Is Foreign Aid to African Countries Counter-Productive?

I have often been mystified by "calibration" models that draw policy conclusions based on little more than what seems like manufactured data. In a recent publication, my office neighbour, Elizabeth Caucutt (and co-author Krishna Kumar), shows that calibration models, if anything, show how unhelpful foreign aid has been in many/most African countries. What is more, they do so using calibration models!

Africa: Is Aid an Answer?

Abstract
We address the poverty trap rationale for aid to Africa. We calibrate models that embody typical explanations for stagnation: coordination failures, ineffective mix of occupational choices and imperfect capital markets, and insufficient human capital accumulation coupled with high fertility. Calibration is ideally suited for this evaluation given the paucity of high-quality data, the high degree of model nonlinearity, and the need for conducting counterfactual policy experiments. We find that calibrations that yield multiple equilibria -- one being prosperity and the other stagnation -- are not particularly robust in capturing the African situation. This tempers optimism about foreign aid typically prescribed based on models of multiplicity. Moreover, conditional on multiplicity, the calibrated models indicate that the cost of policy interventions needed to trigger development in stagnant economies is small. The lack of reforms in Africa, despite the low estimated costs, suggests political hurdles to reform. It is not clear that foreign aid would be able to circumvent these. Taken together, we conclude that the case for foreign aid to Africa is weak.

Let me repeat a point I have made several times before. Economists do not oppose aid to poor countries because we are hard-hearted S.O.B.s; in truth, most of us are just as caring as any bleeding-heart socionomologist. Rather, we oppose aid because it doesn't work. It rewards rent-seeking and a victim mentality, and it traps far too many people in their poverty. A better plan might be to buy off or pension off tonnes of petty bureaucrats and to streamline markets in these economies. But of course that would not be an easy task, given entrenched expectations.

Comments

[Scott]

Somewhat related...here's a great Ted lecture on the issue of Aids in Africa and if pouring money into that cause is effective or not.

http://www.ted.com/index.php/talks/emily_oster_flips_our_thinking_on_aids_in_africa.html

[Milton Recht]

Plus, domestic agriculture subsidies in developed countries hinders African developing countries from establishing a competitive export base.

[Raging Ranter]

It rewards rent-seeking and a victim mentality...

Foreign aid does exactly what most subsidies and many government programs at home do. Awards the rent-seekers and those with official "victim" status.

[Raging Ranter]

Ooops, that first sentence should have been in italics or quotes. Or maybe I'm just a plagarizing SOB.