Was DevelopmentAssistance a Mistake?

By WILLIAM EASTERLY*

Development assistance is the combination development wisdom shifted away from mobi- of money, advice, and conditions provided by lizing and guiding capital accumulation.Atten- rich nations and internationalfinancial institu- tion, instead, shifted toward the success of the tions, such as the WorldBank and International East Asian tigers (South Korea, Taiwan, Hong Monetary Fund (IMF), which is designed to Kong, and Singapore),which combined export achieve economic developmentin poor nations. orientation and macroeconomic stability. This This article argues that developmentassistance became the inspiration for structural adjust- was based on three assumptions that, with the ment packages of the IMF, the WorldBank, and benefitof hindsight(although a wise few also had the "WashingtonConsensus," which called for foresight),turned out to have been mistaken. removing price distortions,opening up to trade, and correcting macroeconomic imbalances I. We KnowWhat ActionsAchieve (mainly budget deficits).The slogan of the new EconomicDevelopment wave was "adjustmentwith growth." Alas, loans to finance structural adjustment Development long have known met the same fate in low-income countries as the answers of how to achieve economic devel- the earlier loans to finance investment-there opment. The only problemis that those answers was little or no growth; the loans could not be have continued changing over time. repaid;and the low-income debt crisis stretched To oversimplify,the evolutionof Conventional out into the new millennium with every year Wisdom is as follows (see also DavidL. Lindauer bringing a new wave of debt forgiveness (most and Lant Pritchett2002; the WorldBank 2005; recently, the cancellation of the structural and Dani Rodrik2006). In the 1950s throughthe adjustmentloans in the MultilateralDebt Relief 1970s, development(i.e., economic growth)was Initiative of 2006). In the middle-incomecoun- a simple matterof raising the rate of investment tries of Latin America, there was, for the most to Gross Domestic Product (GDP), including part, adjustmentand debt repayment,but little public investments for roads, dams, irrigation growth comparedto expectations in the 1990s. canals, schools, and electricity, as well as pri- The hope that the "East Asian miracle" could vate investment. Private investment, however, be replicated elsewhere with the same policies was usually not trusted to do enough or to do proved illusory. The Washington Consensus the right things, and so there was a strong role then gave way to second generation reforms for the state to facilitate and direct investment, that stressed the importance of institutions guided by the developmentexperts. such as property rights, contract enforcement, Unfortunately, the debts accumulated to democratic accountability, and freedom from finance these investments turned out not to be corruption. repayable.So, there were two debt crises during Although each shift in the conventionalwis- the 1980s. Middle-income countries had bor- dom was provokedby the failure of the previous rowed from commercial banks at market rates, conventionalwisdom, the argumentwas usually while low-income countrieshad loans from offi- that previous recommendations were "neces- cial agencies at concessional rates. Both entered sary but not sufficient."As Rodrik (2006) points into a long process of rescheduling and writing out, this had the effect of placing all the blame off debt that led to a lost decade for both groups on the recipient ratherthan on the development of debtors.Understandably, inferring that unre- experts, of making the list of "sufficientcondi- payableloans were a sign of unproductiveinvest- tions" for developmentever longer,and of mak- ments, especially in Latin America and Africa, ing the conventionalwisdom nonfalsifiable. A lot of these shifts were provokedby broad * , Room 510, 110 Fifth Avenue, stylized facts and compelling country examples New York,NY 10011 (e-mail: [email protected]). rather than by formal empirics. Development 328

