The delusion that rich countries can pull poor countries out of poverty if they so choose is on public display as the month of July begins. Bob Geldof organized rock concerts in cities around the world to push that idea, while the G8 meeting in Scotland largely focused on debt relief and massive increases in foreign aid to save the world's poor.
Already, the United States and Great Britain have agreed to write off the debt of 18 heavily indebted countries, and President Bush has pledged to double U.S. aid to Africa. The British are calling for new Marshall Plan for Africa.
If history is any guide, the G8's initiatives will do little to reduce poverty in Africa, the world's poorest region and the focus of rich country efforts. Debt relief itself has not proved effective in the past. Since the 1980s, heavily indebted poor countries, most of which are in Africa, have received more than $30 billion in debt forgiveness, yet the debt problem has gotten worse. In practice, countries have been rewarded for having poor economic policies and foreign aid has encouraged their maintenance.
Indeed, the G8's debt relief initiative is really about the failure of past foreign aid. According to Carnegie-Mellon University economist Adam Lerrick, 94 percent of the external debt of heavily indebted poor countries is due to official loans from creditors such as the World Bank or the International Monetary Fund. Since the 1960s, sub-Saharan Africa has received nearly $500 billion in aid, yet the region has become poorer in the past several decades.
It is difficult to conclude from this damning record that the solution is more debt relief and more foreign aid. Calls for a new Marshall Plan are misplaced. In today's dollars, that aid initiative disbursed roughly $100 billion over the course of four years after World War II. Africa thus has already received the equivalent of about five Marshall Plans. Moreover, aid to Africa has been on the rise and is at historic highs. Net development assistance to Africa was about $24 billion in 2003, so the region is currently receiving Marshall Plan levels of aid.
Why has aid performed so poorly and why should we not expect better results in the future? By the 1990s, a long-delayed consensus emerged among development experts that aid that goes into poor policy environments does not work. Overall, there is no correlation between aid and growth, but in Africa aid has harmed development by supporting governments whose policies have actually impoverished people.
Even when aid is supposed to promote policy change, it fails to do so. Countries promise reform, receive donor largesse, then introduce half-hearted reforms or fail to do so altogether. A recent World Bank study looked at the record of aid from 1980 to 2000 and found that "aid on balance significantly retards rather than encourages market-oriented policy reform." That finding is consistent with a previous Bank study that observed that "reform is more likely to be preceded by a decline in aid than an increase in aid."
One reason aid does not promote good policies is because aid agencies have an institutional incentive to lend. When borrowers know that donors will lend irrespective of their actions, the conditions attached to aid lose credibility.
Despite the probability that massive increases in aid would only worsen the credibility of donors' conditions, proponents of more aid to Africa claim that things will be different in the future. Lending will somehow have teeth. Aid will be directed on a "selective" basis to countries that have good governance and have shown a willingness to reform on their own. Aid will support health and education, without which growth is undermined.
In fact, there is no reason to believe that aid effectiveness will noticeably improve. Lending agencies will still have no enforcement mechanism and rich countries will still rely on such agencies, which have a proven record of poor judgment, to determine which countries deserve aid and when.
The World Bank now claims that it is shifting its lending toward governments with better policies and institutions, but a recent World Bank self-evaluation concluded, "So far, there is little evidence that governance is improving or that corruption is decreasing."
A new study by the IMF provides even less reason to be optimistic. The Fund found that aid not only does not boost growth, but that there is "no evidence that aid works better in better policy or geographical environments." Moreover, the IMF found that "no sub-categories [of aid] have any significant impact . . . on growth." The development effect of social, economic, or food aid, in other words, is the same.
African nations can become prosperous, but we are fooling ourselves if we pretend that rich countries can achieve that result through government-to-government wealth transfers. Modesty is missing in the debate. The hard work of economic development has always rested squarely in Africa. It is time for African governments to embrace economic freedom and for rich countries to stop discouraging them from doing so.