Does Foreign Aid Work?

As Paul Theroux said about listening to Paul Hewson – who calls himself “Bono” –

There are probably more annoying things than being hectored about African development by a wealthy Irish rock star in a cowboy hat, but I can’t think of one at the moment.

The foreign aid debate brings out strong opinions. In one corner we have Jeffrey Sachs (The End of Poverty: Economic Possibilities for Our Time), an academic with a Bono-like knack for self-promotion who thinks that aid works, and in the other, William Easterley (The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good), a former World Bank aid professional who thinks it doesn’t.

There is a very good summary of the debate in Financial Times (link here). It also mentions the recent books by Robert Calderisi, and Joseph Stiglitz and Andrew Charlton.

One interesting author is not mentioned. It is Ha-Joon Chang, who teaches economics at University of Cambridge (Kicking Away the Ladder: Policies and Institutions for Economic Development in Historical Perspective). Chang argues against free market fundamentalism, practically all currently industrialized nations used pervasive state intervention in their periods of industrialization. The “Washington Consensus” policies are designed not to help poor countries develop into modern economies but to lock in the advantages of the present industrial leaders.

Update: Read also this article on Chang, http://www.newamerica.net/index.cfm?pg=article&DocID=1080 and this article by William Easterly with advice to Bill Gates and Warren Buffet, 4 Ways To Spend $60 Billion Wisely.

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9 thoughts on “Does Foreign Aid Work?

  1. I have followed the link to Wikipedia, and the article makes the common argument that before its recent economic crisis Argentina had reduced government intervention and moved to a market-oriented economy. The governments that preceded the crisis made some pro-market reforms, made some anti-market reforms and, most importantly, kept most of the anti-market apparatus intact. China, India, Vietnam, Chile, Mexico, Ireland, Estonia and others are better examples of market-oriented reforms.

    All currently under-developed nations have experienced (suffered) pervasive state intervention for decades.

  2. Good article on the FT I thought.

    I’m on the persuasion that foreign aid does not work and only creates problems for these countries, such as an overvalued exchange rate and acute inflation (a la the Dutch disease), and it does not promote instituional change.

    The Stiglitz and Charlton book is good and is possibly where policy should be directed. If market distortions are removed in many developed countries, such as subsidies and tariffs, e.g. CAP, then I believe that it will significantly help developing countries. There has been conditional convergence in the world within the last forty years, but it could be much greater if developing countries have totally free access to the developed world’s markets.

  3. Yeah I managed to read that a couple of weeks ago – it is indeed realsitic and balanaced. His new book is a good read too although it not always as concise as his other articles (I agree with Sen’s review of his book in some respects).

    What I am looking for is Sachs’ review of Easterly. I’m sure it will be in one of the top journals within the next few editions.

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  5. There is a very good summary of the debate in Financial Times (link here). It also mentions the recent books by Robert Calderisi, and Joseph Stiglitz and Andrew Charlton.

    what is the precise issue and number of Financial Times ?
    prof rossi ino rossinor@hotmail.com

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