Giving foreign aid directly to poor countries may end up keeping those countries poor.
For most readers of this blog and others associated with the Acton Institute this claim will be neither surprising nor controversial. Indeed, it’s been a core assumption behind our work on PovertyCure. But until recently, many Americans would have found the idea to be counter-intuitive, if not obviously wrong.
But thanks to the work of the Angus Deaton, the recent winner of the Nobel prize in economic sciences, the conclusion that long-term aid can hinder a country’s economic growth is becoming so mainstream it’s almost a matter of conventional wisdom.
One of the reasons for the change is because Deaton is particularly adept at explaining the reasons why aid can hurt the poor in a way that are easy for the public to understand. For example, Deaton explains how foreign money often changes the relationship between a government and its people:
Think of it this way: In order to have the funding to run a country, a government needs to collect taxes from its people. Since the people ultimately hold the purse strings, they have a certain amount of control over their government. If leaders don’t deliver the basic services they promise, the people have the power to cut them off.
Deaton argued that foreign aid can weaken this relationship, leaving a government less accountable to its people, the congress or parliament, and the courts.
“My critique of aid has been more to do with countries where they get an enormous amount of aid relative to everything else that goes on in that country,” Deaton said in an interview with Wonkblog. “For instance, most governments depend on their people for taxes in order to run themselves and provide services to their people. Governments that get all their money from aid don’t have that at all, and I think of that as very corrosive.”
Economists have long noted that in weak countries there can be a “natural resource curse.” If an otherwise poor country, like Libya or Venezula, has an abundance of one natural resource (such as petroleum) the government leaders can simply nationalize that industry or confiscate the proceeds to fund a regime that has little to no support from the people.
Unfortunately, the same can occur when rich countries give money directly to poor nations. As the Washington Post notes,
Deaton and his supporters offer dozens of examples of humanitarian aid being used to support despotic regimes and compounding misery, including in Zaire, Rwanda, Ethiopia, Somalia, Biafra, and the Khmer Rouge on the border of Cambodia and Thailand. Citing Africa researcher Alex de Waal, Deaton writes that “aid can only reach the victims of war by paying off the warlords, and sometimes extending the war.”
Foreign aid can sometimes be beneficial, especially in short-term disaster relief efforts. But when aid becomes another resource to be fought over for political gain, it can harm those who it was most intended to help.