Sixty Years of Foreign Aid

Abstract

Foreign aid as we know it - the transfer of concessional resources from one government to another government, nongovernmental organization, or international organization, one purpose of which is to promote long-term beneficial change, including poverty reduction, in the recipient country - is something relatively new in relations between states. Apart from several cases of short-term international relief during the 19th and first half of the 20th centuries, foreign economic assistance really began in the wake of World War II with US aid to Greece and Turkey and, shortly thereafter, the Marshall plan for economic recovery in Europe. By 1965, most well-off, industrialized had aid programs of their own and the World Bank and other international organizations were managing sizeable aid transfers. The number of public aid donors increased even more with the entry in the 1970s ofthe petroleum-producing states. More recently, the former socialist bloc have restarted aid programs that they had dropped at the end ofthe Cold War. Those acceding to the European Union are required to have aid programs. And a number of countries are now aid donors, the largest of which is China. India is also increasingly getting in to the aidgiving business and Korea, Turkey, Thailand, and other, smaller have become small but active donors as well.These many efforts over 60 years have involved several trillion dollars in assistance. What have we learned from all this effort? I will divide my answer into two sections: answers with regard to the impact and effectiveness of aid, and answers involving the motives and activities of those governments providing the aid. I will conclude with a peek into the probable future of aidgiving.AID'S IMPACTThe debate on aid's effectiveness and impact has been long and inconclusive. It continues today between what I shall call the resource fundamentalists those who believe that more aid will spur development - and the market fundamentalists who are skeptical that foreign aid has yet, or can in the future be expected, to solve the development problem. Behind this argument, whose prominent proponents today include Jeffrey Sachs of Columbia University (in favour of more aid) and William Easterly of New York University (in favour of more markets), lies a basic disagreement about the role ofthe state in the economy. One side sees the state (and public aid resources) as a critical element in promoting development; the other regards the state as an obstacle to economic progress insofar as it meddles in the functioning of markets. The real lessons from threescore years of aid for development are more complex.Well-functioning markets are important to development but so are wellfunctioning statesInvestment, growth, and poverty reduction require either incentives for individual agents to expand production or, as in the case ofthe Soviet Union for a period, the forced extraction of resources from producers and their investment in the means of production. Governments of poor have often extracted resources from their populaces but have lacked the capacity or will to invest them in productive enterprises. The socialist experiments in developing have mostly been failures. Where governments have tried to control or own the means of production and trade, they have tended to divert resources from productive purposes into political coffers or into their own pockets, ultimately suppressing incentives for farmers to produce and investors to create productive enterprises. This is the major lesson of the failure of development in much of sub-Saharan Africa during the last quarter of the 20th century. This does not mean that all government intervention in poor has been a failure. Capable and effective states like Korea, Taiwan, Botswana, and, above all, China, have by a variety of means led development in their but have also left considerable scope for private agents to make the decisions that have produced investment and growth in their countries. …