Originally published on the CGS blog on October 31, 2014.
The US and other first-world countries could aptly be categorized as the world’s most generous countries concerning the distribution of aid to developing foreign governments. Foreign aid or investment is generally viewed as a win-win scenario for the US: while the receiving party gets money to (hopefully) further develop their economy, the US receives good press and greater international prestige. Unfortunately, many development economists are saying that foreign aid isn’t having as a great an economic impact as we originally might have thought.
William Easterly is one such economist who believes that if the goal of US aid is to develop foreign markets, then we are failing. Easterly and others who espouse these beliefs do not think foreign aid is a bad thing. However, they do believe that the goals of aid need to be properly adjusted to align with the scope of aid productivity. Throwing money at a developing economy will accomplish nothing unless they have the correct resources and know how to develop markets. To this effect, expecting large quantities of foreign aid and loans to increase the GDP of a country is far-fetched.
Easterly provides many reasons that aid does not directly translate into economic growth. One of these reasons is that sometimes the government receiving the aid is authoritarian or has weak institutions,which will lead to money being put in the hands of a select few instead of being invested in the domestic market. This is obviously a practice that must stop, as it is a waste of taxpayer dollars and is directly funding individuals whose interests may not be aligned with ours.
It bears repeating that you would be hard pressed to find someone who believes that aid is inherently problematic. However, the mechanisms and conditions on which we provide aid require some serious updating. We need to start providing stricter conditions for the aid we send to accomplish a more specific economic goal that is mutually beneficial.
In a limited capacity, the US has been altering they ways in which they distribute aid through the Millennial Challenge Corporation. The MCC does not account for all US foreign aid, but it has brought greater transparency to the US foreign aid distribution process. In the future, we should look to government entities like the MCC to shoulder more of the lion’s share of aid projects in hope that the world looks at our example and emulates it.
