Why Nations Fail: The Origins of Power, Prosperity, and Poverty

the United Nations, and NGOs of different ilk recommend as a way of combating poverty around the world. And of course, the cycle of the failure of foreign aid repeats itself over and over again. The idea that rich Western countries should provide large amounts of “developmental aid” in order to solve theproblem of poverty in sub-Saharan Africa, the Caribbean, Central America, and South Asia is based on an incorrect understanding of what causes poverty. Countries such as Afghanistan are poor because of their extractive institutions—which result in lack of property rights, law and order, or well-functioning legal systems and the stifling dominance of national and, more often, local elites over political and economic life. The same institutional problems mean that foreign aid will be ineffective, as it will be plundered and is unlikely to be delivered where it is supposed to go. In the worst-case scenario, it will prop up the regimes that are at the very root of the problems of these societies. If sustained economic growth depends on inclusive institutions, giving aid to regimes presiding over extractive institutions cannot be the solution. This is not to deny that, even beyond humanitarian aid, considerable good comes out of specific aid programs that build schools in areas where none existed before and that pay teachers who would otherwise go unpaid. While much of the aid community that poured into Kabul did little to improve life for ordinary Afghans, there have also been notable successes in building schools, particularly for girls, who were entirely excluded from education under the Taliban and even before.
    One solution—which has recently become more popular, partly based on the recognition that institutions have something to do with prosperity and even the delivery of aid—is to make aid “conditional.” According to this view, continued foreign aid should depend on recipient governments meeting certain conditions—for example, liberalizing markets or moving toward democracy. The George W. Bush administration undertook the biggest step toward this type of conditional aid by starting the Millennium Challenge Accounts, which made future aid payments dependent on quantitative improvements in several dimensions of economic and political development. But the effectiveness of conditional aid appears no better than the unconditional kind. Countries failing to meet these conditions typically receive as much aid as those that do. There is a simple reason: they have a greater need for aid of either the developmental or humanitarian kind. And quite predictably, conditional aid seems to have little effect on a nation’s institutions. After all, it would have been quite surprising forsomebody such as Siaka Stevens in Sierra Leone or Mobutu in the Congo suddenly to start dismantling the extractive institutions on which he depended just for a little more foreign aid. Even in sub-Saharan Africa, where foreign aid is a significant fraction of many governments’ total budget, and even after the Millennium Challenge Accounts, which increased the extent of conditionality, the amount of additional foreign aid that a dictator can obtain by undermining his own power is both small and not worth the risk either to his continued dominance over the country or to his life.
    But all this does not imply that foreign aid, except the humanitarian kind, should cease. Putting an end to foreign aid is impractical and would likely lead to additional human suffering. It is impractical because citizens of many Western nations feel guilt and unease about the economic and humanitarian disasters around the world, and foreign aid makes them believe that something is being done to combat the problems. Even if this something is not very effective, their desire for doing it will continue, and so will foreign aid. The enormous complex of international organizations and NGOs will also ceaselessly demand and mobilize resources to ensure the continuation of the status quo. Also, it would be callous to cut the aid given to the neediest nations. Yes, much of it is wasted. But if out of every dollar given to aid, ten cents makes it to the poorest people in the world, that is ten cents more than they had before to alleviate the most abject poverty, and it might still be better than nothing.
    There are two important lessons here. First, foreign aid is not a very effective means of dealing with the failure of nations around the world today. Far from it.