Jagdish Bhagwati has written a fascinating historical review of foreign aid. Zambian born Goldman Sachs economist Dambisa Moyo has recently criticized aid severely. She has said aid does not get any desired benefits for Africa and only goes into the purses of the politicians. What is worse is that there are hardly any suggestions from any African leaders on what should be done. The suggestions mostly come from Western economists/policymakers who are usually not aware of the local situation.
Bhagwati reviews the broad economic rationale behind aid and how it was seen as beneficial. Foreign aid is based on two principles- moral duty and should yield beneficial results. The second principle has never rally worked which has weakened the first one as well. The early works of Gunnar Myrdal, Paul Rosenstein-Rodan and Arthur Lewis led to some support for foreign aid. This led to rich countries being asked to fix a target for giving s1% of aid every year.
Bhagwati tracks where did 1% come from? Arthur Lewis had a student working in a French colony who said French spent 1% of GNP on the colony. The same was explained by Lewis to a UK MP and the term caought on.
Bhagwati also explaisn how Rosenstein-Rodan got this aid idea popular within US congress. It was the time of Cold war and aid was seen as a way to prevent communism from spreading to the world. Soviets had helped Egypt construct a dam and this was used as a way to show USSR ideas are gaining grounds. So obviously it caught on with US congress!!!
As Cold War became over, Aid was seen as something that would help the developed countries. As poor become more developed because of aid, they would demand more goods and services from developed and would lead latter to grow as well. This was superfluous as spending the same amount in developed countries itself would lead to more prosperity. Another idea was aid would lower illegal immigration. Bhagwati says this was also not right as illiegal immigration would actually increase as people will have more money to bribe on the borders.
All this frustrated Lewis and he said in jest that development econs should hand over iad to Madison Avenue. And this became true after 20 years as we have rockstars, concerts asking to give aid!
Bhagwati also looks at the fame Harrod Domer model which justified aid. The model says there are two ways for a country to grow. One, how much it saves and invests. Two, how much returns it got from investments. The broad idea for foreign aid was it would supplement domestic savings and help in growth. Then as an add on, the domestic savings will also increase over a period of time. However, the recepiuent countries politicians were smart and realized shortfalls in domestic savings would be taken care of. And actually domestic savings went down!!
Overall, the foreign aid failed to pick up. Every year targets are missed.
Bhagwati adds China and India did not grow based on foreign aid but based on reforms. Development basically comes down to how the citizens and poliymakers make proper choices and reform their economies. Foreign aid is unlikely to help.
A great article by Bhagwati. In just about 5 pages, explains so much about foreign aid and its basics.