This content downloaded from 128.122.62.112 on Thu, 1 Aug 2013 15:15:03 PM All use subject to JSTOR Terms and Conditions VOL.97 NO. 2 WASDEVELOPMENTASSISTANCE A MISTAKE? 329 knowledge could draw upon more formal record of achieving development (as opposed empirics like growth regressions. However,the to, say, totalitarian control of the economy by hope that arose in the early 1990s that the New kleptocrats).It is just that we don't know how Growth Literature at least empirically could to get from here to there;which specific actions find the answers eventually collapsed from a contributeto free marketsand good institutions; surplus of answers. Steven N. Durlauf, Paul A. how all the little pieces fit together.That is, we Johnson, and R. W. Temple (2005) pointed out don't know how to achieve development. that 145 differentright-hand-side variables were significantas determinantsof growth in various II. Our Adviceand MoneyWill Make Those studies with around 100 degrees of freedom. CorrectActions Happen When the problemsof unrestrictedspecification were reducedby testing the outcomes of the key Using the same judgment by stylized facts WashingtonConsensus variables on growth, the and country cases that has guided the evolu- results tended to confirm the casual empiricism tion of the conventional wisdom, development described above-countries as a group moved assistance has failed to achieve development. toward "better policies," yet average growth Over the past 42 years, $568 billion (in today's for that group declined for unknown reasons dollars) has flowed into Africa, yet per capita (Easterly2001). growth of the median African nation has been In the new millennium, a remarkablybroad close to zero. The top quarterof recipients group of academics and policymakers seem to (heavily overlapping with Africa) received 17 agree that, after all, maybewe don'tknow how to percent of their GDP in aid over those 42 years, achieve development,although they are reluctant yet they also had near-zeroper capita growth. to say so exactly. The (2005) was Successful cases of developmenthappening due either giving up or offering instantaneousnon- to a large inflow of aid and technical assistance falsifiability: "Different policies can yield the have been hard to find. South Korea is often same result, and the same policy can yield dif- cited, but it took off after aid was reduced, and ferentresults, dependingon countryinstitutional the Koreans disregardedthe advice of the aid contexts and underlyinggrowth strategies."The donors (see JamesFox 2000). Othermore recent BarcelonaDevelopment Agenda (2004), a who's examples frequentlycited (Ghana,Uganda, and who of leading economists,concluded that "there Mozambique)were cases of recovery after steep is no single set of policies that can be guaranteed collapse, and depend on rapid growth episodes to ignite sustained growth. Nations that have that usually prove to be temporary (Ricardo succeeded at this tremendouslyimportant task Hausman,Rodrik, and Pritchett 2005). Botswana have faced different sets of obstacles and have might be a better example of a long-term suc- adopted various policies regarding regulation, cess story initially financed by aid, although exportand industrialpromotion, and technologi- the most well-known case study of Botswana cal innovationand knowledgeacquisition." (, Simon Johnson, and James Lindauer and Pritchett (2002) call it most A. Robinson2004) doesn'teven mentionforeign honestly: "It seems harderthan ever to identify aid. The currentlymost celebratedcases of rapid the keys to growth. For every example, there is a growth-India, China, and Vietnam-receive counterexample.The currentnostrum of one size little aid as a percentageof their GDP. doesn't fit all is not itself a big idea, but a way of With aid, one has an even more serious expressing the absence of any big ideas." problem than with other growth regressions of This does not mean that economists know endogeneity of the right-hand-sidevariable. It's nothing about development,or that they know very likely that low-growth countries got more nothing aboutthe manylittle pieces thatcontrib- aid because they had low growth. This calls for ute to development.Good economic analysis of more formal econometric methods to disen- problems in finance, macroeconomics,taxation tangle the aid outcome from the counterfactual, and public spending,health, agriculture,etc. has utilizing instruments such as population size held up well. Economists are reasonablyconfi- and geostrategic factors. Unfortunately, more dent that some combinationof free marketsand formal empirics on the effect of aid on growth good institutionshas an excellent historicaltrack have suffered from the same problem as other

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the supportof their publics and the assent growth regressions-too many possible specifi- of their when do not need cations and not observations legislatures they enough (to begin to raise revenuesfrom the local economy, aid did not even make with, Durlauf, Johnson, as long as they keep the donors happyand and Temple's 2005 list of 145 statistically sig- willing to provide alternative sources of nificant variables appearing in growth regres- funding." sions). Aid and control variables have included such exotic species as aidA2*policyand Ethnic Simeon Djankov,Jos6 Garcia-Montalvo,and Fractionalization*Assassinations. Not surpris- MartaReynal-Querol (2006) and StephenKnack ingly, positive aid andgrowth results have proven (2001) find empiricallythat aid worsens democ- not to be robust. racy, bureaucraticquality, the rule of law, and The early expectations that aid would raise corruption. growth failed to pay attention to elementary The confidence that aid would raise growth economics-that a lump-sum transferdoes not was also naive about the knowledge and incen- change the incentives at the margin to invest in tive problems that afflict the foreign aid agen- the economy. With today's globalized financial cies. Foreign aid is a public entity spending markets, the paradox first pointed out by Peter the money of rich people on the needs of poor Bauer (1976) is more compelling than ever- people. Unlike most market transactions, the any poor country where incentives to invest are recipientof the aid goods has no ability to signal attractivedoes not need aid, while a poor coun- theirdissatisfaction by discontinuingthe tradeof try without incentives to invest will not have aid money for goods. Unlike the provisionof domes- go into investment. The international capital tic public goods in democracies,the recipientof market imperfections and alleged inevitability aid-financedpublic services has no abilityto reg- of low savings rates in poor countries used to ister dissatisfactionthrough voting. With little or justify aid in the past have not held up well in no feedback from the poor, there is little infor- today's world, with private capital flowing into mation as to which aid programs are working. Zambian government bonds and with Chinese Nor is there muchincentive for the aid agencyto peasants saving far more than Americans. find out what workswhen there is little account- Nor has therebeen muchbetter news on devel- ability (see Easterly2006). These problemsmay opment assistance(money cum advice)changing account for many of the more well-documented the policies that were supposed to raise growth foibles of the aid system: an emphasis on loans accordingto the WashingtonConsensus. Easterly made ratherthan on the results of those loans, a (2005) found that structuraladjustment lending surplus of reportsthat no one reads, a fondness also had no effect on the kind of macro policies for grandframeworks and world summits,moral and price distortionsthat it was supposedto cor- exhortationsto everyonerather than any agency rect. Nicolas van de Walle (2001, 2005) provides taking responsibilityfor any one thing, foreign case study evidence that African countries did technical experts to whom no one is listening, little in terms of reformin responseto structural health clinics without medicines, schools with- adjustmentpackages or aid, and aid may have out textbooks,roads and water systems built but even underminedpolicy reform.As notedearlier, not maintained, aid-financed governmentsthat there was a general worldwidetrend toward bet- stay in power despite corruptionand economic ter policies (as judged by ConventionalWisdom mismanagement,and so on. II), but the degree of movementacross countries Having developmentbe the goal of develop- was not correlated with the intensity of aid or ment assistance made these problemsregarding structuraladjustment lending in those countries. incentives and information worse for the aid Aid agencies also have paid surprisinglyinsuf- agencies than if they had focused on more spe- ficient attentionto the political incentives facing cific tasks such as combatingchildhood diseases, recipient governments, as Todd Moss, Gunilla for example. With many aid agencies operating Pettersson,and van de Walle (2007) suggest: in each country,with developmentof that coun- try dependingon many other factorsbesides aid "Large aid flows can result in a reduction agencies, and with the inability to map actions to in governmental accountability because developmentanyway, it was very hardto hold an governing elites no longer need to ensure individual aid agency accountablefor a good or

