Wrong goals. Approaches That Will Not Lead to Prosperity

Many goals have been set forth as solutions to poverty, as we noted earlier. In order to better show that the goal of continually producing more goods and services is the only route from poverty to prosperity, we will now look more closely at some of these alternative goals and demonstrate how they fail.

A. Dependence on donations from other nations

The harmful results of dependence on foreign aid

No poor nation in history has grown wealthy by depending on donations from other nations. Massachusetts Institute of Technology economics professor Daron Acemoglu and Harvard University economist and political scientist James A. Robinson wrote recently in their lengthy study Why Nations Fail:

The idea that rich Western countries should provide large amounts of “developmental aid” in order to solve the problem of poverty in sub-Saharan Africa, the Caribbean, Central America, and South Asia is based on an incorrect understanding of what causes poverty. Countries such as Afghanistan are poor because of their extractive institutions—which result in lack of property rights, law and order, or well-functioning legal systems and the stifling dominance of national and, more often, local elites over political and economic life. The same institutional problems mean that foreign aid will be ineffective, as it will be plundered and is unlikely to be delivered where it is supposed to go. In the worst-case scenario, it will prop up the regimes that are at the very root of the problems in these societies. . . .

[F]oreign aid is not a very effective means of dealing with the failure of nations around the world today. Far from it. Countries need inclusive economic and political institutions to break out of the cycle of poverty. Foreign aid can typically do little in this respect, and certainly not with the way that it is currently organized.[1]

William Easterly, professor of economics at New York University and a senior research economist at the World Bank for sixteen years, writes about the tragic failure of massive foreign-aid programs:

[In January 2005, Gordon Brown, the United Kingdom’s chancellor of the exchequer,] gave a compassionate speech about the tragedy of extreme poverty affecting billions of people. . . . He called for a doubling of foreign aid. . . . Brown was silent about the other tragedy of the world’s poor. This is the tragedy in which the West spent $2.3 trillion on foreign aid over the last five decades and still had not managed to get twelve-cent medicines to children to prevent half of all malaria deaths. The West spent $2.3 trillion and still had not managed to get four-dollar bed nets to poor families. The West spent $2.3 trillion and still had not managed to get three dollars to each new mother to prevent five million deaths. The West spent $2.3 trillion, and children are still carrying firewood and not going to school. It’s a tragedy that so much well-meaning compassion did not bring these results for needy people.[2]

An Oxford-trained African economist, Dambisa Moyo of Zambia, argues that foreign aid is actually the main cause of continuing poverty in Africa. She explains that aid has prevented Africa from moving toward economic growth:

But has more than US$1 trillion in development assistance over the last several decades made African people better off? No. In fact across the globe recipients of this aid are worse off; much worse off. Aid has helped make the poor poorer and the growth slower. . . . The notion that aid can alleviate systemic poverty, and has done so, is a myth. Millions in Africa are poorer today because of aid; misery and poverty have not ended but have increased. Aid has been, and continues to be, an unmitigated political, economic and humanitarian disaster for most parts of the developing world.[3]

Moyo goes on to explain that she is not opposed to “humanitarian or emergency aid,” which helps people affected by catastrophes, nor is she opposed to “charity-based” aid, which is disbursed by charitable organizations (presumably religious groups and humanitarian agencies). But she is opposed to “aid payments made directly to governments,” either through government-to-government transfers or through agencies such as the World Bank.[4] In what she calls “systematic aid,” Moyo includes both cash transfers and loans at below-market interest rates, because, she says, “policymakers in poor economies may come to view [these loans] as roughly equivalent to grants.” Therefore, she says, “For the purposes of this book, aid is defined as the sum total of both concessional loans and grants.”[5]

Moyo then traces the history of aid given to African nations from 1940 to the present and shows why, overall, it has been more harmful than helpful. This is true whether the aid was given to help industrial projects, to alleviate poverty, or to encourage economic “stabilization and adjustment” (with economic reform conditions attached), and whether it was contingent on reform of government corruption, tied to increasing democratic reforms in governments, or was “glamour aid” promoted by famous entertainers and government leaders.[6]

She explains that “one of the underlying problems of aid” is “that it is fungible—that monies set aside for one purpose are easily diverted towards another,” often including “private pockets, instead of the public purse.” But, she explains, “when this happens, as it so often does, no real punishments or sanctions are ever imposed. So more grants mean more graft.”[7]

Angus Deaton, the Dwight D. Eisenhower Professor of Economics and International Affairs at Princeton University, writes:

The historical record tells us that it is possible to grow and eliminate poverty without foreign aid; all of the now-rich countries did so. We also know that some of the most successful poor countries, such as India and China, grew with very little aid relative to their size, or with aid that was dictated by their own priorities rather than donors’. . . .

