Monday, April 10, 2006

Foreign Aid - A Reply to Cato's Radelet

Mr. Radelet wants to argue in favor of Aid as a minimum charge to help countries prosper (along the lines of a credit to push liberal economic policy), but he his evidence starts to fall apart, when you look closer.

Take a closer look: $2.3 billion over 50 years is $46 billion a year, a modest amount for any global capital flow. And only about half went to low income countries, with the rest to middle-income countries like Israel that didn’t need it. So we have around $26 billion a year for all the low income countries.

46$ billions is a lot, even if it is distributed amongst many countries, because some of those poor countries don't even have the 46 $ billions in assets. Also, he precisely shows why this aid doesn't work, it doesn't arrive where it is needed. The idea to spend money on countries is as inefficient as giving a beggar a credit line of 10000 dollar.
They just won't use it for the things the money was intended to be used. Also, why give Israel money at all? They are not poor, but they need that money to run their socialized economy. If you take away the money, they have incentive to release parts of their economy in private hands again.

This works out to be a rip-roaring $14 per person per year in low-income countries. Much of that goes to consultant reports or is tied to purchases in donor countries where it gets much less bang for the buck. As a result the recipients actually get far less than these figures indicate. So let’s cut the grandstanding. It ain’t much. In Easterly’s judgment, based on his opening vignette, because poverty still exists in Ethiopia after it has received all of $14 per person in aid per year (Ethiopia happened to receive exactly the average amount), “aid doesn’t work.” Please!

Again he only shows that spending money at states doesn't solve anything and thus plays into the hands of his opponents. The evidence obviously points towards the idea that foreign aid is useless at best and encouraging beaurocrazy at worst.
He then continues to show that foreign aid has been misused and wasted by either dictatorships or economic-engineering projects by democratic countries (to please some special interests).

Korea until the early 1970s received more than three times as much aid per person than the average low-income country. Botswana is Africa’s great growth miracle, and since 1960 it has received 8 times—8 times!—more aid per person than the average low-income country (and still today receives more than the average low-income country). More recently, large recipients like Mozambique and Uganda have nearly doubled their incomes since the early 1990s. In much maligned Egypt, since 1960 average real income has tripled, infant mortality has dropped from 189 to an astonishing 35 per thousand, and literacy rates have nearly doubled.

Then comes this passage, which is a bit confusing, because equals addicts with state-induced economies to economic development. The fact that Botswana is still using 8 times the aid of an average low-income country after it had its growth miracle, shows that this growth is stimulated by the credit from abroad and obviously would vanish if the credit ceases.
Neither Mozambique nor Uganda are good examples for foreign aid, because both have waged wars in the past decades trying to enrich themselves (Uganda in Kongo f.e.).

Egypt on the other side has really been a growth magnet, but this is largely due to liberation of the people and increasing literacy due to privately funded schools, one could argue at the same time. So, it is a confused example. If a state is supporting liberal policies, it is changing (like Egypt, although the personal freedom level is still low) and foreign aid has a little part in it, but it is mostly the policy that changes the country. The same is true to dictatorships or welfare-states in Africa, who get a major share of aid money, but still can't better their countries.

Mr Radelet also underestimates the worth of 14$ to someone who leaves on a few pence a day. So, 14$ is often not that few he thinks it is.

Easterly rightly despairs that millions still needlessly die of disease (despite our generous $14 of assistance), but he neglects to mention those that now live. A recent book documents how millions of lives have been saved in developing countries through large-scale health interventions in the last several decades. [1] Routine immunizations save 3 million lives every year. Small pox was eradicated, and polio nearly so. And there has been enormous progress in fighting river blindness, guinea worm, diarrheal diseases, and others. Aid programs did not always discover these medicines and technologies (although in some cases they did, like oral rehydration therapy to fight diarrhea), but they were central to delivering them to the poor. Without these programs, millions of these people would be dead. Tell them that aid has been wasted, and that we all would be better off without it.

Yes, those programs have done a big deal, but they were organized either by private instutions or almost private NGO's like Red Cross. Also, they didn't hand out money but medicine, a luxury good that is not comparable to clothes and food. While food and clothes put local business out of work, medicine does not, because it is a high quality product that can't be produced in those poor countries. There is no market competition that can be ruined by importing medicine. This is also part of the success story of beating malaria in Africa (which was also initiated by private companies rather than foreign aid (which actually prevented beating MALARIA!).

However, he is right that there is a marginal backing of growth corresponding to the foreign aid delivered, the question is in what sectors of the market. I still haven't read the studies he adviced to read (I will do this once I have time), but I fear I know what kind of sectors are growing: Government sectors...

No comments: