Jagdish Bhagwati on Development Aid

In reviewing Dambisa Moyo’s Dead Aid in Foreign Affairs, Jagdish Bhagwati takes an interesting look at the history of development aid. He traces the changes in the way economists viewed aid as well as changes in the tactics used by aid advocates. He also notes that while many development debates are still aid-related, recent large-scale development success stories, such as those in India and China, have a very different relation to development aid—almost none at all.

Bhagwati’s essay focuses on development aid rather than humanitarian aid. Humanitarian aid seeks to alleviate human suffering during crises like war, famine, or natural disaster. Development aid attempts to improve living standards in recipient countries by promoting economic growth.

After WWII, proponents of development aid included economists like Nobelist Gunnar Myrdal and Paul Rosentstein-Rodan “who felt that the principles of progressive taxation—redistribution within nations—ought to be extended across international borders.” At the time, development economists observed that domestic savings rates in less-developed countries were too low to finance adequate levels of investment. Without sufficient investment, less-developed economies would not grow quickly enough to raise per capita incomes and reduce poverty.

This theoretical framework appealed to aid proponents. They saw in it a natural role for aid as fill for the gap between desired investment and actual savings in less-developed countries. In this view, aid from developed countries would increase the rate of economic growth in the recipient country and increase domestic savings rates. Eventually, the reasoning went, recipient countries would grow their way out of aid dependence.

According to Bhagwati, this approach provided an intellectual bulwark for development aid throughout the 1970s. He notes that aid proponents nevertheless found it difficult to convince legislators in developed countries to commit more revenue to non-constituents. To keep aid flows up, proponents had to alter their justifications for aid over time—from cosmopolitan altruism immediately after WWII, to Soviet containment during the height of the Cold War, and enlightened self-interest during the 1970s.

In more recent decades, economists and leaders in both developed and less-developed countries began to understand that development aid was not having its desired effect on economic growth rates. Part of the current debate centers on whether past shortcomings stem from insufficient levels of aid or the fact that aid is simply not an effective way to generate growth. Naturally, many aid proponents fall on the ‘more aid’ side of this debate. As Bhagwati points out, the tactics used to generate aid have become even more inventive, and now include savvy marketing and celebrity advocates.

For Bhagwati, aid is not dead, but it is not a means to growth in the world’s poorest countries either. He believes that aid has been ineffective partly because proponents failed to recognize its perverse effect on recipients’ incentives to save and invest:

To learn more about growth, Bhagwati suggests a close look at the development experiences of China and India—places where development aid played a minimal role. In China and India, changes to the rules that governed economic activity, particularly interactions with the rest of the world, were key contributors to growth. Once given the means to work and share ideas with people all over the globe, Chinese and Indian citizens began to achieve for themselves what donors could not have provided through aid.