Why Foreign Aid Fails

The history of foreign aid is littered with good intentions and bad outcomes. Even the world's hyperpower was unable to take advantage of substantial foreign aid in the aftermath of Hurricane Katrina. Granted, it is not moral quibbling to question taking charity from poorer nations, but the United States allowed donations to be ruined by the elements while needy people went without.

Given the failure of the United States to effectively harness foreign aid, it is unsurprising that most poor countries don't use it well either. But after decades of experience in the post-WW2 period, wealthy donor countries haven't figured out how to make the system work. Foreign aid doesn't even result in warm feelings these days. Developing countries have a highly developed sense of sometimes justified exploitation, and just as understandably, many rich nations don't feel like giving billions to help the less fortunate if all they receive in return is a public relations black eye.

Foreign aid fails because one-time donations aren't used to invest in the future. It's not surprising to economists that behavior doesn't change when the underlying incentive structure doesn't alter one bit. Yet one-time gifts are unlikely to change incentives because they only influence the present. Tying future gifts to specific goals being reached is the economic prescription, but the political reality is that rich countries won't want to give to countries that are getting along fine on their own, and poor countries can't get big projects going without substantial start-up capital.

Giving foreign aid from a long-term perspective is the only way to actually leverage change, but long-term foreign aid is not particularly desired by anyone.

Ironically, only an iron-fisted dictatorship that is capable of forcing unpalatable changes down the throats of unwilling poor people is likely to make good use of foreign aid. Of course, depending on the good will of dictators is a losing strategy as well.

The only reliable course to economic growth is for a country to help itself. Sadly, the sorts of changes required will be sufficiently unpopular that poor people are almost always going to be unable to help themselves.