Foreign Aid Won’t Eliminate Poverty

Current foreign aid programs don’t address underlying causes of poverty. Pro or con?

Pro: A Better Model Exists

For 2011, the United States has committed nearly $57 billion in new foreign aid dollars, with billions more coming from private philanthropy. Yet this type of support will be a spectacular failure.

The trillions of dollars in aid that have flowed into undeveloped nations since the 1960s haven’t made a dent in world poverty. That’s because too often that aid is based on the charity model, with well-intentioned donors handing out food, medicine, and other supplies to the world’s poorest communities. While that charity is desperately needed, it doesn’t provide the education, tools, and capital resources required to help those communities create a self-sustaining business sector that can build true prosperity.

Instead of repeating these mistakes, it’s time to revisit the one strategy that has ever really worked: the Marshall Plan, which rebuilt Europe after World War II. It did not dole out supplies—that had ended by 1947, when the Marshall Plan began. Instead it made loans directly to local businesses. Those loans were paid back to their governments, which used that money for commercial infrastructure. More important, to qualify for the plan countries had to enact pro-business policies to ensure that local firms could succeed.

There is no doubt that rich countries today have both the technology and the wealth necessary to eliminate poverty. What we lack is the will to use those resources effectively. Shifting aid to the local business sector in order to cultivate a middle class, while tying it to government reform, is the oldest, surest, and only way to accomplish that.

Con: The Breakthroughs Are Undeniable

Simplistic statements that aid "fails" or "works" are not helpful or correct. Many global breakthroughs over the past decade have been financed by government-to-government foreign aid.

Although official aid still adds up to only 0.3 percent of rich countries’ average income, its successes have ranged from huge jumps in global primary school enrollment to Malawi’s recent doubling of national food production. Global health has seen pronounced gains, too. In less than 10 years, foreign-aid-backed programs helped deliver antiretroviral treatment to approximately 4 million people with HIV/AIDS in sub-Saharan Africa, a feat commonly viewed to be impossible in 2000. Over the same period, measles deaths worldwide dropped by nearly 80 percent. And since 2008 alone, more than 290 million modern antimalaria bed nets have been distributed throughout Africa, contributing to major reductions in child mortality across the region.

The successes share common attributes. In all these cases, leadership in developing countries is backed with enough resources to deliver proven goods and services to populations in need. A goal-oriented and transparent technical review process helps to ensure that programs are guided by evidence, rather than politics. And rigorous evaluation systems help promote accountability and course adjustment when programs fall short.

These world-changing breakthroughs do not imply that all aid has been allocated with equal impact. There have been many successes and many failures. But the evidence shows that results-oriented programs can—and do—bring critical breakthroughs to vast populations across the world’s poorest countries.

Opinions and conclusions expressed in the Debate Room do not necessarily reflect the views of Bloomberg Businessweek, Businessweek.com, or Bloomberg LP.

Reader Comments

Jackson

The idea of a Marshall Plan for developing countries is a good one, yet I wonder whether it is a bit simplistic. Following the second World War, a proven pool of industrialists were easily found. These successful businessmen, who had seen their capital stock destroyed, could make immediate use of Marshall funds to rebuild. In the developing world, successful industrialists generally do not lack for capital but instead use their strong connection to political figures to create oligopolies across profitable businesses (from cement, to car dealerships, soda bottling etc). The creation of a true entrepreneurial class and a thriving small business sector is critical for development. This requires education, good health (both for the entrepreneur and her family) and many of the other benefits afforded by foreign aid. Mr Duggan's approach of picking winners and lending them money will only exacerbate wealth at the top, while leaving the poorest behind.

Elizabeth Woolf

Cultivating a middle class in developing countries sounds like a great idea, but what makes Mr. Duggan think that the U.S., by keeping firmer controls on where its foreign aid money goes, can achieve this? We haven't been able to do it here, not by a long shot.

Sharon Kahn

To some degree, Professors Duggan and McArthur are comparing apples and oranges. (Both are admirable fruits, but are not interchangeable.) The "strings attached" model that Prof. Duggan suggests follows the private capitalistic approach. Although it may be initially more expensive to qualify worthy recipients, one hopes that businesses will eventually stand on their own. To get to that point, though, Prof. McArthur's call for aid to support basic health and nutrition issues--as well as creating a workable local infrastructure--may be needed.

Squeezebox

Foreign aid is a failure. Corrupt governments siphon off the money to line their personal pockets. Loans are defaulted, especially when there's a coup. Governments even use food as a weapon against their own people. Band-Aid tried to deliver food, but it stacked up on the docks because it couldn't be distributed. Guerillas take it, and distribute it to their supporters. Governments take it and give it to their supporters, and the average Joe starves.

Julio Herrera

Development comes from within. I agree with Dr. Duggan and Prof. Sala-i-Martin: There should be more emphasis on helping people from developing countries start their own businesses. As Dr. Duggan said, part of the aid should go for relief, but if you aim for a sustainable development of the country, entrepreneurship is crucial. I would suggest that in addition of the business loans that he suggests, there should also be some kind of entrepreneurship advice as part of the aid, to help the people in developing countries start and run successful businesses. The governments in these countries usually don't have policies that support entrepreneurs, so entrepreneurs need all the help that they can get.

