Kelsey Price Judkins POLS 5710 International Political Economies 12 December 2011 Final Exam Over the last 50 year major powers and international organizations have poured huge amounts of foreign aid into the third world in an effort to promote economic development. According to Easterly how effective have these efforts been? What sorts of problems have plagued them? How could the global North better promote growth and development in the future? What role, if any, will changing technology and ideas play in this? Foreign Aid as a Double-Edged Sword: Good Intentions Misguided The use of foreign aid, particularly by the United States, as a means to not only perpetuate economic growth, but also as political leverage dates to over half a century ago at the end of World War II. Beginning as a means to reconstruct a war-ravaged Europe, the concept foreign development aid dates to the Marshall Plan, which attempted to strengthen ties to European states and limit the influence of the Soviet Union. Introduced by President Harry Truman as “Embark[ing] on a bold new program for making the benefits of our scientific advances and industrial progress available for the improvement and growth of underdeveloped areas,” foreign aid as a means to achieve growth is justified by the belief “poverty is a handicap and a threat both to [undeveloped countries] and to more prosperous areas” (Truman). While proponents of foreign aid point to the Marshall Plan as proof of the long-term growth foreign aid provides underdeveloped countries, opponents such as William Easterly counter that growth remains an elusive achievement for the majority of third world countries, despite mammoth amounts of foreign aid from developed countries, particularly Western states. However, even though United States’ economic policy is increasingly tied to national security policy in that the recipients of foreign aid, overall under Easterly’s theories, such aid is largely unbeneficial from
an economic standpoint. While these efforts are doubtless good intentions, their implementation through policy measures frequently lead to a lack of ineffectiveness due to flawed models of economic growth and high levels of corruption. In the analysis of such foreign efforts and the integration of new technologies through globalization, better understanding of development can lead to accelerated growth in developing countries. Foreign aid, or the idea thereof, is perhaps best summarized as twofold in intentions. To a degree, foreign aid is undeniably what political economist David Baldwin describes as “foremost a technique of statecraft. It is, in other words, a means by which one nation tries to get other nations to act in desired ways” (Baldwin, 3). Consider the post World War II Marshall Plan for example, the plan was crucial in Western Europe’s economic recovery and helped the United States assure political alignment with economic interests of the European Union. It should be further noted that the Marshall Plan was also, to a degree, the economic counterpart to the security policy of containment. United States foreign aid was heavily concentrated in former Axis countries such as Japan, West Germany, and Greece, operating under the belief in that providing aid, the United States could ensure the countries would not be susceptible to communism. However, as Easterly is quick to note in his work, The Elusive Quest for Growth, foreign aid’s intend extends beyond political gain as, “Experts don’t care about rising gross domestic product for its own sake. We care because it betters the lot of the poor and reduces the proportion of people who are poor” (Elusive Quest, 4). Easterly cites several models of foreign aid that he believes prove to be inadequate in meeting the growth needs of developing countries. Such policies, even ones promoting technology, prove to be inefficient to continually sustain growth, because they fail to wholly encompass various economic principles that are key to long-term growth. Many foreign aid
practices in investments are based on the principles of the early work of economists Evsey Domar, which essentially state that GDP growth, will be proportional to the investment spending in GDP, whether that be through financial loans or technology capital. However, as evidenced by the financing of the Morogoro Shoe Factory in Tanzania by the World Bank in the 1970s, blind investment in technology is ineffective in the end without technological change. There is only so much technology that can be provided in the form of foreign aid before the increase of output by more machines is zero. The key to efficiency in this scenario is, according to Robert Solow, technological change (Elusive Quest, 51). That is to say, many current foreign aid investment programs prove to be inefficient because they yield low additional output, whether that is due to inefficient training in technology or mismanagement of such investments. Technology is a two-fold aspect of foreign aid. As earlier discussed, increasing the total amount of technology does not necessarily reflect an increase in output, indeed, the total amount of technology, without an increase in labor productivity leads to an overall smaller level of output in a scenario where there is little productive but large total sums of technology as opposed to higher productivity and less machinery. Furthermore, Easterly argues that the technological knowledge, under the right conditions, can promote growth for developing countries. Technology itself is not enough, and indeed at times a hindrance, for growth. However, changing technology can play a positive role in growth in that some countries have the potential to skip obsolete technology and head straight to the front of new technological development (Elusive Quest, 171). To an extent, technology change can be a hindrance for countries that need foreign aid should the changes render old goods and technologies produced by the country obsolete, but a boon for growth as the change leads to overall higher productivity. Operating under this technological argument presented by Easterly, it is assumable that sustainable and long-term
growth can only be achieved so long as the population using said technology is able to adapt to new technology quickly, and indeed, expand on such technological change to perpetuate more growth. Other examples of uneconomical foreign aid include debt relief and education programs, because—as with earlier forms of aid discussed—they are not necessarily bad in intention, but their flaws lie within the implementation of such programs. In another piece that originally ran in the Washington Post, Easterly contends that although programs such as debt relief are feel-good economic policies, in reality they only further expose problems with the overarching fatal flaw of previous and current foreign aid efforts, mismanagement of foreign aid. Such policies “simply create perverse incentives by directing scarce aid resources to countries that have best proved their capacity to mismanage such funds” (“Debt Relief,” 21). Indeed, the lack of efficiency of the majority of foreign aid programs is directly attributable to mismanagement of foreign aid funds. Corruption, therefore, is the crowning problem the global North has encounter in its attempt to efficiently distribute foreign aid to achieve the highest yield of return. A study conducted by the National Bureau of Economic Research supports Easterly’s claim that corruption is the largest contributing factor to poor policy implementation in regards to foreign aid. Conducted in 1999, the Bureau’s study found that there was no evidence to suggest foreign aid typically goes to less corrupt governments and rather, according to some measures, governments with higher instances of corruption tend to receive more foreign aid than less corrupt ones (Alesina and Weder, 4). Easterly contends the problem of corruption extends past the corruption itself, and it “not only has a direct effect on growth; it also has an indirect effect because it makes other policies that affect growth worse” (Elusive Quest, 246).
