Development Aid: No Quick Fix

Reports Highlight the Complexities of Assistance and Trade

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HONG KONG, DEC. 17, 2005 ( How to help developing countries is once more in the headlines. Trade ministers from 149 countries met in Hong Kong this week to continue trade talks organized by the World Trade Organization. Negotiations in the so-called Doha round have been going on now for four years and have been deadlocked over the issues of agricultural subsidies, and reforms in the area of services and industrial goods, the Wall Street Journal reported Monday.

A number of recent reports on trade and aid point to the complex issues involved in stimulating economic growth in developing countries. On Dec. 8 the World Bank released a report titled, «Poverty and the WTO — Impacts of the Doha Development Agenda.»

An «ambitious» agreement in the Doha round would reduce poverty, asserted the report’s authors, L. Alan Winters, director of the World Bank’s Research Group, and Thomas Hertel, professor of economics at Purdue University.

«International trade is arguably the most direct economic means by which rich countries influence poor countries,» the report contends. The reforms proposed in the Doha round would have the greatest impact on prices and trade volumes for farm and food products, followed by textiles and clothing.

Brazil, the report calculates, could reduce poverty by 0.4% in the short term if the reforms are implemented, and 1.1% in the long term. China would also reduce poverty by 1.3% in the long term.

But other countries could suffer. Bangladesh, for example, a net importer of agricultural produce, would risk a 1.1% rise in poverty in the short term. But its poverty rate in the long run could fall more than 4.6%, the report estimates.

The improvements are not automatic, however. Governments need to improve infrastructure and reform domestic marketing institutions, in order to ensure that higher world prices are transmitted to rural areas. They also need to educate rural populations better, and help farmers benefit from new export opportunities.

Some progress has been made in these areas, the World Trade Organization reported Monday. In a press release the WTO noted that the amount of aid to help developing countries to participate more efficiently in international trade has increased by 50% since the Doha round commenced in November 2001.

What works, and doesn’t

Another World Bank report, published Dec. 7, focused on difficulties in ensuring that aid programs achieve the desired result. In «Reaching the Poor: What Works, What Doesn’t, and Why,» the World Bank analyzed the gap between intentions and results in the area of health programs.

The study found that programs designed to reach poor people, often end up instead helping the better-off. The report found that in almost all of the more than 20 countries surveyed, the richest 20% of the population received more, or as much, of the government’s subsidized maternal and child health-care services as the poorest 20%.

There were exceptions, however. In Mexico, for example, one program pays poor families for clinic and school attendance. The program has more than 20 million beneficiaries, and 80% of those receiving payments are in the population’s poorest 40%. In Ghana and Zambia the distribution of treated bed nets, to combat malaria, has also had success in reaching the poorest sectors of the population.

But duplicating these good results is not easy, the report concluded. It said that there was no single method that can be easily introduced to deal with problems in different countries. Instead, the solution lies in adapting programs to the local characteristics.

How to help the poor was the subject of another publication issued in the week prior to the Hong Kong meeting. «How to Make Poverty History» was published by the International Institute for Environment and Development (IIED), a non-governmental organization based in London.

The report was skeptical about publicity given to big international aid agreements. «The reality is often less magnanimous,» the foreword commented, «with the same money being pledged away several times, and recycled from one context to another.»

The report’s chapter on Africa mentioned points that were similar to the conclusions reached in the World Bank study on reaching the poor. One of the greatest failings in development assistance, noted the IIED, is the lack of support for local organizations. «Only a very small proportion of official development assistance goes to what poor groups identify as their priorities,» the report commented.

The study stressed the need to concentrate on a few fundamental priorities, such as the provision of services in the area of good-quality schools, health care and the provision of water and sanitation. The publication also noted the importance of guaranteeing the rule of law, and ensuring it is applied in such a way that protects poorer groups’ rights and livelihoods.

Aid and growth

A pair of studies published earlier this year pointed to the importance of progress in the trade talks, as they found that foreign aid is of very limited help. The International Monetary Fund published the working papers June 1.

In «Aid and Growth: What Does the Cross-Country Evidence Really Show?» authors Raghuram Rajan and Arvind Subramanian found little evidence of a positive relationship between aid inflows into a country and its economic growth.

In fact, the paper states: «We find virtually no evidence that aid works better in better policy or institutional or geographical environments, or that certain kinds of aid work better than others.»

The paper examined diverse types of aid, for example, whether it is food aid in the case of short-term crises, or long-term aid for infrastructure. It also examined aid from different types of donors, and, on the receiving side, whether it is given to those institutions with good policies or bad ones.

The findings, the authors explained, do not imply that aid cannot be beneficial. But they do suggest that for aid to be effective in the future, it will have to be rethought.

In the second paper, «What Undermines Aid’s Impact on Growth?» the same authors looked at why it is so hard to find a positive effect of aid on the long-term growth of poor countries, even those with good policies.

Rajan and Subramanian found that aid inflows adversely affect a country’s competitiveness. The inflow of funds from overseas causes the exchange rate to become overvalued. This has a negative impact on industries that are labor intensive and those in the manufacturing sector.

By contrast, they noted, private flows such as remittances do not seem to create these adverse effects. They suggest this could be explained by the fact that remittances are spent differently, thus reducing their impact on the exchange rate.

Aid can also have a negative effect on governments. The authors referred to other studies that observe how aid initially is something additional to the government’s budget, but eventually the country becomes more lax on raising tax revenues, and more aid is necessary. So, the short-term beneficial effects of aid may dissipate over the long run as it creates a culture of dependency.

In addition, the provision of aid, by expanding a government’s resources outside of normal tax inflows, relaxes the need for authorities to be accountable for their actions to citizens, «which may have a corrupting influence even on the best intentioned of governments in the long run.»

The paper did, however, note that humanitarian aid is important and useful in averting crisis and immense suffering. Moreover, if it were used in a more effective way, the improvements from aid could outweigh the negative impact on exchange rates.

But they did warn against the fallacy of considering the lack of progress in developing nations as something that can be easily solved just through large increases in the amount of aid. Money can buy o
nly so much, so soon.

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