This is the tragedy in which the West already spent .3 trillion on foreign aid over the last 5 decades and still had not managed to get 12-cent medicines to children to prevent half of all malaria deaths.The West spent .3 trillion and still had not managed to get bed nets to poor families.
Critics of foreign aid programs do not necessarily argue that every single aid program ever conceived has failed, but that, since aid usually fails, maintaining current aid programs or creating new ones is probably a bad idea. aid goes more often to more corrupt governments than less corrupt ones has already been mentioned (the authors do note that U. aid goes more often to democracies than dictatorships, however). Reform proposals that remove political criteria from aid decisions are essentially dead on arrival, as there is little incentive for politicians to change a system from which they benefit.
The Political Economy of Foreign Aid If foreign aid programs have usually failed, why do they persist? aid still seems to be motivated more by state interest than altruism in the post-Cold War period. Abolishing the IMF and World Bank would probably on balance do some good, but if reform is unlikely due to entrenched interests, abolition is also unlikely, although the visibility and simplicity of a clean sweep might make abolition better able than arcane, technical reforms to appeal to a grassroots, popular coalition.
Easterlys argument suffers from the economists tendency to exogenize the state, to assume that government actors are beyond the mechanisms of maximization that drive market actors.
By contrast, this paper presents a political economy model of foreign aid and argues that both humanitarian aid and multilateral structural adjustment and development assistance through the International Monetary Fund (IMF) and World Bank have actually been designed to fail in their ostensible aims: if they were to be reformed along the lines Easterly suggests, they would lose their political raison dêtre.
The West spent $2.3 trillion and still had not managed to get $3 to each new mother to prevent 5 million child deaths. According to Easterly, the main problems with foreign aid have been: 1) an inappropriate development model based on the financing gap, and 2) maladministration, caused by a lack of accountability for aid agencies to the people whom they are supposed to serve. He then proposes to reform the way foreign aid is administered so that it actually benefits the people whom it is supposed to help.
This paper goes beyond Easterlys contingent critique of foreign aid to argue that aid agencies are essentially un-reformable.One of the main problems with aid is that a number of developing country governments have diverted aid to the private bank accounts of government officials. However, Thacker finds that the IMF not only fails to use sound market criteria in lending decisions (countries that have previously defaulted on IMF loans are more likely to receive loans than countries that have never defaulted), but also loans more often to countries that move toward the U. More recent and sophisticated work has supported the general thesis that countries friendly to the U. are more likely to receive both IMF and World Bank loans. Detailed case studies have shown that U. pressure was responsible for lenient terms on IMF loans to Egypt and Russia. This evidence might seem to support the charges of radical critics of globalization that the IMF and World Bank are tools of U. imperialism in the Third World, mechanisms whereby the Treasury Department imposes economic policies favorable to Wall Street investors and multinational corporations on helpless Third World governments. It turns out that governments in developing countries seek out IMF loans precisely because they want the conditions attached to them.For instance, Alberto Alesina and Beatrice Weder find that more corrupt governments receive just as much foreign aid as less corrupt governments, that the United States government even gives more aid to more corrupt governments, and that the level of aid a country receives tends to increase corruption in the future. Peter Boone also finds that aid goes mostly toward wasteful public consumption, Jakob Svensson finds that aid actually inhibits beneficial policy reforms, and Karen Remmer finds that foreign aid not only increases government spending, but it also reduces revenues, presumably because aid-dependent governments feel less need to promote the kinds of economic growth that generate tax revenue. Craig Burnside and David Dollar find that aid has a slight positive effect on economic growth when the recipient country has good policies, but since the evidence overwhelmingly suggests that aid tends to undermine good policies, their finding does not have clear policy implications. James Vreeland has corrected for the fact that market-friendly governments tend to be the ones who seek IMF loans (and therefore would grow faster than other governments without IMF loans); once this correction is performed, he finds that IMF programs actually reduce economic growth by one and a half percentage points for each year the country remains under an IMF agreement. Vreeland also finds that IMF programs redistribute income from labor to capital and therefore increase income inequality. By blaming the IMF for unpopular economic reforms, these governments can evade the voters wrath while still implementing the reforms that they secretly want.Presumably growth-killing policies benefit the politicians who implement and maintain them; otherwise, they would not exist.To answer this question, we need to turn to the study of political institutions.According to UN Food and Agriculture Organization Director-General Jacques Diouf, Most food aid is donated on condition that it be purchased and processed in, and shipped from, donor countries, even when adequate supplies are available in the region where it is needed. The United States government, for instance, requires that all food aid be transported on U. Additionally, food aid can sometimes harm those it is intended to help, as when UN food giveaways in Mogadishu, Somalia in 1993 went chiefly to the warlords and harmed the destitute and persecuted Rahanweyn farmers, who then could not sell their own produce. The second type of political consideration involved in aid lies in the realm of international diplomacy (high politics). As Bhagwati notes, multinationals attracted by subsidies generally add little value. Studies of American states have shown that tax breaks and subsidies do not generate positive externalities and may not even make a difference in businesses location decisions. What can governments in developing countries do, then, to attract FDI and to speed up technological change in domestic industry?The real question is, What should these governments not do?Government-led industrialization is a risky business, and it usually fails. He points to six specific policy errors: 1) high inflation, which can be combatted through an independent central bank, dollarization, or a currency board; 2) high black market premiums, which can be eliminated by removing exchange controls; 3) high budget deficits, which can be tackled with a strong finance minister or a constitutional requirement that all legislation increasing spending must be fully costed; 4) killing banks, which doesnt happen if inflation is low, black market premiums are low, and interest rates are liberalized; 5) closing the economy, which can be averted by slashing tariffs and restrictions on investment; and 6) government disservice, which can be caused by foreign aid or natural resource dependence and can often be addressed through the creation of private, competitive markets. Robert Barro finds that high government consumption also reduces growth rates. Cross-national studies of FDI inflows specifically have found similar results: countries that are open to trade and have low inflation, budget deficits, and corruption attract more FDI.Moreover, democratic countries attract more FDI than authoritarian ones, while IMF agreements cause a decline in FDI inflows. Having the right policies is important for development, but what makes it more likely that a country will have the right policies in the first place?Branko Milanovic argued that loans through the IMF and World Bank should not be considered aid since they have to be repaid, but this argument ignores the fact that these loans are offered at interest rates substantially below market otherwise, governments would have no reason to accept them, given the policy strings attached (known as conditionality).Grants-in-aid are largely conducted bilaterally, government-to-government, or through United Nations agencies.