Three different approaches to foreign aid

While preparing for a research trip to Ghana, our class read and debated three different takes on aid:

Sachs takes the standard governmental approach: poor countries are caught in a “poverty trap” and can’t escape without a big financial push from foreign governments. Easterly lambasts that approach, claiming that government aid actually makes things worse, but doesn’t really provide any answers other than saying that small-scale, solution-minded people will fuel a slow evolution of change. Prahalad takes a completely different tack, outlining how multi-national corporations are poised to transform the developing world (and themselves) by creating new products and systems geared just for them.
Throughout the semester readers of each book would present prominent themes and cases from each book and we would discuss different views on development. While in Ghana we all read Paul Collier’s The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It. In some ways Collier condenses Sachs’ views while tempering them with Easterly’s cautions, and by calling for a broader array of development tools, somewhat invokes Prahalad (who unfortunately just passed away, I was informed).

Collier outlines four potential traps that the poorest countries can fall into:

1) The Conflict Trap: countries can become stuck in a cycle of coups, dictators, and civil war. Collier shows that countries undergoing a coup d’etat are often due for a second a few years later. Civil wars are expensive (costing $64 billion on average), driving a country further into economic woes, and prompting further coups. When a country falls into abject poverty, often the prospects for young men are nonexistent, making them more amenable to recruitment from extremist groups. Governments often attempt to quell rebellions, but their inevitable mistakes will cause further frustration in the general public and prompt further rebellion. The instability of war-torn countries also make poor candidates for foreign investment, perpetuating a cycle of poverty.
2) The Natural Resource Trap: This one appears to be an oxymoron–most people think that the discovery of oil or minerals fuels economic growth, but the opposite may be true. Most of the proceeds from natural resources go to the few who own the land or mineral rights. While the added wealth may “trickle down” to the general population, this influx of revenue creates incentives for government to become worse: if they can squelch democracy or make government less transparent, they can keep more of the wealth for themselves. Collier points out that many developing countries become worse after discovering oil, diamonds, or gold. Ironically, large quantities of foreign aid might act in the same way.
3) Being Landlocked with Bad Neighbors: African geography is very unfortunate–most countries were carved out around a colonial outpost, creating roundish countries, some of which are landlocked in desert areas. Ideally, Collier would like to redraw country boundaries so everyone has access to the sea. If you are landlocked but rich in resources, you will find a way to export them. But landlocked, resource-poor countries (e.g. Chad, CAR, Niger) are dependent on the infrastructure of their neighbors to survive. If a country such as Nigeria goes through tough times, it has catastrophic spillovers into its landlocked neighbors.
4) Bad Governance in a Small Country: Poor countries have a hard time educating their people. This leads to poorly-trained government officials. Compound this by the brain drain that often accompanies hard times, and you’re looking at a poorly run government at best. In addition to an exodus of people, you experience capital flight as well, as people race to get their money out of the country and into more stable vehicles.
On top of all of this, Collier explains that it’s possible for many countries to just miss the bus. What if India and China made it, but their models don’t work in Mali because it’s too far behind. Now if Mali wants to function in an international market, they must compete with other developing countries that have already climbed the learning curve. It’s a gloomy picture.
Whether this is true or not, Collier outlines a few harmful practices we are engaging in that should probably go (i.e., first rule: do no harm). When developed countries subsidize production to prop up failing industries, we do immense damage to foreign markets relative to the gains we experience. Also, Aid agencies appear to be focused largely on middle-income countries, and should scale up in bottom-billion countries instead (although this may be a result of aid being tied to diplomatic and military goals of developing countries, instead of actual need–this explains why we won’t see USAID opening up operations in Mauritania anytime soon.)
One of the more controversial claims in the book, and one I feel is fraught with perverse (read: colonial) incentives, is that foreign countries should provide military assistance to bottom-billion countries to prevent civil strife. This may sound good in theory (or not), but I can’t help remembering the origin of the phrase “third-world”: the third world are the countries caught like pawns between the capitalist first world and communist second world. In other words, aid and guns may be two sides of the same coin, and there are no disinterested benefactors.
Collier also recommends a stronger presence of international charters, but I’m a little skeptical about that one. Who listens to the U.N.? Rogue states and bottom-billion countries definitely don’t. Collier does bring up a good point though, that we need to provide the governments of developing countries some much-needed guidance on practices (whether we follow our own recommendations or not…)

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Article by: Dave

Dave Cannon is a Seattle-based entrepreneur and consultant to nonprofits and small businesses. He loves Thai food and takes terrible photographs. You can follow him on Linkedin.
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