The overall lack of notable growth in developing countries is undeniably linked to rates of corruption. Operating under Easterly’s hypothesis that corrupt countries tend to be less developed and developed countries have less corruption, the conclusion remains real economic return of foreign aid is only possible if there is enforceable measures to ensure foreign aid is managed properly. Surely, countries such as India, which are not as poor as Zimbabwe, but not as developed as the UK, stand to benefit the most in this scenario. Compare say, countries X and Y, and Z, where country X is among the poorest fifth of countries and has a considerable track record of poor governance, while country Y is not nearly as poor as, but not as corrupt X, and nearly nowhere as near as developed as Z, who remains in the top fifth of developed countries. Operating under Easterly’s theory, even if Z were to invest more foreign aid in X compared to Y, Y would always have a higher return on the actual amount of aid to productivity, meaning Y would have a higher rate of growth than X. Thus, under this model, the key to growth for country X is not the foreign aid itself, but the ability of country Z—assuming the role of the global North—to promote better governance policies in country Z in order to achieve a higher return on their investments in terms of foreign aid. It is crucial the global North examine their policies regarding foreign aid, and adjust policies to better reflect the actual amount of return on aid investment. Too often, policies such as foreign aid are not actually negative in theory, merely in practice, due to a variety of overlooked problems such as rate of productivity or returns, due to factors such as technological changes and corruption. Such a concept is not unique to economics or political economies. Consider, for example, the United Nation’s Millennium Development Goals, which were set at the Millennium Summit in 2000. Designed with the goal of reducing overall global poverty, these objectives address a variety of economic, social, and cultural factors such as fighting
gender inequality, illiteracy, and environmental sustainability. While some regions of the globe, notably the Middle East, Latin America, and north Asia have made considerable progress towards meeting the goals, which have a target timeframe of 2015, other regions, particularly sub-Saharan Africa are nowhere close to meeting such targets. Undeniably, the ability to meet these goals are somewhat tied into country GDP, but the crucial variable in the ability of the country to met a goal is tied to their overall comparative disadvantage (Ellenwood and Price, 2122). Sub-Saharan Africa is undeniably at the largest comparative disadvantage when it comes to a region’s ability to meet the MDGs, suffering from the highest mortality, illiteracy and HIV/AIDs rates. Regardless that the United Nations put the highest amount of emphasis on the region, it was still the most behind at meeting these goals compared to other regions, primarily because it had the most impoverished condition to begin with. The same can be concluded regarding positive growth in developed countries based on foreign aid based on Easterly’s theories. Because such countries are at such a disadvantage in terms of wealth, there are fewer incentives for growth, but all the incentive for corruption. Thus, the global North, or rather, the developed world’s foreign aid is misguided in that in misidentifies the source of poverty as low GDP itself. Rather, the failure is in poor governance and oversight of GDP growth, and before high GDP growth can be achieved through foreign aid, it must be first directed and governance itself.
Works Cited Alesina, Alberto, and Beatrice Weder. "Do Corrupt Governments Receive Less Foreign Aid?" American Economic Review 92.4 (2002): 1126-1137. Print. Baldwin, David. Economic Development and American Foreign Policy, 1943-1962. Chicago: University of Chicago Press, 1966. Easterly, William. “Debt Relief.” Foreign Policy. 127 (2001): 20-26. Print Easterly, William. The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics. Cambridge (Massachusetts) [etc.: MIT, 2002. Print. Ellenwood, Mickey and Kelsey Price. “Millennium Development Goals and the African Union.” RHSMUN African Union. International Model United Nations Association. 2010. Truman, Harry. "Inaugural Address." Presidential Inauguration. Washington, D.C. 20 Jan 1949. Address.