Atlantic Council

Alan Wood argues that it's time to rethink how we fight poverty in the developing world, shifting from aid to profit-based approaches. 

Quite a while ago, trade and development economist Peter Bauer (1915-2002) of the London School of Economics famously remarked that aid was a transfer of wealth from poor people in rich countries to rich people in poor countries. Has this changed? Here is a quote from a recent book by two men from the present generation of US development economists: "Private charities and countries' foreign aid agencies have spent billions annually for decades now, hoping to wipe out poverty. We've seen round after round of debt relief since the 1970s. But despite all this, the average Kenyan is still no richer today than in 1963. Will things really be any different this time around?"

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After five decades and trillions of aid dollars, the most aid-intensive regions, notably much of Africa, are still poverty stricken, suggesting the big push approach is unlikely to be a great success.

As for the poverty trap, an idea that dates from the same era, [NYU economist William] Easterly argues it has been refuted by the successful escape from poverty of many societies without much aid as a percentage of their total income, China and India, which had African-style poverty levels as recently as the '80s, being cases in point. "Fortunately for the world's poor and for all the rest of us, there are much more dynamic forces in the world than UN bureaucrats and their academic advocates," he said earlier this year.

The world poverty rate has declined by half over the past 30 years, and it has had little to do with foreign aid. Chief among these dynamic forces, in Easterly's view, is capitalism. Criticising Gates's attack on capitalism and his call in The Wall Street Journal in February for much more corporate philanthropy, Easterly commented that philanthropy had proved awfully weak compared with the profit motive. He said profit-motivated capitalism had done wonders for poor workers, with the globalisation of capitalism from 1950 to the present increasing annual average income in the world to $7000 from $2000.  Contrary to popular belief, poor countries' incomes grew at about the same rate as those of the rich ones, leading to the greatest mass exit from poverty in world history.

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Easterly is not opposed to foreign aid for poor countries; on the contrary, he thinks, like [Jeffrey] Sachs, that the remaining levels of world poverty are a disgrace. But his approach rejects the grand plan and the deployment of the legions and billions of the foreign aid establishment. Instead, he prefers a multitude of smaller programs that can be much more easily monitored and audited to see what works, and systems that give more economic and political freedoms to individuals to find their own solutions to poverty.  Easterly has history on his side. Even in China, which remains a communist state, rapid economic growth followed the freeing up of its economic life and greater political freedom relative to its earlier totalitarianism, not the nostrums of the foreign aid establishment.

Whether this approach, which has shown promise in limited application, would work on a wider scale remains to be seen.  But, surely, continuing the failed approach of the past half century isn't the way to go.

James Joyner is managing editor of the Atlantic Council. Photo from Reuters Pictures.