How to Help Poor Countries

Nancy Birdsall, Dani Rodrik, and Arvind Subramanian

From Foreign Affairs, July/August 2005

Summary:  Increasing aid and market access for poor countries makes sense but will not do that much good. Wealthy nations should also push other measures that could be far more rewarding, such as giving the poor more control over economic policy, financing new development-friendly technologies, and opening labor markets.

Nancy Birdsall is President of the Center for Global Development in Washington, D.C. Dani Rodrik is Professor of International Political Economy at Harvard's John F. Kennedy School of Government. Arvind Subramanian is Division Chief in the Research Department of the International Monetary Fund. The views expressed here are their own and not those of their respective institutions.

There are many reasons for the mixed performance of foreign assistance. Donors themselves cause many of the problems. Recipient countries can be overwhelmed by the multiplicity of donors pursuing many, even inconsistent, objectives, disbursing aid to innumerable projects and imposing a plethora of conditions on its use. These factors contribute to rather than offset a poor country's lack of institutional capacity. On top of that, there is the natural volatility and uncertainty of foreign aid, which make it difficult for recipient governments to plan their budgets. For more than a decade, the bureaucracies of donor states and organizations have been unable, despite good intentions and constant resolve, to change the political incentives and constraints that impede the reform of their aid-delivery apparatuses.

Probably more important, however, are institutional deficiencies on the recipients' side. Aid is only as good as the ability of a recipient's economy and government to use it prudently and productively. Thus, the fundamental dilemma: countries most in need of aid are often those least able to use it well. That sets limits on the extent to which large infusions of foreign funds can make a difference.

The greatest example of the success of aid -- the Marshall Plan -- illustrates the importance of homegrown institutional competence. Because the institutions and capabilities of the United Kingdom, France, and Germany survived the war to a large extent, even their war-ravaged economies were able to exploit fully the potential of financial assistance.

This simple point addresses the view that aid is a sine qua non for African development on account of the continent's bad geography and favorable environment for diseases. A country's growth may in fact be hampered by its unsuitability for agriculture, its isolated geography, and its susceptibility to malaria and other tropical diseases. In such cases, it might seem appropriate that donors give more. But adverse geography does not fundamentally alter the fact that the effectiveness of assistance depends on the institutions of the recipient country. At its best, aid has helped nations rebuild after conflicts and assisted in achieving specific objectives. But its role in creating and sustaining key institutions and long-term economic health has been much less clear.

SINS OF COMMISSION

To help developing countries help themselves, wealthy nations must begin to lift the burdens they impose on the poor. Currently, the developed world uses international trade agreements to impose costly and onerous obligations on poor countries. The most egregious example has been the WTO's intellectual property agreement, the Trade-Related Aspects of Intellectual Property Rights (TRIPS). Despite recent efforts to cushion its impact on the poorest countries, TRIPS will make the prices of essential medicines significantly greater, and this at a time when poor countries are being ravaged by one of the worst health epidemics ever known -- HIV/AIDS. The price increase means that money from the citizens of poor countries will be transferred directly to wealthy pharmaceutical companies. The resulting revenue, although a significant amount of money for the poor countries, will be a relatively small part of the companies' net total profits -- hardly enough to induce extra research and development.

An international community that presides over TRIPS and similar agreements forfeits any claim to being development-friendly. This must change: the rich countries cannot just amend TRIPS; they must abolish it altogether. A simple comparison makes the point clear: major industrial countries such as Italy, Japan, and Switzerland adopted pharmaceuticals patent protection when their per capita income was about $20,000; developing countries will adopt it at income levels of $500 per capita, in the case of the poorest, and $2,000-4,000 for the middle-income countries. By these standards, forcing developing countries to abide by TRIPS is about 50-100 years premature.

But costly obligations are not restricted to TRIPS. Trade agreements between the United States and countries such as Jordan, Morocco, and Vietnam have required the latter to adhere to intellectual property regulations that go beyond TRIPS, further increasing the patent holder's monopoly and restricting access to medicines. Other trade agreements have called for developing countries to open their capital accounts immediately, despite recent experience showing that doing so exposes the countries to the volatility of international capital flows.

Just as crucial for empowering poor countries is providing them with enough space to craft their own economic policy. During the last decade, economists have come to understand that economic development is at once easier and harder than previously thought. Many countries have reduced poverty and generated significant economic growth without the deep, comprehensive structural reform that has been the centerpiece for development institutions over the last quarter century. That is the good news. The bad news is that there are few general economic-policy standards that seem to apply to every country -- except for such basic principles as macroeconomic stability, outward orientation, accountable government, and market-based incentives. The hard part is moving beyond these broad objectives and figuring out the appropriate specific policies for each developing country's particular needs. The many poor countries that have made progress on the general standards can better craft their own economic course if they have adequate room for policy autonomy and experimentation. The idea may sound radical, but would China have been better off implementing a garden-variety World Bank structural adjustment program in 1978 instead of its own brand of heterodox gradualism?