Wednesday, July 18, 2007

Does Foreign Aid Work?

On his blog, Nicholas Kristof of The New York Times asks some tough questions about the efficacy of foreign aid. Given his strong concern for world poverty, the answers are troubling:

One of the most vexing challenges for humanitarians has been the lack of evidence that foreign aid is effective.
Traditionally, it was assumed that foreign aid would fight poverty and spur economic growth rates in poor countries. But then a number of studies found zero correlation between aid inflows and growth rates in poor countries. A landmark study by Dollar and Burnside, however, found that aid might help in countries with good governance — and that became the new standard. The new conventional wisdom was that aid might not work in all countries, but it would spur growth in countries with low corruption and sound policies. That’s the theory behind the Millennium Challenge Accounts, the new U.S. aid program.
But in recent years, that view has been challenged as well. The newest examination is here, in an important paper by Raghuram Rajan and Arvind Subramanian.


The Rajan and Subramanian paper (found here)finds little economic impact of foreign aid--regardless of governance:
We examine the effects of aid on growth in cross-sectional and panel data—after correcting for the possible bias that poorer (or stronger) growth may draw aid contributions to recipient countries. Even after this correction, we find little robust evidence of a positive (or negative)relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings suggest that for aid to be effective in the
future, the aid apparatus will have to be rethought.


Nicholas Kristof then asks a logical question about whether economic aid is the only value of foreign aid, and gets a mixed answer:
I accept that aid may not be very good at promoting growth. But it strikes me that growth is not the only goal of aid; saving lives is another. I favor programs to cut maternal mortality not because I think that Africa will then grow more quickly, but because it’s monstrous that half a million women a year die so needlessly. The eradication of smallpox was an extraordinary achievement not for its growth implications, but because it saved so many lives. I also think that health interventions — vaccinations and bednets, for example — have a pretty good track record.
I emailed Arvind and asked him his take on this. Here’s what he said:

Yes, I would agree that aid can be useful to save lives. The question in my mind, however, is the following: even in regard to health, are some aid interventions more effective than others, and if so, what distinguishes the two? Because it seems also clear to me that aid has not always helped improve health systems within countries. So, I come to the tentative, and by no means robust, conclusion that where health outcomes require one-off/non-sustained interventions (bednets, vaccinations etc), they can be helpful but where outcomes require more sustained/ongoing attention/effort outside help is perhaps less effective.


One of the problems with ongoing interventions is that the inflow bids up the local exchange rate and undermines local businesses. Another, particularly with health interventions, is that aid groups often hire local scarce local doctors, who end up not saving patients but pushing paperwork for the UN or NGO’s.


In the end, Kristof notes the new book by Paul Collier that I discussed on this blog here. You can read the entire post (plus comments) here.

We have a moral obligation to address extreme poverty, in my view at least. Part of this obligation, however, is to be effective--the questions that Krisof raises merit some serious thought.

What do you all think?

1 comment:

Phil Snyder said...

One of the problems with foreign aid is that we give it to the wrong people. We tend to give aid to governments because we think that governments will give it to their people. This is often not the case. One of the poorest populations is the Palestinians. How did Arafat die so wealthy while his people were so poor? One of the biggest problems with foreign aid is tyrannical governments that use the aid as a weapon against those that oppose them or use it to enrich themselves.

Until this is changed, foreign aid will never really benefit other countries.

YBIC,
Phil Snyder