Aid cannot make poor countries rich

When, just over a month ago, Donald Trump froze funding for the agency through which America doles out most of its aid, Mr Trump’s decision is an extreme example of a broader trend. On February 25th Sir Keir Starmer chopped Britain’s aid budget from 0.5% to 0.3% of gross national income to spend more on defence. France, the most generous Western donor after America, will this year reduce aid by 35%. Germany is considering cuts, too. Polling indicates broad domestic support for these decisions. Most big-name economists, including at the IMF and the World Bank, still insist on the importance of development spending—that intended to make countries richer—but even this consensus is fraying: some influential development economists now question how much good such spending really does. Could something better emerge from the mess?

But by halting USAID Mr Trump has also paralysed a much larger system dedicated to boosting economic growth. Development spending accounts for almost three-quarters of all aid. It most often subsidises favoured industries, frequently funds infrastructure construction and sometimes pays the salaries of teachers.

Development agencies were first established to support newly independent colonies. Inspired by the Marshall Plan, which rebuilt post-war Europe with American money, President John F. Kennedy set up USAID in 1961. The promise was that a richer world would be both better for the worst-off and friendlier to the countries financing its growth.

Things did not get going. From 2014 to 2024, the world’s 78 poorest economies grew more slowly than in the decade to 1970, when aid was first emerging. This is perhaps unsurprising, given earlier studies. In 2004 William Easterly of New York University and co-authors found that, from 1970 to 1997, aid was just as likely to shrink the world’s poorest economies as to help them grow. A year later the World Bank produced a post mortem on two decades of development aid, poring over the history of its recipients. The researchers concluded that its grants and loans did not move the needle on growth. In 2019 the IMF reached a similar conclusion.  Each generation of development spending has failed in its own way.  Health spending has had some real successes.

What lies behind this failure? Aid organisations are often criticised for wasting money on bureaucracy. In reality, they face a more fundamental problem: they have no idea how to encourage economic growth. The theory behind most Western aid has been staunchly liberal (in the British sense) for decades. Officials hope to build a private sector that can export to global markets, schools capable of furnishing firms with workers and infrastructure that will attract investment. Recipients are encouraged to dismantle regulation that stands in the way of free markets and to curtail unnecessary spending.

Yet it is hard to hand out enormous sums without turning poor countries into miniature command economies. Development projects mostly attempt to build entire industries, such as dairy farming or fisheries, from scratch. Disbursal conditions can have a faintly Soviet air.

Many problems are similar to those that plague industrial policy in rich countries, not least when picking winners. Western aid officials often want to prevent local politicians, who control crucial industries, from profiting as a result of their projects, meaning they select obscure sectors for tax breaks, credit and subsidies. With few investors willing to stump up capital, and little interest from local politicians, the businesses duly flop.

Recipient countries have created entire bureaucracies devoted to planning, securing and documenting aid.  This makes any cuts to development spending, no matter how inefficient, a nightmare. National leaders protest that they will have to reduce spending on clinics or schools, or resist loosening a currency peg. Indeed, adroit politicians must both work with donors, so as to keep services running, and dodge the difficult reforms they seek, so as not to upset voters. The governments of Egypt, Kenya and Pakistan all find themselves caught in this pattern, with politicians punished when they fail to keep both sides happy. 

Moreover, it is not just governments that are warped by aid. In many countries, everything from the banking system to import permits is designed to accommodate donors’ needs. Embryonic industries that are not favoured by aid officials barely stand a chance.

The next generation of aid is likely to be even more strategic, and less concerned with saving lives.

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