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Foreign aid policy offers a poor solution to problems of poverty

By Helen Hughes - posted Monday, 15 April 2002

The aid industry, led by the World Bank, met last month in Monterrey, Mexico, to drum up financial support for international aid institutions. Two years ago 189 countries promised to cut poverty in half, reduce child poverty by two thirds and ensure universal education. The World Bank wants rich countries to increase their aid budgets by $10 billion each year for five years to $100 billion a year to achieve this.

What decent person could possibly object to these humanitarian targets or begrudge such an effort by rich countries? Isn't it mean spirited, even indecent, to question either the targets or the means?

Unfortunately the answer is no. The aid industry has had 50 years to show what it can do. The World Bank has made a considerable effort to persuade donors that aid is effective. The evidence is not there.


The argument that 80 per cent of the World Bank's projects have been successful has correctly been described by William Easterly, who has written as a leading economist at the Bank for many years, as being 'totally subjective and unreliable'.

It is evident that, except in a few economies (Hong Kong, Singapore and Taiwan), standards of living in developing countries have risen far more slowly than economic opportunities allowed.

The World Bank has therefore revived an old argument - aid works in countries that adopt reasonable economic policies.

But the Bank's assessment of reasonable policies is as subjective and unreliable as the evaluation of its projects.

Its glamour country of the moment is China. There is no doubt that opening the door, even only partially, from communism to markets has greatly improved standards of living, at least on the east coast of China.

State-owned firms continue to undermine the hard work and tremendous entrepreneurial spirit of the Chinese people. More than 100 million are admitted to have left the western provinces to scrape a meagre, illegal living in the prospering coastal provinces. Rising protest in the countryside is finding some expression even in the severely restricted press.


Theoretically more than 20 years down the market road, China has no banking and financial system. Its state-owned banks dispense funds to state-owned enterprises. Even the flagship Bank of China is mired in bad debts. The Chinese economy is being run, with high levels of corruption, for the benefit of some 20 million senior Communist Party officials. China is the World Bank's largest borrower.

Is James Wolfensohn seeking billions for its "reasonable" policies? Who is to be the judge of "reasonable"?

The World Bank and the International Monetary Fund have made enough egregiously wrong policy judgements to be disqualified.

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This article was first published in The Australian on 27 March 2002.

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About the Author

Professor Helen Hughes AO is a senior fellow of the Centre for Independent Studies.

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