“Official” Development Aid: A Fundamental Failure?

It is easy to denounce critics of development aid such as U.S. Treasury Secretary Paul O’Neill. Such naysayers dismiss him as a simpleton — or a greedy capitalist who does not care. But, in my view, there is a more complex case to be made, as Mr. O’Neill does, that economic development assistance has not worked.

This is certainly true for government-to-government aid for economic development. It has served mainly as a welfare prop for dysfunctional third world governments. Unfortunately, quite a few of the 120 poorest countries are ruled by tyrants and grifters who habitually steal or waste most aid funds.

Not surprisingly, income per capita in these countries has grown at a snail’s pace. In fact, in places such as Africa, it has hardly grown at all. Therefore, the continuation of the flow of such subsidies accomplishes only one goal: It maintains the pretense that “development” is actually being accomplished.

Executed in this way, though, development aid actually crowds out true development. In particular it has proven to be an inadequate substitute for social, legal and financial reforms. Such reforms are necessary if any poor country is to generate or attract investment. Private investment — foreign or domestic — is the only known and time-tested route to rapid development.

As a matter of fact, no country that has refused to make the necessary free market reforms has prospered since World War II. Not a single one. To the contrary, the 120 countries that have relied on concessionary aid for capital have remained poor.

The few that reformed, meanwhile, have gotten relatively rich. These include Portugal, Greece, Hong Kong, Singapore, South Korea and Taiwan. Now, as the 21st century unfolds, China, the countries of Eastern Europe, Chile and Mexico and, hopefully, India, are marching down the route of free enterprise too.

Why are such successes ignored so relentlessly as the cry for increased official aid grows ever louder? Ideology is the only answer.

Many in Europe and the United States — including most journalists who write about development — believe that the subjection of greedy private enterprise to disinterested government is a sacred obligation.

So these proponents happily — and perhaps even deliberately — confuse themselves as well as their audiences about aid. The method used by supporters of development aid to conjure this fog is to lump all forms of international charity and assistance into a single package. This tactic wraps successes around the failures — and lets supporters claim that all aid is wonderful.

But let’s consider the three types of aid in greater depth. Reconstruction aid generally works because the societies receiving the funds knew exactly what they were doing before calamity struck. They know exactly what to do afterwards, too. They just need seed capital and the funds to rebuild destroyed infrastructure.

United Nations agencies, the World Health Organization and hundreds of religious, private and government institutions have dispensed the second kind of aid. Literally billions of humans in impoverished countries live healthier and longer lives because of such assistance. There is no disputing it.

Yes, proponents of economic development aid can point to thousands of successful individual projects. One such faithful citation is the late 1950s project that bred superior strains of rice — and launched the green revolution in South East Asia.

And sure enough, giant dams, irrigation projects, telephone networks, electric systems, roads and ports built by aid funds are scattered throughout the Third World. As a result of such tangible examples, to the casual eye, aid does “work.”

But take a closer look. Many of these projects could certainly have been built with private funds — if the proper civil order had been established. Yet, more vital still, is that all these “successful” individual aid projects have not produced a ripple of additional economic growth.

Sure enough, these projects do add their weight to the recipient nation’s economic landscape. But they do nothing to generate subsequent self-perpetuating increase in real per capita income. The proof of this is the lack of growth, or painfully slow growth, decade after decade in the incomes of citizens living in all the aid-dependent countries.

In hindsight, this is hardly any wonder. True economic growth involves the installation — often from scratch in impoverished countries — of the legal procedures, financial institutions and business and technical practices. That is not an easy future. After all, it took 200 years to develop them in the industrial countries.

And yet, a new dam or road — however useful — does nothing to change local property rights law. Only successful local farmers and tradesmen can bring about such a transformation. They do so by operating day to day, by trial and error — and winning market shares over less successful competitors.

Foreign aid and domestic bureaucrats cannot do this. By definition, they are outside the competitive market in which such changes must be worked out.

This is all that Paul O’Neill, the reform-minded U.S. treasury secretary, has been saying. Government-to-government development aid — as we know it — doesn’t work. In fact, it actually blocks real development — if it is granted before a country has adopted the necessary reforms.

That Mr. O’Neill is on the move with his criticism is proven by the fact that he is supported by a rising chorus of private aid analysts — few of whom are Republican partisan. Still, they are no longer willing to avert their gaze from the disappointment wrought by aid. William Easterly, a former World Bank official, penned a devastating analysis of that institution’s failures last year in his book, “The Elusive Quest for Growth.”

Messrs, Secretary O’Neill and Easterly are demanding that the West face the facts of this failure. They urge fundamental reform. For starters, Mr. O’Neill wants to convert assistance for education, health care and other social services now coming from the World Bank and other official financial lending agencies to be converted into outright grants.

Such “soft” aid, O’Neill points out, does not pretend to create specific economic profits that could fund a specific payback. It shouldn’t be required to. Presently, only about 8% of all of the most concessionary funding from the World Bank are outright grants. O’Neill wants the grants raised to half. Europe’s finance ministers say, how about 10% in grants?

Next, O’Neill wants most economic development lending — the kind that is supposed to generate a “profit” — to be temporarily halted.

According to him, it would resume only when — and if — the poor country involved installs reforms that will let it attract and keep private investment. Remember, such private investment is the only know way to generate rapid, self-replicating growth in any country.

For this, the political and scribbling classes of the West want to hang Mr. O’Neill. If they can’t argue the facts, they argue the man. This is shameful — and perpetuates great harm to the world’s poor.April 4, 2002