Foreign aid has been poured into the developing world for decades, but poverty persists. What are we doing wrong; not giving enough, giving too much, or maybe giving it in the wrong way? This article explores the economics behind one of the most debated questions in development economics.
[Shneur is a third year Commerce/Economics student and is a Publications Officer at ESSA. Shneur is interested in development economics and international trade, and how exploring competing perspectives in these fields can help us tackle our world’s most challenging issues.]
Starvation in Africa mostly comes up as a response to a stubborn child refusing to eat their broccoli. We usually only notice humanitarian crises in the developing world if we happen to watch a Netflix documentary instead of rewatching an episode of The Office for the third time. To most of us, extreme poverty is distant, but for those who live it, the gates of prosperity seem firmly shut with little means of finding a way in.
The standard of living we enjoy in Australia is immeasurably higher than that of hundreds of millions of people across the globe. You and I can reasonably expect stable healthcare, food security, and (relatively) decent public infrastructure. That is not to say that domestic economic issues are non-existent, but the issues we face seem trivial compared to those in the Global South.
We all want to help, but exactly how is a difficult question. Economists and policy analysts fiercely debate the correct course of action, with their disagreements rooted in vastly differing economic theories.
Give a Man a Fish
One school of thought believes that poverty is rooted in the poverty trap and that coordinated foreign aid programs are key to breaking it (Sachs, 2005). The poverty trap theory suggests that poverty is a cycle, an economy too poor to invest and therefore too underinvested to grow.
Imagine a rice farmer in rural Cambodia whose field has a small yield each year, enough to feed his family but with little left over to sell. Living on subsistence, he is unable to invest in fertilizer, meaning his yearly yield stays stagnant. Now imagine a charity gives him some fertilizer, next year’s yield would be larger and he can sell some of his surplus to buy fertilizer for the following year. With crops increasing each year he can eventually sustain a much higher standard of living. Proponents of this theory of poverty argue that this process can be extended to an entire economy.
A country lacking good transportation, education, a healthy population, and physical infrastructure is unable to invest in its future. Crucially, aid programs must happen on a large scale, with massive coordinated investment into schools, hospitals, and public infrastructure across all aid providers to ensure nothing is left uncovered (Sachs, 2005). The initial investment must be large enough for an entire country to break free.
Teach a Man to Fish
Others, however, are more sceptical. Foreign aid, to some, seems like a way to make an economy dependent on outside help and unable to develop on its own (Moyo, 2009). Consider a T-shirt maker in Uganda depending on his small business to survive. Along comes a well-funded American NGO giving out free clothing. Unable to compete, the small business owner is pushed out of the market. If this happens systemically, an economy cannot build up its own industries, held down indefinitely by well-meaning do-gooders. In this view, independent self-sustaining industry is the key to economic success, and constant outside stimulus hinders an economy’s ability to grow.
There is also the issue of corruption. Aid has in many cases helped prop up corrupt leaders. With resources coming from outside, leaders are not held accountable to their citizens and can therefore hold on to power unchallenged (Moyo, 2009). A tragic recent example is South Sudan, where the country received large amounts of desperately needed aid. While some basic needs of the people were met, the foreign charity allowed the local government to avoid accountability that citizens might have otherwise demanded from them. While not taking responsibility for the economic condition of the country, government officials were able to pocket some of the aid, further solidifying their grasp on power (de Waal, 2014).
To these sceptics, a more effective method would be to encourage foreign direct investment and trade, using market forces to lift a country out of poverty rather than well-meaning but counterproductive charity.
Just Enough
Between these two perspectives stands a more nuanced approach (Banerjee & Duflo, 2011). This view holds that yes, there is some truth to the poverty trap theory, but no, flooding a country with aid will not fix the problem. Poorly targeted aid causes real harm, but we cannot rely purely on market forces either.
A child learning to walk needs to try and fail on their own, but also occasionally needs a helping hand. Targeted investment in key industries can kickstart an economy without smothering it, so aid should be provided but with precision and local knowledge.
One example of this view in action is the Graduation Program, an initiative where researchers, working alongside local communities, provided a small one-time stimulus to individual families across six countries (Banerjee et al., 2015). After this initial investment the researchers withdrew, giving families enough support to kickstart their own growth without creating dependency. Those who received the support reported positive economic and psychological effects years later. The key to its success was targeted aid, locally informed and time-limited, that allowed recipients to stand on their own feet. In this view, aid in and of itself is not good or bad, rather, its effectiveness depends on the way it is carried out.
As long as poverty persists the debate will continue. What matters is that the argument never becomes an end in itself. Behind every economic theory are real people still waiting outside the gates of prosperity.
References
Banerjee, A., Duflo, E., Goldberg, N., Karlan, D., Osei, R., Parienté, W., Shapiro, J., Thuysbaert, B., & Udry, C. (2015). A multifaceted program causes lasting progress for the very poor: Evidence from six countries. Science, 348(6236), 1260799. https://doi.org/10.1126/science.1260799
Banerjee, A. V., & Duflo, E. (2011). Poor economics: A radical rethinking of the way to fight global poverty. PublicAffairs.
Moyo, D. (2009). Dead aid: Why aid is not working and how there is a better way for Africa. Farrar, Straus and Giroux.
Sachs, J. D. (2005). The end of poverty: Economic possibilities for our time. Penguin Press.
de Waal, A. (2014). When kleptocracy becomes insolvent: Brute causes of the civil war in South Sudan. African Affairs, 113(452), 347–369. https://doi.org/10.1093/afraf/adu028
