Foreign Policy

Aid and Discomfort

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Perpetuating Poverty: The World Bank, the IMF, and the Developing World, edited by Doug Bandow and Ian Vásquez, Washington, D: The Cato Institute, 359 pages, $15.95

My nursing-student friend recently completed a home health visit to an indigent, elderly couple in rural Virginia. Wheelchair-bound and suffering from numerous medical ailments, the couple had lived for years in their cramped, three-room home without running water, indoor plumbing, or reliable heating. Several months ago a variety of Virginia government agencies cooperated in building a small bathroom onto their house. It gets little use. You must navigate four stairs to enter it; once inside there is barely enough room for a person–much less a wheelchair–to turn around; and neither the husband nor wife can clamber into or out of the traditional tub. It's a mini­-white elephant testifying to government aid gone awry.

In the field of foreign aid, the white elephants tend to be much larger, such as a meagerly producing fish pond in Malawi that was situated next door to a bird sanctuary and massive transmigration schemes in Indonesia that have exacerbated ethnic conflicts. In his much-discussed 1989 book, Lords of Poverty, leftist journalist Graham Hancock told numerous stories of such projects created world-wide by sometimes blundering, sometimes treacherous applications of foreign aid. His scathing book flogged the World Bank, International Monetary Fund, and U.S. Agency for International Development (USAID) for the same sins committed by the Blue Ridge bureaucrats involved in the bathroom fiasco: wastefulness, use of inappropriate technologies, and blind disregard for the opinions of the actual recipients of their "assistance."

A new critique of foreign aid, this time from the right, largely corroborates these now-familiar charges against the aid bureaucracy, but extends and deepens the analysis in helpful ways. Perpetuating Poverty–a tightly edited collection of 16 essays by such notables as Nicholas Eberstadt, George B.N. Ayittey, Paul Craig Roberts, James Bovard, and William McGurn–is probably the most important, and damning, assessment of aid policy to date because it asks and answers questions more fundamental than those raised in previous evaluations.

Anthologies often make for tiresome, incoherent reading, but editors Doug Bandow and Ian Vásquez have gathered well-crafted selections sharing several common themes. The contributors agree, first, that massive wealth transfers from rich to poor countries (the World Bank has channeled $300 billion since the early 1950s) have not worked. Latin America is mired in $430 billion of debt; per capita incomes in sub-Saharan Africa are lower now than two decades ago, and, Bandow writes, "According to the United Nations, the 47 poorest countries in the underdeveloped world, many of them heavy aid recipients, have experienced no growth in recent years and are expected to show continuing declines in per capita incomes." Employing numerous examples from Africa, Latin America, and South Asia, the contributors argue persuasively that aid has failed to encourage sustainable economic growth and raise living standards in the less-developed countries (LDCs).

But the contributors go further: Not only has aid not worked, it has actually exacerbated the problems it intended to alleviate. Aid, they argue, has entrenched regimes with misguided, statist economic policies and dubious human rights records. In addition, "by ameliorating the symptoms of economic collapse," multilateral aid has permitted recipients to postpone necessary market-oriented reforms.

The authors also agree that the real problem with foreign aid is not just that particular grants and loans have been used foolishly, creating the nightmares and gross inefficiencies Hancock chronicled. The problem is that the whole mentality of aid is based on an erroneous understanding of the reasons for underdevelopment and the causes of economic growth. The World Bank et al., the authors argue repeatedly, see capital and technology transfer as the key to growth, and fail to appreciate the economic potential of ordinary Third World citizens operating in free markets.

Experts from the aid agencies too often consider the state the main engine of development and favor government planning. Even in the pro-market, post­–Cold War period, the contributors assert, the agencies merely mouth free market rhetoric and posture as advocates of economic liberalization while continuing to lend to governments rather than to the private sector. They also regularly fail to punish aid recipients who abandon market-oriented reforms.

As Bovard puts it: "[E]very time the [World] Bank loudly praises the marketplace, it silently damns its own record. The Bank, more than any other international institution, is responsible for the Third World's rush to socialism and economic collapse. While the Bank has been very effective at expanding government control of Third World economies, it has unfortunately been extremely ineffective at encouraging private-sector-oriented reform."

The contributors to Perpetuating Poverty believe that the causes of persistent poverty in the Third World lie principally within the LDCs themselves–in their statist economies and mercantilist regulatory systems, which shut the poor out of the formal economy–rather than in the external conditions of the global economy. Thus these analysts think market-oriented reforms within the LDCs are urgent and increased international wealth transfers are irrelevant if not harmful. (Their emphasis on faulty domestic policies in the LDCs does not, importantly, lead them to neglect the very real problems of industrialized countries' protectionism. The last quarter of the book is reserved for arguments in favor of trade liberalization and foreign private investment by the North to spur growth in the South.)

Perpetuating Poverty doesn't merely say that the foreign aid bureaucracy's diagnosis of and prescription for Third World ills is fundamentally flawed. It argues that the foreign-aid establishment doesn't seem to care that its policies don't work. Citing evaluations published by the agencies themselves, various contributors show that the institutions are aware of their own dismal performance records. In one report, cited by Bovard, the World Bank admitted that 75 percent of its agricultural projects in Africa were failures.