Aid as we have known it has not helped countries to grow.[8]

Likewise, economist James Peron writes:

For almost half a century the countries of Africa have been awash in aid. Hundreds of billions of dollars have been given to African governments. More billions were lent to these same governments. Countless tons of food have inundated the continent, and swarms of consultants, experts, and administrators have descended to solve Africa’s problems.

Yet the state of development in Africa is no better today than it was when all this started. Per capita income for most of Africa is either stagnant or declining. . . .

A World Bank report admitted that 75 percent of their African agricultural projects were failures. . . .

The Marxist dictatorship of Ethiopia’s Mengistu Haile Mariam was a major recipient of donor funds. . . . Relief aid was intentionally kept away from some of the most severely affected areas because it suited Mengistu’s regime to starve its opponents. . . . President Mobotu of Zaire managed to build a fortune in his Swiss bank account that was estimated as high as $10 billion. . . . Marxist autocratic regimes were often heavily financed by European governments. . . . The Italian Socialist Party gave heavy financial backing to Somalia’s Marxist government of warlord Said Barre. . . . The New York Times reported that when President Julius Nyerere of Tanzania announced a radical Marxist program, “many Western aid donors, particularly in Scandinavia, gave enthusiastic backing to this socialist experiment, pouring an estimated $10 billion into Tanzania over 20 years”. . . . The Marxist regime of Samora Machel in Mozambique similarly destroyed that country’s agricultural output through price controls. . . . The continent itself is rich in resources, but the incentive to produce has been destroyed by government policies.[9]

However, economist Paul Collier, while recognizing that much aid is harmful and fails to reach its goal, still thinks that in very limited situations aid is necessary and can sometimes be helpful.[10] He specifies that such aid should be given not to the already-developing countries that receive most foreign aid today, but to the countries in which the absolute poorest people of the world (“the bottom billion”) reside, and that it must be given with very well defined restrictions and much more effective supervision.

Collier also recognizes that in some situations foreign aid can make a military coup more likely and can actually detract from necessary reforms that have to be made in a nation.[11] Even then, Collier does not see aid as the primary means by which poor nations can emerge from poverty, but rather as a necessary help for particularly dire situations.

  • [1] Daron Acemoglu and James A. Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty(New York: Crown Publishers, 2012), 452-54. We explain what they mean by “inclusive” institutionsin a later section (310, note 2).
  • [2] William Easterly, The White Man’s Burden: Why the Wests Efforts to Aid the Rest Have Done So Much Ill andSo Little Good (New York: Penguin, 2006), 4.
  • [3] Dambisa Moyo, Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa (New York:Farrar, Straus & Giroux, 2009), xix.
  • [4] Ibid., 7.
  • [5] Ibid., 8-9.
  • [6] Moyo traces the history of these kinds of aid on pages 10-28. Similar criticisms are advanced with thesupport of more detailed research in William Easterly, The Elusive Questfor Growth: Economists’ Adventuresand Misadventures in the Tropics (Cambridge, MA: The MIT Press, 2001), esp. chaps. 2-7.
  • [7] Moyo, Dead Aid, 46.
  • [8] Angus Deaton, writing in Abhijit Vinayak Banerjee et al., Making Aid Work (Cambridge, MA: The MITPress, 2007), 56-57, emphasis added.
  • [9] James Peron, “The Sorry Record of Foreign Aid in Africa,” in The Freeman, 51, no. 8 (August 2001), accessed August 28, 2012, www.thefreemanonline.org/features/the-sorry-record-of-foreign-aid-in-africa/.
  • [10] See Paul Collier, The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It(Oxford: Oxford University Press, 2007), 99-123.
  • [11] Ibid., 104-5, 116.
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