How foreign aid can help the poor--and why it doesn't.(Advertisement)

People who think foreign aid ought to be used to help end poverty complain that it has too many strings attached. That strings are attached is true; the problem is not too many strings but rather that the wrong strings are attached to end poverty.

Most aid reflects a deal between leaders in rich, democratic countries and leaders in poor, despotic countries. Autocrats need money to keep core supporters--the military, key bureaucrats, close family members--in line, and democrats need policy concessions that help with reelection. Since few voters care much about foreign policy, these are marginal effects and so small amounts are spent on aid.

A natural opportunity exists for deals between democrats and autocrats. The latter don't need successful policies to stay in office, so they can agree to policies their citizens don't like in exchange for money to sustain them in power. Just consider Hosni Mubarak's agreement for Egypt to live in peace with Israel. In fact, autocrats like Mubarak must maintain their citizenry's dislike for policy concessions they grant. If the policy could be enforced without aid, there would be no reason to continue to pay. Democratic leaders cannot easily buy incumbency; they must deliver policies their constituents like. Thus, the main string attached to foreign aid deals is money for policy. That is a winning situation for leaders in donor and recipient countries and is pretty good for donor citizens too. But it is bad for ordinary citizens in the recipient country. Their welfare is sold for aid.

No wonder aid does little to raise incomes, improve health or education, or do the myriad other things well-intentioned people would like aid to do. How might these problems be corrected? There are four steps to ...