The New Approach to Foreign Aid: Is the Enthusiasm Warranted?

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The failure of past foreign aid programshas given rise to a new consensus on how tomake foreign aid effective. According to thenew approach, aid that goes into poor countriesthat have good policies and institutionsis highly effective at promoting growth andreducing poverty. Disbursing aid to countriesthat have good policies contrasts withthe traditional practice of providing aid tocountries irrespective of the quality of theirpolicies or providing aid to promote policyreforms. President George Bush’s proposedforeign aid initiative, the MillenniumChallenge Account, is based on the selectiveapproach to foreign assistance, as are, inlarge part, the World Bank’s calls to doubleforeign aid flows worldwide.

Yet enthusiasm about the promise of selectiveaid is unfounded. Bold empirical claimsabout the positive effects of “selectivity” arebased entirely on World Bank research, mostof which is difficult or impossible to reproduceby outside researchers. Though theWorld Bank’s research has had an enormousinfluence on the debate, the few attempts toreproduce the Bank’s findings using its owndata and methodology have contravened theBank’s findings.

Providing development assistance to countrieswith decent policies and institutions is adubious undertaking. Good policies will reapthe rewards of growth. “Overrewarding” thosecountries with foreign aid, by contrast, mayhave effects similar to those of traditional foreignaid programs: slowing the pace of reformand development.

Even if selectivity could somehow bemade effective, the practical impediments tomaking it work are formidable. Delivery ofMCA funds, for example, will surely sufferfrom politicization, bureaucratic self-interest,and congressional micromanagement.The prevalence of traditional foreign aid programsthroughout the developing world willalso undermine the intended impact of morenarrowly focused selective aid programs.

Ian Vásquez

Ian Vásquez is director of the Cato Institute’s Project on Global Economic Liberty and editor of Global Fortune: The Stumble and Rise of World Capitalism, published by the Cato Institute (2000).