USA/Africa Dialogue, No. 296: Fighting Global Poverty

THE UNITED NATIONS has a history of proclaiming utopian goals, and the
U.N. report delivered Monday under the leadership of Columbia
University's Jeffrey D. Sachs could be viewed as part of this pattern.
It is subtitled "A Practical Plan to Achieve the Millennium Development
Goals." But many of these goals, adopted at a summit of heads of state
in 2000, are themselves not practicable, despite significant recent
progress. Between 1990 and 2002, the number of people in extreme poverty
declined by 130 million; child mortality rates fell from 88 to 70 deaths
per 1,000 live births; an additional 14 percent of the developing
world's people acquired access to sanitation. But the U.N. goals include
reducing the child mortality rate by two-thirds between 1990 and 2015
and halving the proportion of people without access to sanitation. This
is unrealistic, and the United Nations should stop setting itself up for
failure.
That said, the report rightly calls for a big increase in development
assistance. It says that donors should give at least 0.5 percent of
their gross national product, then scale that up to 0.7 percent by 2015.
For donors taken as a whole, this would imply an immediate doubling in
official development assistance; for the United States, it would mean a
bigger jump, since President Bush's expansion of the U.S. aid budget has
lifted it from 0.1 percent to 0.15 percent of GNP. The report advertises
the quick wins that could be purchased with extra assistance, such as
free distribution of malaria bed nets, the elimination of fees at
schools and health clinics, and a drive to fertilize exhausted soils in
hungry parts of Africa.
In practice, money cannot magically achieve these things; it has to be
managed by the people of developing countries and often by their
governments. It's fair to ask whether extra aid would actually
accomplish its goals or whether it would merely stoke corruption. The
large and inevitably contested economics literature on this question
provides a reassuring answer; the prevailing evidence is that aid does
boost growth and reduce poverty in countries with reasonably good
institutions and policies. A new addition to this literature, by Michael
Clemens, Steven Radelet and Rikhil Bhavnani of the Center for Global
Development in Washington, makes an even stronger claim. The authors
take out categories of aid that should not be expected to boost growth
in the short term (disaster relief on the one hand; funding for
long-term efforts such as environmental protection, education and health
on the other) and then analyze the growth effects of the residual
categories (aid for roads, ports, agriculture and so on). They find that
the sort of aid that might be expected to boost growth actually did so
quite a bit, and not just in countries with strong institutions and good
policies.
So the case for extra aid is solid. It matters a lot, however, how the
money is spent, because bad aid can actually entrench poverty. When aid
flows into a country, it can drive the exchange rate up, harming the
producers who are the only hope of long-term, self-sustaining
development. This risk -- akin to the "Dutch disease" suffered by oil
exporters -- needs to be managed. If the aid is spent on imports such as
insecticide-treated mosquito nets or AIDS medicines, the inflow of
foreign capital is neutralized and the exchange rate will not budge.
Similarly, if aid is spent on projects that boost productivity, this
gain can outweigh the handicap of a stronger currency. In Uganda, for
example, poor roads push up farmers' costs by as much as 40 percent, so
aid for road-building could deliver an enormous boost to cotton and
coffee exporters.
In short, the Dutch-disease trap is only a trap if the aid is spent
badly. That means aid needs to be focused on countries that use it well,
with the caveat that even effective governments can't absorb too much
external assistance. Cross-country analysis suggests that once aid
accounts for more than 20 to 25 percent of gross domestic product, it

often ceases to do good, possibly because flows above that level
encourage officials to focus on their relationships with foreign patrons
rather than feeling accountable to the poor of their own countries. Some
"donor darlings" in Africa are already at or above this danger
threshold. Aid to Ethiopia, Malawi and Rwanda represents about 20
percent of each economy, while the ratio for sub-Saharan Africa as a
whole stands at around 6 percent.
In the past decade or so, much has been learned about how to deliver aid
effectively. Donors should not dictate development programs from afar;
they should support plans that enjoy political legitimacy in each
developing country. Aid should be targeted at a long list of obstacles
to growth; there is no silver bullet. The new U.N. report wisely
endorses this conventional wisdom, while reminding the world that
millions of people can be rescued from hunger and poverty if aid budgets
are boosted. Despite its unfortunate utopian premise, it pushes in the