later in each place. I’m sure if you switched the populations (moved the Japanese tsunami survivors to Haiti just after the hurricane, for instance) and repeated the experiment, the outcome would take longer, but the end result would be similar. The Singaporeans took 50 years to turn the whole country from a swamp into a first world nation.

What if the things that produce the wealth can’t be easily shipped in? If it’s institutions, it’s hard to transplant those in without a hefty dose of colonialism (although Paul Romer is giving it a red hot go in Honduras, and more power to him). If it’s culture (such as an allegiance to civil society, instead of a tribalist mindset), that’s much harder to fix. If it’s genetics – yikes. Thankfully, cases like Singapore suggest that you can get a hell of a large change in a short period of time without altering the genetic makeup of your country.

People have talked about all these things plenty of times. But what I think isn’t properly appreciated is that the assumption that “more stuff -> development” was entirely unproven when the aid experiment started.

Take all the rich countries in the world today. How many of them were made rich by being given stuff from other countries? The answer is of course ‘none’. Whatever caused their development, it wasn’t because they got huge transfers from the outside world. Even if you doubt this general principle (and you’d be wrong), you’d have to concede that this is surely true for the industrial revolution in England, since there wasn’t anybody richer to give them a handout.

So we know that being given stuff isn’t a necessary condition for development. And now we know that it’s not sufficient either. In this light, the complete failure of the foreign aid experiment shouldn’t come as a surprise at all. We were trying to make poor countries rich using a method that had not been successfully implemented before in human history. Like most experiments tried without a strong reason to presuppose success, the result was failure. Poor countries, it seems, can’t be made rich in any meaningful way just by giving them more stuff.

One of the current poverty ‘silver bullets’ seems to be microfinance. Like bed nets, I presume that it will have some benefit. Like bed nets, I also presume that it will be entirely insufficient to make meaningful changes to poverty levels. We’ll see if I’m right -  I’d be delighted to be proven wrong, but I’m not holding my breath.

The worst assumptions are the ones you don’t even realize you’re making.

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