September 18, 2003

September 18, 2003 | Commentary on Foreign Aid and Development

The Poverty of Nations

On Sept. 23, the World Bank Group and the board of governors of the International Monetary Fund will meet in Dubai to try -- yet again -- to determine "how current international monetary issues should be addressed."

Let's hope they bring some fresh ideas because -- despite a $1.5 billion annual budget, 100-plus offices and more than 10,000 employees -- their current approach isn't working. The World Bank's motto is: "Our dream is a world without poverty." But its assistance has done little or nothing to alleviate poverty and, in many cases, has helped perpetuate the systems that brought the hardship in the first place.

Consider the "accomplishments" of the International Development Association (IDA), the branch of the World Bank Group that lends money to the world's poorest countries. India, its top recipient of aid, has received $28.8 billion since 1961; Kenya, ranked 10th, has received $3.2 billion since 1964. On average, the top 10 recipients of IDA aid have been on this dole for 37 years. What do they have to show for it? Their per capita incomes have climbed from between $117 and $447 in the 1960s to between $124 and $527 today.

Bangladesh, the world's No. 3 recipient of foreign aid and a member of the IDA's top 10, is, coincidentally, also the world's third-poorest country. Why? Transparency International, an organization that spotlights corruption in government, ranks it the world's most corrupt country. The group says Bangladesh's corruption means its gross domestic product is 4.7 percent lower than it otherwise would be.

The pattern of squandered money holds for the top 10 recipients of IMF loans -- Brazil, Turkey, Argentina, México, South Korea, Russia, Indonesia, India, Philippines and Pakistan. This group has received between $3.6 billion (Pakistan) and $53 billion (Brazil) since 1958 (except for Russia, which didn't begin to receive loans until 1992). And now, after four decades of well-intentioned assistance, most of these countries' economies remain repressed and poor.

There are a few exceptions, most notably South Korea, which made significant improvements in enforcing contracts and policing property rights. As a result, its per capita income has climbed from $1,325 in 1960 to more than $14,000 today.

In most cases, though, the assistance hasn't helped. Why? Largely because recipients have failed to address the main causes of their economic ruin -- corruption, repressed economies, weak judicial systems and excessive state ownership of key enterprises.

Every year, The Heritage Foundation and The Wall Street Journal issue an "Index of Economic Freedom." The Index surveys 161 countries and rates each on a 1 to 5 scale, with 1 representing the world's freest economies -- those with low tax rates, transparency in government, reduced red tape and a strong commitment to property rights, among other factors.

In almost every case, countries at the top of the scale, the 1s and 2s, are far wealthier than the 3s, 4s and 5s, indicating a strong correlation between economic freedom and per capita income. It's simple: When governments establish strong courts, strong property rights and strong rule of law, when they lower or eliminate tariffs, make it easy to open businesses, privatize state-owned enterprises and reduce barriers to foreign ownership, incomes rise and economies flourish.

The World Bank and the IMF won't come close to realizing the dream of "a world without poverty" as long as they keep feeding money to countries with repressed economies and weak judicial systems. These factors breed corruption and deter growth. And the aid merely enables the problems to persist. Argentina, for example, recently used IMF funds to pay government debts so it could avoid much-needed reform of its corrupt public sector.

Fortunately, the world has begun to see the folly of bestowing huge financial aid packages on countries without the economic freedom or rule of law to properly take advantage of them.

Last year, at an economic summit in Monterrey, Mexico, President Bush set the tone with his proposal for Millennium Challenge Accounts, which would make U.S. foreign aid contingent on countries reforming their economies and judicial systems. Other experts, such as Allan Meltzer of Carnegie-Mellon University, suggest the World Bank and the IMF change their lending practices so they send funds only after reforms have been made.

If this meeting leads to changes along these lines, it will have been more than worthwhile. If not, that dream of a world without poverty will remain just that -- a dream.

Ana Eiras is a policy analyst in the Center for International Trade and Economics at The Heritage Foundation.

About the Author

Ana I. Eiras Senior Policy Analyst on International Economics
Center for Trade and Economics (CTE)

Related Issues: Foreign Aid and Development