This content downloaded from 128.122.62.112 on Thu, 1 Aug 2013 15:15:03 PM All use subject to JSTOR Terms and Conditions VOL.97 NO. 2 WASDEVELOPMENTASSISTANCE A MISTAKE? 331 bad developmentoutcome. Hence, development Yet, "what must we do?" is a question that assistance, as it is now conceived, is inherently people cannot help asking about a problem as unaccountableand unableto process feedback. tragic as worldpoverty; and experts are the ones who say they have the answers. The twentieth III. We KnowWho "We"Are century'sfirst developmenteconomist may have been Vladimir Lenin, who wrote a famous pam- Despite the frequencyof statementslike "we phlet in 1902 called "WhatIs to Be Done?" He must end world poverty,"it is seldom clarified said that the revolutionary intelligentsia had who this "we" is that is taking responsibil- the answer. A long line of such diverse think- ity for world poverty. Is it the World Bank or ers going back to the FrenchRevolution such as United Nations officials? Is it national govern- Edmund Burke, ,, ment leaders? Is it celebrities? Perhaps "devel- Isaiah Berlin, and JamesC. Scott have criticized opment experts"are the most likely candidates. the idea that experts can redesign society, and The expert traditionis so strong that the World the catastrophicoutcomes of the more extreme Bank's (2005) response to the failure of expert attemptsto do so supportedthese criticisms. Yet analysis on how to achieve development is to the unquenchabledemand for experts who can intensify the use of expert analysis. call tell "us"the right answers shows no sign of ending soon. "A vital lesson for policy formulationand policy advice is the need to be cognizant IV. Conclusion of the shadow prices of constraintsand to addresswhatever is the constraint binding In sum, we don't know what actions achieve on in the right manner and in the growth, development, our advice and aid do not make right sequence. This requiresrecognizing and more economic those actions happeneven if we knew what they country specificities, and we are not even sure who this "we"is analysis and rigor than does a formulaic were, approachto policy making."(World Bank that is supposed to achieve development.I take 2005). away from this that developmentassistance was a mistake. The other possibility, that development Yet it doesn't necessarily follow that foreign experts are greatly overrated as a means to aid should be eliminated. Once freed from the achieve development,goes againstthe self-inter- delusion that it can accomplish development, est of everyone in this profession(including this foreign aid could finance piecemeal steps aimed author).Yet it is true, after all, that development at accomplishingparticular tasks for which there experts played no role in the development of is clearly a huge demand-to reduce malaria the developed countries. Anne Krueger (2007) deaths,to providemore clean water,to build and notes, " was a new maintain roads, to provide scholarshipsfor tal- field ... because earliereconomic growth in the ented but poor students,and so on. It could seek developed countries had more or less 'just hap- to create more opportunitiesfor poor individu- pened': while developmentof roads, railroads, als, ratherthan try to transformpoor societies. education systems ... had been undertakenby The knowledge and incentive problemsfor each governments,it had not been done as part of a such focused effort seem more solvable than conscious 'development'policy." that of "developmentassistance," although not Economists should not find it so hard to easy. As far as the experts are concerned, they take the idea of a spontaneousbottom-up order would do well to rememberthe principlesof the emerging out of the decentralized actions of division of labor and gains from specialization, many actors, as opposed to a strategic vision focusing on problemssuch as inflationstabiliza- offered by a few experts.The invisible handmay tion, financial regulation, or elimination of red operatein other areas besides the free market-- tape encounteredby businesses. They probably institutions may emerge much more from the have a lot to offer in those areas. Economists social norms and spontaneousarrangements of still have a more general role to play in making many actors than from the diktat of some expert the case for individual freedoms that allow the from above (see Avinash K. Dixit 2003). spontaneous,bottom-up processes to work.

