One of the poorest nations in the world, Malawi, depends on help to operate its capital. The World Bank constructed Lilongwe in the 1970s, and its straight avenues are lined with government buildings, development organizations, and charitable organizations. Foreign officials are housed in informal communities, which are identified by the flag of their national sponsor at the entrance. Policymakers have divided labor over the past fifty years: Europe supports agriculture, Japan supports energy initiatives, Britain finances schools, and Ireland fosters a cottage industry of justice advocates. Doors at the health ministry, which is funded by Chinese, are labeled by the donor rather than the department.
USAID was there as well. However, many projects halted overnight when Donald Trump placed a financial freeze on the organization that distributes the majority of America’s help just over a month ago. Later, a waiver permitted the continuation of “life-saving” initiatives.
The choice made by Mr. Trump is an extreme illustration of a larger pattern. In order to increase defense spending, Sir Keir Starmer reduced Britain’s assistance budget from 0.5% to 0.3% of gross national income on February 25. This year, France—the second-largest Western donor after the United States—will cut funding by 35%. Germany is also thinking about making cutbacks. According to polls, these decisions are widely supported at home. The majority of well-known economists, including those at the World Bank and IMF, continue to emphasize the value of development investment, which is meant to increase a nation’s wealth, but even this consensus is eroding: several prominent development economists increasingly doubt the true benefits of such spending. Could it lead to something better?
First, think about the existing use of funds. Last year, wealthy nations spent $256 billion, or 0.4% of GDP, on foreign aid. This amount is sufficient to provide sub-Saharan African governments an amount equal to their entire tax receipts. The original purpose of development organizations was to aid recently independent colonies. USAID was established in 1961 by President John F. Kennedy, who was influenced by the Marshall Plan, which used American funds to rebuild post-war Europe. It was promised that a wealthier world would benefit the poorest people and be more hospitable to the nations funding its development. Aid economists viewed developing nations as poor nations in need of further government funding.
However, despite the aid, development didn’t start. The 78 poorest economies in the world expanded more slowly between 2014 and 2024 than they did during the decade leading up to 1970, when help began becoming available. Considering previous research, this may not be shocking. Between 1970 and 1997, aid was equally likely to cause the world’s weakest economies to contract than to expand, according to research conducted in 2004 by William Easterly of New York University and his colleagues. A year later, the World Bank combed through the beneficiaries’ histories to prepare a post mortem on two decades of development funding. The researchers came to the conclusion that its loans and grants had no effect on growth. The IMF came to a similar conclusion in 2019. As Charles Kenny of the Centre for Global Development, a think-tank, notes: “There is no country that has really grown from aid!”
Source: Economist
