Because strong evidence exists that a growing economy is the most reliable means for lifting large numbers of people out of extreme poverty, aid strategies usually aim at spurring growth.
One widely adopted economic theory asserts that sustained growth depends on investment, which in turn depends on the availability of savings. When a nation's rate of savings is insufficient to drive investment for growth, foreign aid can be called in to make up the difference.
According to this theory, once aid gets growth going, the recipient nation's rate of savings will begin to increase, and investment will increase along with it. This additional investment will spur further growth, thus alleviating more poverty and eventually freeing the country from the need for foreign aid.
This theory drove the first "big push" of foreign aid to developing nations in the 1960s. Over time, however, evidence accumulated that such large influxes of aid to "prime the pump" for economic growth could not be trusted to generate savings and investment.
Economist William Easterly examined data for 88 countries that received aid between 1965 and 1995 and found that only 17 of them (19.3%) showed any positive statistical correlation between aid and investment, and only four showed a significant positive correlation. To Easterly, this evidence suggested that instead of increasing investment, much of the "big-push" aid simply fueled consumption. Why?
Easterly points to history for an answer. "[Past] progress in wealthy countries arrived through piecemeal steps, gradual reforms, incremental investment, and experimental probing, accompanied by gradually accelerating economic growth." What was true for the West then, he maintains, is true elsewhere now. "The problems of poor nations have deep institutional roots at home, where markets don't work well, and politicians and civil servants aren't accountable to their citizens. … [Any] big push will be forced to rely on dysfunctional local institutions."
To drive his point home, Easterly cites World Bank research on the delivery of medicines. While treatment for measles and malaria may cost only pennies per person, the Bank found that anywhere from 30 percent to 70 percent of the drugs destined for rural health clinics in several African countries never reached their intended recipients.
Economist Jeffrey Sachs argues that, if consumption on the receiving end siphons off resources intended for development, there are also problems on the other side of the aid equation. Sachs is the economic architect of the UN's Millennium Development Goals and a strong advocate for a new big push.
According to Sachs's data, global foreign aid for sub-Saharan Africa ostensibly totaled $30 per person in 2002, but only $12 actually reached Africa to fund development. Of the other 60%, $5 went to consultants in the donor countries, $4 paid interest to donor nations on prior loans, $5 covered debt relief operations, and $3 went for food aid and other emergency relief. For U.S. aid to the region ($3 per person), the ratio was even worse. Subtracting administrative costs, fees to U.S. consultants, debt relief, food, and other emergency aid, the amount of U.S. aid arriving in country totaled only 6 cents per African. We should not be surprised, Sachs contends, if we see little to show for it.
Sachs marshals extensive quantitative analysis to support his claim that another, wiser big push undertaken now can largely alleviate extreme poverty and its associated health problems within a generation. From his viewpoint, it's just a matter of rallying the necessary worldwide political will. Easterly cautions that raising such utopian expectations will simply generate a disillusioned backlash when actual outcomes are less than hoped for.
Both economists agree, however, that previous failures are not a justification for doing nothing at all. "Doubling the relatively trivial portion of their income that rich Westerners give to poor Africans is a worthy enough cause," Easterly writes, but he adds that it's also important to educate Westerners to have realistic expectations. Progress along the road to economic self-sufficiency for nations mired in the poverty trap is likely to be a long, hard "slog." And any success, great or small, will require strong incentives to overcome problems in the mechanism of foreign aid itself.
