... No-Trade, Not Aid.(third world development)(Brief Article)(Statistical Data Included)

For good and ill, foreign aid is back--a weapon in the new war against terror. First comes debt relief for Pakistan, which owes $37 billion. What next? A flood of new development funds for Uzbekistan, Turkmenistan, India and others seems almost inevitable. The funds may be politically essential. But they could become an economic tragedy for the Third World. The reason: official development assistance--a.k.a. foreign aid--does not work. It is a return to the bad old days, when aid-dominated development relentlessly disappointed hopes that the world's poor could ever rise to riches.

We in the West still tend to consider aid a measure of how much nations care about the poor. The United States is constantly belabored as a tightwad, infamously ranking 22d in donations as a percentage of national income. But truth be told, development experts in both the First and Third Worlds threw in the intellectual towel on aid by the end of the 1980s. Their disillusion reflected hard reality. For 40 years, these experts had pumped a trillion dollars' worth of loans and grants into the 120 poorest nations and got precious little for it. Growth everywhere was slow; in some places, per capita incomes even fell. The failures were especially glaring in sub-Saharan Africa, where agricultural output per person is no larger today than in 1960--even though eight of every 10 Africans are farmers. A recent World Bank study showed that countries that stuck with traditional aid and made no effort to fight corruption and promote free markets grew by just 1 percent a year over the past two decades. Countries that adopted at least some reforms grew by 5 percent.

Nations that plunged whole hog into competitive private enterprise have done best of all, of course. Japan and the Pacific tigers were the earliest rags-to-riches models. Greece, Portugal, Chile and Malaysia have climbed aboard the growth train. Turkey and Mexico are mounting the step. Nearly everybody else--including Pakistan and all of South Asia--is inching toward reform, too, even nations that are not yet in the competitive game. Given the record, it's hard to escape another fact: when it comes to economic advancement, the likes of McDonald's, Nike and General Motors, not to mention thousands of other local and international companies, have done more for Third World development than foreign aid could ever hope to do.

Since the 1990s the development game has turned inside out. At the start of the decade foreign aid totaled $49 billion a year and private- investment flows were $6 billion less. By 1998 official ...