Nonetheless, the agencies fail to adjust their lending behavior accordingly; indeed, their usual response is to increase aid. Nicholas Eberstadt offers a particularly eloquent explanation for this phenomenon: "To a disturbing degree, Western bilateral and multilateral aid agencies treat objectives and strategy as peripheral to the real business at hand. Throughout the so-called donor community there is a pervasive tendency to equate performance with 'moving money': to judge aid not by the effectiveness with which it is spent, but simply by the fact that it is spent."

In similar comments, contributor James B. Burnham identifies a fundamental flaw in aid policy that other analysts sometimes miss: the disjunction between the multilaterals' constituted purposes, which are economic, and their actual underlying objectives, which are political and diplomatic. Since much aid is "treated as a useful lever for achieving broader diplomatic objectives," the recipient's economic performance can become a secondary consideration. Until this incongruity is widely acknowledged, discussions about the appropriate role of foreign aid (if there is to be any role at all) are likely to bear little fruit.

Because of the international crises so familiar today, aid policy is being shaped more by global circumstances than by the deliberate action of policy makers. This reactive character of aid policy is particularly ironic because the foreign-aid establishment has been more introspective in the past few years than usual. For example, last summer the IMF and World Bank celebrated their 50th anniversary and so have been indulging, as The Economist put it, "in a prolonged bout of navel-gazing." Such reflection has not produced much innovative thinking: One World Bank official, when asked what he thought would follow the bank's 50th anniversary, replied, "Well, the 51st anniversary."

Like the multilaterals, USAID has been rethinking its role. In November 1993, the Clinton administration unveiled the agency's "entirely new" foreign-aid strategy. Under it, aid is to be directed to specific objectives, such as environmentally friendly development, democracy, and growth through trade and investment, rather than to specific countries. This is innovative thinking, but unfortunately it isn't being practiced: The $13.7 billion approved by the Senate for 1994 will go mainly to the same familiar clients.

USAID's new idea, though, is a step in the right direction because, if actually implemented, it could mean major reforms in aid policy that take into account the criticisms raised in Perpetuating Poverty. For example, the book's contributors argue repeatedly that a major problem with aid is that it goes to LDC governments instead of their economically productive citizens. Since one of the stated objectives of the Clinton foreign-aid policy is stimulating market-oriented economic growth, and since aid is supposed to be disbursed to further specific objectives rather than to placate client states, the way has been paved for non-governmental entities to receive assistance. Perpetuating Poverty could have taken up several lines of inquiry suggested by the Clinton reforms, such as how best to channel aid to the LDCs through private voluntary organizations and domestic businesses in the poor countries.

The contributors to Perpetuating Poverty want to end foreign aid as we know it. Though their case is persuasive, such an outcome is unlikely for at least two reasons. First, while opinion polls regularly indicate that Americans show little enthusiasm for foreign aid in general, Americans nevertheless often demand humanitarian action in the face of human tragedies. (Rwanda comes immediately to mind, and images of the Somalian and Ethiopian famines aren't far behind.) Many Americans think foreign aid is an expression of humanitarianism, because they are usually told that aid is essentially economic and meant to alleviate Third World distress. Perpetuating Poverty would have been strengthened by a serious consideration of the merits of relief, as opposed to development assistance, and by the recognition that many citizens think that terminating relief aid is undesirable.

Still, it's true that the statist development model on which foreign aid is currently based is fundamentally flawed. The lessons of the past four decades of development experience in the LDCs clearly demonstrate that market-friendly, outward-looking policies lead to growth while state-centered approaches fail. But the contributors ought to have taken up an additional question: What role, if any, is there for foreign assistance if the multilaterals embrace in practice as well as in rhetoric the neoliberal development model Perpetuating Poverty favors? Since ending all aid doesn't seem immediately feasible, such a question about the transformation of aid is crucial.

The book could have included, for example, an essay discussing the merits of aid to social investment funds which permit LDCs undergoing market-oriented reforms to cushion the pains of structural adjustment on the poor. It also could have assessed the role that foreign aid played in the economic success stories of the East Asian tigers (Singapore, South Korea, Taiwan, and Hong Kong) as well as newly industrializing countries such as Chile, Malaysia, Indonesia, and Thailand. While those countries have received significantly less aid than many LDCs, they nevertheless have received some, and it would be helpful to understand how such assistance helped or hindered them in their adoption of pro-market, neoliberal development strategies.

Finally, given the mixed (both diplomatic and economic) objectives of foreign-aid policy, it would have been useful for the contributors to have assessed the individual performance of each of the three components of foreign aid–security assistance, development assistance, and humanitarian assistance.

Despite these oversights, Perpetuating Poverty is a powerful book that should encourage policy makers to reevaluate the very phrase "foreign aid." Such language assumes that concessionary wealth transfers from the developed to the underdeveloped countries actually assist the latter in making economic progress. Perpetuating Poverty relentlessly explains why this is often not so. With that matter settled, the way is now clear for an equally rigorous, radical rethinking of aid policy that could transform "foreign assistance" into something that actually serves the poor rather than prolongs their agony.

Amy L. Sherman is author of Preferential Option: A Christian and Neoliberal Strategy for Latin America's Poor (Eerdmans) and a visiting fellow of the Ethics and Public Policy Center.