Giving up on foreign aid?

• Author: Ranis, Gustav
• Position: Essay

Andrei Shleifer (2009) and David Skarbek and Peter Leeson (2009) offer devastating critiques of foreign aid. Following Peter Bauer's and, more recently, William Easterly's lead, they assert that if aid has any impact at 'all it is most likely to do harm. The only exception, offered by Skarbek and Leeson, is that it may do some good at the micro-project level. I would like to raise what is rapidly becoming a contrarian point of view.

The Current State of Aid

At this point in time foreign aid indeed threatens to become one of the casualties of the current economic crisis. Instead of doubling the U.S. contribution, as President Obama had promised during his campaign, it appears that it will prove difficult to even maintain prior year levels. The same is true of the other OECD donors, in spite of all the agreement reached at the G8 summits at Gleneagles in 2005, Heiligendamm in 2007, and Toyako in 2008. The developing countries will just have to wait, which, according to these critics, is probably a good thing. Enhancing the resources of the International Monetary Fund, the World Bank, and the regional banks is apparently as much as can be tolerated by rich-country parliaments when there are serious budgetary constraints coupled with a growing skepticism about aid's entitlement to priority.

The source of the earlier revival of U.S. interest in foreign aid can be located primarily in the reaction to 9/11, as reflected in the U.S. National Security Strategy Memorandmn of 2002, listing foreign aid as one of the three main pillars of U.S. foreign policy. While most terrorists have been middle class, they have found havens in poor countries--or so the argument goes. Reinforeement has come from the Bono/Jeff Sachs/NGO humanitarian quarters, seized with the importance of achieving the Millennium Development Goals.

Aid Skepticism

Aid effectiveness has been subject to mounting doubts for several reasons. One, and critical, is the by now general acknowledgement--even by the World Bank and IMF---of the failure of the Structural Adjustment Lending of the 1980s and 90s, tied to conditionality enshrining the Washington Consensus, but usually deteriorating into annual ritual dances, with donors initially insisting on reforms but ultimately yielding to the need to disburse.

The Poverty Reduction Strategy Papers which followed were intended to shore up the lack of real ownership and included a reduction of the customary average 60 conditions per country to approximately 30. However, most observers, even the major donors, agree that this did not measurably improve the situation. The PRSPs are still prepared with the help of large-sized manuals produced by the international financial institutions and cannot go forward without their seal of approval. At a Kampala meeting not long ago, 15 African countries denounced the PRSPs as Structural Adjustment Lending in sheep's...