March 12, 2008

Is Official Development Assistance Effective to Boost Growth? Palliative vs. Development Economics

Practitioners often flaunt official Development Aid (ODA) as the panacea to fight against poverty and boost development. For these reason, many practitioners, NGOs and the United Nations pledge and claim for more aid (0,7% of the GDP of developed countries).

Even if these practitioners are driven by good intentions the results of ODA in the last fifty years are extremely disappointing. In fact, if we look at the ODA impacts on growth we see that, as Rajan and Subramanian demonstrate, there is no robust positive relationship between aid and growth.

I propose in this blog some reasons that can explain this failure that it is mainly caused by the last thirty years policies:
  • ODA, notably multilateral, was used in the 80s and 90s to promote Washington Consensus policies. Liberalizing trade provoked in many countries the destruction of their industrial sector (1). The outcome was the slowdown of growth, unemployment and increase of poverty. These impacts were amplified by privatizations and “less-state” policies.
  • There are also some external factors that reduced growth and create poverty. The more important ones were probably: debt service, oil prices, global economic crises and huge increase of developed countries agricultural subsidies. However, the last two elements are linked to policies adopted by developing countries.
  • ODA, mainly provided by bilateral donors, often follow the political and economic interest of the donor. For example, ODA tends to maintain the colonial division of labour with developing countries producing only raw materials and handicraft. What is more, ODA now deals more with emergency situations than with development.
  • ODA is more focused on what Erik Reinert (see the “interesting to read” section on this blog) call “palliative” economics than development economics. In fact, aid community prefers to try to solve the worst negative impacts of development failures in developing countries (as increase of disease, health care, poverty in very peripheral areas, etc). They chose to treat the symptoms of the disease instead of its causes.


I could conclude that ODA is useless and we need to simply eliminate it. Nevertheless, I think that we can reform it. ODA can become a genuine instrument for development.

The following changes, some of them already discussed by the ODA community, can contribute to this objective:

  • ODA should be linked by a real ownership of developing countries that should use it as a tool in broader development strategy. Donors discuss on this issue but they are very far to achieve it. For example, PRSP have been criticized because developing countries poorly choose how to spend resources.
  • Donors should spend less money in “palliative” policies and more in development policies. We should invest more in industrialization and advanced services development. In fact, only by developing these sectors a country can have enough resources to invest durably in health care and education. Furthermore, as Reinert, demonstrate only the development of an industrial sector can help to durably improve farmers living conditions. Donors often continue to implement the same kind of project. What is needed is to think outside the box notably to use new technologies for development.
  • Donors invest a huge amount of resources in the so-called “good governance”. This is a waste of money. In fact, if we look at the most successful former developing countries (as Korea, Singapore, etc.), they were not good examples of “good governance”: there were corruption, rent-seeking, authoritarian governments, etc. Nevertheless, they succeed and after reaching a level in their development, they choose to implement democracy, human rights, anti-corruption policies, etc. Implementing these policies in LDC is a waste of money and could be counterproductive in terms of development. In the early phases of development, there is only a good- or bad-for-business governance.
  • National decision-makers are the most well placed to design a development strategy and to choose what and when policies should be implemented. International experts, with few exceptions, tends to propose (and often to impose) one-size-fit-all approaches based on econometric models. We should adopt a new approach on development. Rodrik call this approach experimental. We need to learn more form past experiences and from our (of a developing country decision-maker) mistakes. We should learn more on experiences of successful countries than form econometric unrealistic models. What is more, each country has its specificities and a one-size-fit-all strategy did not exist.
  • We should use more tools that history demonstrate that they are effective. For example, it is better to improve South-South integration than North-South Free Trade Agreements. In general, we need to better understand how the successful Marshal Plan worked in Europe and replicate it in the developing worldthrough ODA. I will explain its main characteristics in another post.

In conclusion, ODA donors should assess the failure of development aid and think seriously on how to improve it. They should surpass old (and new) ideological thinking and adopt a more experimental approach that takes into consideration past experiences and assessments of development results. Development and not palliative measures should be the focus of ODA. We need better development economics scholars that can think outside the box and criticize past and current policies. We also need to think on aid and its inter-linkages with global governance and international engagements. In fact, it is useless to promote cotton industry in Benin if the US gave huge subsidies to their cotton farmers.

Foot Notes

(1)For more information on trade and development issues look at my previous post.

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