Thursday, August 9, 2007

Nicholas Kristof on Foreign Aid

Nicholas Kristof, who has been long interested in issues of development has a very interesting column today about whether foreign aid works--it is an expansion of some thoughts he previously posted on his blog (my own post on this Kristof post can be found here):

A handful of recent books and studies suggest that aid is sometimes oversold, including the superb new work called “The Bottom Billion,” by Paul Collier, the World Bank’s former research economist (it’s the best nonfiction book so far this year). A forthcoming book, “Farewell to Alms,” by Gregory Clark, a University of California economist, even argues that conventional aid can leave African countries worse off than ever.

And a study by two economists formerly of the I.M.F., Raghuram Rajan and Arvind Subramanian, forthcoming in The Review of Economics and Statistics, concludes:

“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.”

So does this mean we should give up on foreign aid?

No, not at all. On the contrary, I believe there is an urgent need for more aid. But this is an important discussion worth having, and the critics (though a minority of the experts) make some fair points. Plus, there’s no doubt that aid can be made more effective.

. . .

Critics of aid worry that aid can jack up a poor country’s exchange rate and thus undermine local businesses. That’s a legitimate concern, but private aid flows are typically too modest to have an impact.

Another concern is that when aid groups move into a country, they grab all resources — sometimes turning scarce doctors into managers of aid bureaucracies. That’s also a genuine problem.

But this is the 30th anniversary of the eradication of smallpox, and it’s worth considering that foreign aid project.

The U.S. invested $32 million over 10 years in the global battle against smallpox. That sum is recouped every two months, simply because Americans no longer need to get vaccinated against smallpox. So that investment has yielded a 46 percent annual return since smallpox was eradicated.

In addition, an estimated 1.5 million people used to die annually of smallpox. So eradication has saved around 45 million lives over the last three decades.

Smallpox was a great success but not a fluke. Among other historical foreign aid successes are immunizations, oral rehydration therapy and the green revolution.

More broadly, when we pay a few hundred dollars for fistula surgery so that a teenage girl no longer will leak urine or feces for the rest of her life, that operation may not stimulate economic growth. But no one who sees such a girl’s happiness after surgery can doubt that such aid is effective, for it truly saves a human being.

Look, it’s true that aid doesn’t always work — any more than other projects do. We spend billions on our military, yet it doesn’t always succeed. But the lesson should be to deploy military power more wisely, not to give up on it.

So how do we make aid smarter? Health and education spending has a pretty good record. Some interventions, like school feedings run by the World Food Program, address both areas: For just 10 cents a day, a child gets a lunch that reduces malnutrition and improves attendance.

And we should commit more aid to nurturing manufacturing and business development, so that countries can grow on their own.

One great U.S. program, the African Growth and Opportunity Act, or A.G.O.A., does that and should be expanded. Another excellent U.S. aid program, the Millennium Challenge Account, nudges countries toward better governance — yet a stingy and myopic Congress is balking at funding it.

So let’s accept that getting foreign aid right is harder than it looks — but also remember that 4,110 people didn’t die today from smallpox. Aid can be cause for celebration, not embarrassment.

Read it all here (subscription required).

Read more of my own posts about world poverty and development here.

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