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

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The failure of past foreign aid programs has given rise to a new consensus on how to make foreign aid effective. According to the new approach, aid that goes into poor countries that have good policies and institutions is highly effective at promoting growth and reducing poverty. Disbursing aid to countries that have good policies contrasts with the traditional practice of providing aid to countries irrespective of the quality of their policies or providing aid to promote policy reforms. President George Bush’s proposed foreign aid initiative, the Millennium Challenge Account, is based on the selective approach to foreign assistance, as are, in large part, the World Bank’s calls to double foreign aid flows worldwide.

Yet enthusiasm about the promise of selective aid is unfounded. Bold empirical claims about the positive effects of “selectivity” are based entirely on World Bank research, most of which is difficult or impossible to reproduce by outside researchers. Though the World Bank’s research has had an enormous influence on the debate, the few attempts to reproduce the Bank’s findings using its own data and methodology have contravened the Bank’s findings.

Providing development assistance to countries with decent policies and institutions is a dubious undertaking. Good policies will reap the rewards of growth. “Overrewarding” those countries with foreign aid, by contrast, may have effects similar to those of traditional foreign aid programs: slowing the pace of reform and development.

Even if selectivity could somehow be made effective, the practical impediments to making it work are formidable. Delivery of MCA funds, for example, will surely suffer from politicization, bureaucratic self‐​interest, and congressional micromanagement. The prevalence of traditional foreign aid programs throughout the developing world will also undermine the intended impact of more narrowly 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).