Does Aid Lead To Economic Growth? Former IMF Economists Say No

2 comments | July 20th, 2007 | Trackback

I was interested to find an article entitled “Economists see aid to poor nations as ineffective”, which reports the findings of two former IMF economists.

I do think this is a topic worthy of serious and also critical thought, and for those reasons I was glad to see the article.

But I also think the topic of aid is one which just naturally includes value judgments, and I have to say I was frustrated at the lack of information accompanying this broad claim. It is not presented as the personal opinions or musings of a couple random people; it is presented as serious research by economists, and as such will likely be given a lot of weight by readers.

Their conclusions?
“We find little evidence of a robust positive correlation between aid and [economic] growth”, or that “certain kinds of aid work better than others”

Their recommendation?
“If there is no clear evidence that aid boosts growth, then handing out more money makes little sense…the aid money would be better spent on a research and development fund to get the private sector to make products to help poor countries.”

It’s not clear what kinds of aid they considered (or what they considered aid), over what period, and either what a “robust” correlation between aid and growth would be or what correlation they actually found.

On the “values” side, I might note that there is an underlying but unsaid assumption that the goal of providing aid is to increase economic growth. I think there are a variety of other reasons why, even if aid does not result in “robust” economic growth, it would still make sense to give aid. Alleviating human suffering, for one, is a goal which most of us would agree is worthwhile, although it is unlikely to have a “robust” connection to economic growth.

Most societies believe in treating and preventing illness regardless of whether the individual person (say, a retired person) is likely to become a productive worker or high-spending consumer. It’s just the right thing to do anyway.

There is also an assumption that where financial aid “fails” to bring economic growth, there are products which would successfully achieve this end. They give one example of a malaria vaccine, which is an issue in its own right, but, even from my own relatively uninformed viewpoint, I think the suggestion that money should be invested in private companies rather than administered as aid is one which should not be taken lightly.

While I think it makes sense to pay attention whether aid is addressing the root causes of a problem, this did not seem to play an important enough role in the research to merit a mention in the article.

Finally, given that they do not specify what kind of aid they considered, I also thought it was inappropriate that they refer to aid generally as “handing out money”. I don’t think it takes a complex understanding of international aid to know that it involves a lot more than handing out money.

What do you think?