Aid as a Curse

Financial Times writes about the foreign aid debate,

“The battlefield is littered with the bodies of simplistic theories about poverty and failure, for every one of which there is a contradiction. Africa is poor because it has had bloodstained and kleptomaniac dictators, for example, ignores the fact that so has Indonesia, whose record on growth and poverty reduction compares rather favourably with the self-confessed failure of Tanzania’s remarkably decent and honest Julius Nyerere.”

There is no mystery here. Generous aid to Tanzania did a lot of damage by funding a government and a political party that carried out a truly remarkable set of harebrained policies.

How did Tanzania manage to attract so much aid? In spite of presiding over a one-party state, Nyerere was widely perceived as being a Third World Social Democrat. Tanzania therefore received large amounts of aid from countries where Social Democratic parties were strong; Scandinavia, Holland, Canada and Germany.


Real GDP per Capita Aid as % of GDI

1960 2003 % Change 1988-2003
Indonesia 960 3903 307% 1.20%
Tanzania 383 552  44% 18.20%

Real GDP per capita in constant prices. Aid as percentage of Gross Domestic Investment only available 1988-2003. Data source: NYU’s Global Development Network Growth Database.

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6 thoughts on “Aid as a Curse

  1. One of the primary reasons that Aid fails in the first place is it is not Aid. It becomes a windfall. Same problem happens with corporate graft. Our governments start the entitlements with a good intention of bailing out a country or a company and after a while becomes part of the revenue generated by the reciever of the Aid.

    Western world we’ve tried to curtail this by offering the food shipment programs only to find that it becomes a food for guns barter system. Additionally because there is more food in an environment that normally wouldn’t sustain the population that lives there, the population increases. Thereby increasing the population density and the requirement for more resources to a population that doesn’t necessarily give anything back.

    It’s almost as if Altruism is a myth dreamt by total morons that don’t understand people will take without offering anything back.

    If you’d like to see a miniture version of this happening all someone needs to do is look at the Canadian Aborignal population. 50 years ago the government paid through the nose to help fix social situations, now all that has happened is the general populations have grown and some cities have become uninhabitable because of the tribes that run the towns. A good example is Winnipeg. However if the welfare and all of the secondary off shoot social aid industries dissappeared tommorrow you would find that people end up finding some way to earn a living or they go back to the rez.

    As an Algonquin indian (I’m not an Aboriginal anything) living in a conservative Ontario it helped a lot of that the local government looked at no community interest group to provide aid for. Additionally it made it unaffordable to go on welfare. People understand after that point that it is time to work for a living.

    The Opposite to conservative Ontario is Aid ridden Manitoba and it’s jewel city Winnipeg. Which as a Native, I don’t feel safe walking around in because I know nearly every brown face around me is a drunken bum that would rob me for the shoes on my feet. Why because everything is given and taken, never earned.

  2. Check your calculations again. The percentage changes have some errors.

    Moreover, I have done some research on remittances, closely related to foreign aid in the sense that both create an inflow of foreign currency, but totally different on purpose. I had found a negative impact of remittances on the growth of real GDP per capita. So, there are several issues to be considered.

  3. Lars Smith,
    The main argument I have found was that remittances were basically used for consumption purpose rather than investment. So, basically, the production did not go up though consumption went up. For other reasons, please visit my blog and read the post entitled
    Explaining remittance behavior and the role of remittances in the GDP growth in Nepal…..

  4. dreamnepal,

    I guess that your work is a case-study on Nepal. Therefore it is hard for one to compare remittances with foreign aid since you have no cross-sectional or panel data analysis. Therefore your work might lack some external validity and your result might purely be a reflection of exogenous factors which you have not modelled. Anyway, the consumption (rather than Inv) arguement has been made by Giles Atkinson and Kirk Hamilton (2003) regarding the natural resource curse. Given that the resource curse acts in a smilar way to foreign aid, you might want to take a look at that paper.

  5. Rob,
    Agreed. My study is highly restricted and lacks the panel nature of the data. However, the concept of remittances acting as compensatory flows rather than investment flows isn’t new to the development economics.
    Ralph Chami and others from the IMF did a cross-sectional studies and they too found a negative relation between remittances and per capita GDP growth. Paula and colleagues from IMF did yet another study and they too found a negative relation for financially developed countries.
    So, you might want to read those papers.

    On the other hand, the effectiveness of foreign aid has always been questioned and yea I agree, it is hard to relate foreign aid with remittance flows due to different strings attached to foreign aid.
    Check out my site http://www.dreamnepal.wordpress.com and read the summary. Should you want to read the whole paper email me and I will send that to you.

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