The Magazine

Help That Helps

A new business model for foreign aid.

Aug 31, 2009, Vol. 14, No. 46 • By CAROL C. ADELMAN and NICHOLAS EBERSTADT
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Like many other bureaucratic organizations, foreign aid institutions are geared to fighting the last war. Social, economic, and demographic changes in the developing world over the past several decades have been rapid, and they have transformed the low-income landscape in obvious respects, but these realities have yet to be internalized by our international development assistance agencies and programs. There are not just new problems to be faced; there are important new opportunities to be grasped. Three major changes in particular need to be recognized immediately.

First, in much of the developing world, especially in Latin America and Asia, economic and demographic changes--including declining fertility and infant mortality and rising life expectancy--are producing a "grayer" population structure and more affluence. These trends have tilted the locus of health problems in most developing countries to such chronic illnesses as cancer, cardiovascular disease, and diabetes, and away from the traditional problems of infectious diseases and child survival. While "traditional" health problems are still predominant in sub-Saharan countries, the chronic disease burden is significant even in Africa, affecting the working-age population so vital to productivity and growth.

Second, there has been an increase in the skill-based talent pool as millions of people who have studied in developed countries have returned home to start businesses and NGOs. The rise of this pool of trained professionals and entrepreneurs in developing countries means that there are steadily increasing opportunities for aid organizations to partner with local talent. They have an enhanced opportunity to promote local ownership, self-reliance, and sustainability through their projects.

Finally, there are major streams of international financial resources available today (some of them entirely new) that were not present when foreign assistance was conceived after World War II. Some 83 percent of total financial flows from the developed to developing world are private resources, in the form of investment, remittances, and philanthropy. These private flows dwarf government aid to the developing world. Most important, they have opened up new ways of addressing problems. Increasingly, private philanthropists are taking a venture-capitalist approach to aid, viewing themselves as problem-solvers and partners rather than simply as donors. Private resources are flowing through new channels: the Internet, cell-phone transfers, cause-related marketing, remittances, and social networking sites. Economic growth in emerging economies is creating considerable wealth. Large NGOs such as the Aga Khan Foundation (which focuses on needs in South Asia, Central Asia, and East Africa) have now been joined by thousands of community foundations in the developing world that are solving local problems with local funding from wealthy individuals and companies.

What's needed today is more flexibility in aid programming. Aid can be tailored to each country's evolving conditions and development opportunities. It should also be premised on leverage--that is, linking U.S. public resources to the myriad emerging streams of private endeavor that characterize global development and encouraging the emergence of more innovative and efficient ways of delivering assistance and better evaluating the aid's ultimate impact.

Countries are much more likely to grow when they embrace policies that create open economies, and encourage trade, private investment, business creation, savings, and innovation. Good governance and the development of a sturdy institutional domestic framework, including rule of law, individual rights, and property rights, are critical to prosperity.

Since the early 1950s, scholars and students of development have debated to what extent, if any, foreign aid helps countries. Their studies have been strikingly inconclusive and have certainly failed to demonstrate that official development assistance makes a regular and predictable contribution to overall macroeconomic growth. We reviewed nine major studies, and the majority of them show no categorical relationship between aid and growth, with only one asserting an unqualified positive relationship. The two most dramatic and consequential modern cases of rapid growth and poverty reduction in the Third World--post-Mao China and India during the last two decades--are not attributable in any appreciable measure to flows of official aid. On the other hand, the ratio of aid to GDP is generally quite high in sub-Saharan countries, but more foreign aid has not resulted in increased per-capita GDP in the region.