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
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
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.