JadedintheOC

My sentiments exactly, Squeezebox.

It's a great idea, but how do you get so many corrupt government's to join in this effort? Haiti is a perfect example--why after years of so many countries dumping in millions of dollars is it still the poorest country in the world?

They starve their people and line their pockets for themselves. So what is the plan for that?

Reggie

That's the best answer of all time. Just my humble opinion.

Loha

Just like cola companies do competitive advertising, developed countires have done competitive aid, giving to maintain a foot in the door with governments of poor countries--to win alliances (as in Pakistan), to sway democratic polices versus other options, or to just obtain access to the market including the very lucrative armaments and nuclear technology market. It's a very high stakes game where the house always wins. Developing-country leaders know how to play one country against another--and get the most. But what do they do with all this windfall? Good question, but very difficult to answer.

Most likely the money never leaves the capitals of these countries and finds its way to its intended recipients who live very far away from the capitals. Stretch Mercedes limos, Harvard education for children, etc., are the norm.

The probability of the funds trickling down to where the [people] live are the same as for a Western diplomat finding his way past the national airport, the capital receptions, the edge of town, the broken rural roads, and finally reaching a village in the middle of the Amazon.

Mr. Psb

Seems silly to talk about growing the middle class in poor foreign countries when we can't even do it here in the U.S. anymore.

Steve

Bottomline is that the whole aid industry employs lots and lots of westerners who eschew "evil" work in a corporation in their home countries. This industry is self sustaining and is impossible to downsize or kill.

N. Meh

Dear Mr. McArthur,

I have read your opinion carefully and it seems that you should be allowed to express your opinion, but I would characterize it as a dangerous one...

Real data is not on your side.

"For the first time in human history, the number of hungry people worldwide will exceed one billion this year"

source: http://www.wfp.org/1billion

You don't give references but just sporadic figures.

You should at least feel ashamed...both for your thoughts and also for your golden boy appearance.

David

To say aid is completely bad is a crude understanding of the dynamics of development. I will continue to say Aid is critical when the government is insensitive, thuggery, and moronic. Aid comes in to cover the gap caused by failure of the market, government, and other parties. However, what needs to be done is to change the aid methodology, have peerless monitoring mechanisms and ensure the real beneficiaries access that aid. Also the need to ensure that aid develops people's capabilities other than allowing it to kill human initiative. In short I would agree with those who say the current aid methodology is doing a disservice to the poor. It is laced with hurting conditionalities as well as working in difficult environments full of thugs and gangsters. All in all, on humanitarian grounds let medicines and food flow.

reader

If anything, foreign aid creates more poverty. Local businesses in countries that receive lots of foreign aid are crushed by floods of free goods. Try opening a clothing store in a city where clothing is free.

And providing the bare necessities for the needy is great, but when their populations are also growing exponentially, all it does is create more poverty.

Ghost

The article's title says, "Foreign Aid Won’t Eliminate Poverty."

Is foreign aid supposed to eliminate poverty?

Herbert Bagambe

Its supposed o contribute towards elimination, but must vital build a foundation for self sustainance of countries to reduce avoidable future dependencies. Some dependenies may be a result of economic and financial systems shocks, temporary and there are institutions like the IMF and governments for intervention. But foreign aid should build the fundamentals for countries to even deal with the shocks mentioned. With fundamentals in place, borrowing is more possible either in the markets (bonds), institutions or government. Fundamentals provide confidence in almost all aspects including attracting foreign investment critical for new technologies and innovation (international expertise remains a vital thing, as countries can't work in isolation). They work in teams such as the EU or NAFTA (though it seems to have its own unique way of workng) and other arrangements in Asia and Africa.

All in all it should build the fundamentals to ensure future self sustianaince.

Nelson Amaro

A return to the origins is the advice after the 2nd World War. The problem is that it is forgotten, that Europe's infrastructure was destroyed but all their human resources (education, health, social services, etc.) were almost intact. Money thrown in this context tends to multiply and grow. This is not the case in developing countries. The sixties witnessed the First Development Decade precisely following the example of the forties and fities. The promise of 0.7% of GDP going to developing countries never materialized. We are now in the globalization age. Communications and migration are the trends that push us ahead. Employment is the answer now. How to generate jobs should be the objective of any aid. Charity belonged to self-contained countries in the past.

thomas

Does foreign aid work? It all depends on who the recipients are.

Western European nations that were helped to recover by the Marshall Plan were ready to rebuild themselves because they had functional governments in the past. They knew how to govern themselves.The notorious and sad, really, failures of nations simply do not know how to govern themselves.

It is impossible to skip phenomena such as the Renaissance and become a functional nation with a functional, decent government. The so-called underdeveloped nations will not get there in our lifetimes or even our children's lifetimes.

This is a very sad reality. There are many highly capable and altogether admirable individual citizens who had the ill fortune to be born in the wrong place in the wrong nation. Perhaps historical developments will restore, or at least reduce, some of the glaring inequalities--or perhaps they will not.

What can one do in the meanwhile? Count our blessings, I guess, and give thanks for having been born lucky.

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