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.

GETTING DEVELOPMENT RIGHT

The year 2005 has become the year of development. In September, at the UN Millennium Summit meeting of heads of state, in New York, leaders of wealthy nations will emphasize their commitment to deeper debt relief and increased aid programs for developing countries. The Millennium Development Goals, the centerpiece of the conference's program, call for halving the levels of world poverty and hunger by 2015.

The summit will focus on increasing international aid to 0.7 percent of donors' gross national product to finance a doubling of aid transfers to especially needy areas, particularly in Africa. With respect to global trade, efforts will center on the Doha Round of multilateral trade negotiations and opening markets to important exports (such as cotton) from developing countries. The discussions will thus proceed based on two implicit but critical underlying assumptions: that wealthy nations can materially shape development in the poor world and that their efforts to do so should consist largely of providing resources to and trading opportunities for poor countries.

These assumptions ignore key lessons of the last four decades -- and of economic history more generally. Development is something largely determined by poor countries themselves, and outsiders can play only a limited role. Developing countries themselves emphasize this point, but in the rich world it is often forgotten. So too is the fact that financial aid and the further opening of wealthy countries' markets are tools with only a limited ability to trigger growth, especially in the poorest countries. The tremendous amount of energy and political capital expended on these efforts in official circles threatens to crowd out attention to other ways in which rich countries could do less harm and more good. A singular focus on aid and market access at the September 2005 Millennium Summit should not leave other potentially rewarding measures on the back burner.

BOOTSTRAPS

Consider Nicaragua and Vietnam. Both are poor countries with primarily agricultural economies. Both have suffered from long periods of conflict. And both have benefited from substantial foreign aid. But only Vietnam has reduced poverty dramatically and enjoyed steady economic growth (five percent per capita since 1988). Nicaragua has floundered economically, with per capita growth too modest to make a real dent in the number of poor people.

Vietnam faced a U.S. embargo until 1994, and it is still not a member of the World Trade Organization (WTO). Despite these obstacles, it has found markets for its growing exports of coffee and other agricultural products and has successfully begun diversifying into manufacturing as well, especially of textiles. Nicaragua, on the other hand, benefits from preferential access to the lucrative U.S. market and had several billion dollars of its official debt written off in the 1990s. Yet its coffee and clothing export industries have not been able to compete with Vietnam's.

Why has Vietnam outpaced Nicaragua? The answers are internal: history and economic and political institutions have trumped other factors in determining economic success. Access to the U.S. market and the largesse of Western donors have not been powerful enough to overcome Nicaragua's history of social and economic inequality: land and power there have long been concentrated in the hands of a few elites, and the government has failed to invest enough in infrastructure and public welfare.

The experiences of many other developing countries confirm the importance of specific internal factors. Like Vietnam, neither China nor India -- the two emerging superstars of the last quarter century -- has benefited from trade preferences. And neither has received much foreign aid compared to countries in Africa and Central America. But by enacting creative domestic reforms, China and India have prospered, and in both countries poverty has plunged.