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Fortunately, the inability of the experts Easterly, William. 2005. "What Did Structural and the aid donors to provide the answers for AdjustmentAdjust? The Association of Poli- development has not stopped development cies and Growth with Repeated IMF and from "just happening" on its own. Economic World Bank AdjustmentLoans." Journal of growth, without much influence by experts or DevelopmentEconomics, 76(1): 1-22. much contributionby foreign aid, is happening Easterly,William. 2006. The WhiteMan's Bur- around the world in places like China, India, den: Why the West's Efforts to Aid the Rest Chile, Botswana, Turkey,and Vietnam, gener- Have Done So Much Ill and So Little Good. ally involving homegrown, gradual movement New York:Penguin Press. towardfreer markets.Even thoughsome of these Fox, James. 2000. "Applyingthe Comprehensive success stories could later flop, history suggests Development Frameworkto USAID Experi- their place will be taken by new permanentexits ences." Operations Evaluation Department from poverty.This shouldbe enough to reassure WorkingPaper 15. those who care about world poverty to have Hausmann, Ricardo, Lant Pritchett, and Dani some hope ratherthan despair. Rodrik. 2005. "GrowthAccelerations." Jour- nal of Economic Growth,10(4): 303-29. REFERENCES Knack, Stephen. 2001. "Aid Dependence and the Quality of Governance: Cross-Country Acemoglu, Daron, Simon Johnson, and James EmpiricalTests." Southern Economic Journal, A. Robinson. 2003. "An African Success 68(2): 310-29. Story:Botswana." In In Search of Prosperity: Krueger,Anne 0. 2007. "UnderstandingContext Analytic Narrativeson Economic Growth,ed. and Interlinkages in Development Policy; Dani Rodrik, 80-119. Princeton and Oxford: Policy Formulation and Implementation." PrincetonUniversity Press. Paper presentedat the annual meeting of the Barcelona DevelopmentAgenda. 2004. Forum Allied Social Science Associations,Chicago. Barcelona 2004. http://www.barcelona2004. Lindauer,David L., and Lant Pritchett. 2002. org/esp/banco_del_conocimiento/docs/ "What'sthe Big Idea? The Third Generation agenda_eng.pdf. (accessed December 27, of Policies for Economic Growth."Economia, 2006). 3(1): 1-28. Bauer, Peter T. 1976. Dissent on Development: Moss, Todd,Gunilla Pettersson,and Nicolasvan Studiesand Debates in DevelopmentEconom- der Walle. Forthcoming."An Aid-Institutions ics. Princeton:Princeton University Press. Paradox?A Review Essay on Aid Dependency Dixit, Avinash K. 2004. Lawlessness and Eco- and State Building in Sub-SaharanAfrica." nomics: Alternative Modes of Governance. In ReinventingForeign Aid, ed. W. Easterly. Princeton:Princeton University Press. Cambridge,MA: MIT Press. Djankov, Simeon, Jose Garcia Montalvo, and Rodrik, Dani. 2006. "Goodbye Washington Marta Reynal-Querol.2006. "The Curse of Consensus, Hello Washington Confusion?" Aid." http://papers.ssrn.com/sol3/papers. http://ksghome.harvard.edul-drodrik/Lesso cfm?abstractid=893558. ns%200of%20the%201990s%20review%20_ Durlauf,Steven N., PaulA. Johnson,and Jonathan JEL_.pdf. R. W. Temple.2005. "GrowthEconometrics." van der Walle,Nicolas. 2001. African Economies In Handbook of Economic Growth. Vol. IA, and the Politics of Permanent Crisis, 1979- ed. Philippe Aghion and Steven N. Durlauf, 1999. Cambridge:Cambridge University Press. 555-678. Amsterdam:Elsevier Science, North- van der Walle, Nicolas. 2004. Overcoming Holland. StagnationinAid-Dependent Countries. Wash- Easterly, William. 2001. "The Lost Decades: ington, DC: Centerfor Global Development. Developing Countries'Stagnation in Spite of World Bank. 2005. Economic Growth in the Policy Reform 1980-1998."Journal of Eco- 1990s: Learningfrom a Decade of Reform. nomic Growth,6(2): 135-57. Washington,DC: WorldBank.

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