Four “Poverty Traps” Are Part of Conundrum for Foreign Aid

Jim Kolbe
Content Type
Journal Article
European Affairs
Issue Number
Publication Date
Winter / Spring 2008
The European Institute
Muddled thinking is dangerous for international development. For one thing, cost benefit arguments neglect the high price exacted by failed states. For another, as noted in an important new book, The Bottom Billion, some countries are trapped by special circumstances that need special remedies.
Foreign Policy, Development, Emerging Markets, Humanitarian Aid, International Trade and Finance
Political Geography
United States, Europe
Europe celebrated the 60th anniversary of the Marshall Plan last year. It was a celebration worth having. The Marshall Plan represented a stunning departure of foreign policy in all modern history. Never before had a conquering nation reached out its hand in such beneficence to its vanquished foe. For that matter, never before had foreign assistance been attempted or even contemplated on such a scale. And one would be hard pressed to find any other aid program before or since that so thoroughly met the overarching strategic goals of a nation - which in this case was jump-starting European economies and shoring-up western Europe as a bulwark against the growing expansionist threat of the Soviet Union. The Marshall Plan's success may not be beyond questioning, but it is widely accepted on both sides of the Atlantic as a success. In fact, it is so widely accepted that attempts to emulate or replicate it have been undertaken not only by its sponsor, the United States, but by the very countries that it was designed to benefit. Europe, once it returned to prosperity, along with another defeated foe, Japan, became champions of providing assistance to poor countries around the globe. To date, more than a trillion dollars has been transferred from western democracies to impoverished countries and people in an effort to lift them by the bootstraps and propel them toward their own prosperity as the Marshall Plan did for Europe. Of course, it hasn't worked out quite the same way. One cannot find in Africa comparable successes to match the dramatic results demonstrated by Europe in the intervening years since World War II. At least partly as a consequence of the relative failure of foreign assistance, a whole new school of doubting Thomas's and advocates of alternative approaches has opened a debate on the future of development assistance - its scope and size, its shape, even its very existence. To a large degree, this debate is possible only because the Cold War ended and the perceived Soviet threat evaporated. During the Cold War era, aid was seen largely through a narrow prism: does it assist U.S. and NATO objectives of containing the Soviet threat and diminishing the possibility of governments in developing countries aligning themselves with the USSR? Post-Cold War, aid-giving governments were at the very least required to rethink the objectives of foreign assistance, leading many policy makers and policy wonks to question its value altogether. Some have argued that the rich and developed countries (we'll call them the "donor" countries) simply aren't doing enough in foreign assistance. This school of thought led to the G-8 enshrinement of the goal for donor countries to spend no less than seven-tenths of one percent of gross domestic product on foreign assistance to the poorer, less developed countries - a figure which leaves all but a small group of European, mostly Nordic, countries embarrassingly far below the "acceptable" minimum. Jeffrey Sachs has been the leading champion of this line of thinking, but he has been joined by many others in the development community - NGOs, private philanthropic groups, academicians and numerous government ministers and parliamentarians - in calling for increases in aid dollars. In its simplest form, this argument suggests that a much larger amount of foreign assistance, delivered in its current form, will succeed in lifting the impoverished countries over the line of poverty and into a world of prosperity enjoyed by the countries that dispense the assistance. More recently, a fierce counterattack has been launched against the "more is better" school of foreign assistance. This group argues that most foreign assistance is a demonstrable failure, and that by almost any measure - growth, education and health statistics, per capita income, improved governance and democracy - poorer countries are no better or worse off despite the massive transfer of aid dollars over the past half century. Yes, they concede, many countries have dramatically advanced from poverty to relative prosperity, most notably countries in Asia such as South Korea, Thailand, or Singapore. But, these countries were not major beneficiaries of foreign assistance in terms of aid as a percentage of their income and their advancement has been largely due to their own government's policies rather than policies designed by outsiders. William Easterly, in his book, The White Man's Burden, articulates many of these arguments in a very cogent fashion. These arguments, of course, find fertile soil with some policy makers, especially in the United States Congress, who oppose either increased foreign assistance spending or any aid whatsoever. The problem with the "naysayer" argument is that it leaves unanswered the question of what prescription should be written - if not assistance - for the poor countries of the world? Of course, a purist, libertarian, argument can be advanced that says countries must take responsibility for their own fate, adopt laws and build institutions that encourage investment and trade, and so extricate themselves from the poverty trap. For many, however, this argument is either morally unacceptable or ignores the important linkage of poverty and failed states to the security interests of the donor countries. Is there not some alternative to these polar opposite positions, some way to think about foreign assistance other than simply opening the spigot to pour more good money after bad, or alternatively, to just recite its demonstrable failures and shut the spigot off entirely? Is there some middle ground or at least a different prism through which we might examine the issues of aid and development? One such approach is suggested by Paul Collier in his recent book, The Bottom Billion. An economist by training and former director of development research at The World Bank, Collier offers a refreshingly pragmatic approach to the poverty dilemma, but one that is also bolstered by rigorous analysis. His subtitle - Why the Poorest Countries Are Failing and What Can Be Done About It - suggests that he has not only thought about the problem itself, but its solutions as well. In many ways, Collier's analysis of the problem is more intriguing than his proposed solutions. Why, Collier asks at the outset, have some countries in the last 60 years succeeded in raising themselves from poverty while others have not only failed, but actually regressed? Why is the gap between most of the world and the "bottom billion" actually widening, instead of narrowing, as one might expect with the advance of globalization and economic development? Collier posits four "traps" for the poorest of the poor. The first is conflict. Collier argues that it is not the fact that there is political conflict, something inherent in the very act of governing, but the form the conflict takes - prolonged civil wars and swift coup d'états, both of which can be costly and repetitive. The second trap is overdependence on a natural resource. Some countries have successfully avoided this trap, but for most the discovery and exploitation of a single resource - oil, diamonds, opium - becomes a tool for corrupt politicians to divert the resources to a handful of favored rulers while the economy suffers from "Dutch disease" - the excessive rise of the national currency, which undermines export competitiveness for manufactured products. A third trap Collier identifies is what he describes as the bad luck of geography - being a landlocked country, surrounded by countries equally poor, and lacking the infrastructure to move products to and from ports, but able to import and export violence with neighboring states. In other words, "neighbors matter." The final trap in Collier's list is the impact of bad governance over a period of time. Transparency International has named Chad and Bangladesh as the two most corrupt societies on the globe. And yet, having the dubious distinction of being designated "most corrupt" has not prevented Bangladesh from adopting reasonable, growth and investment-oriented economic policies. Conversely, the same designation has not encouraged Chad to do the same. The result is a marked divergence in economic growth in these two countries, suggesting that different elements of governance can have differing effects on a country's success in lifting itself from poverty. Is there any way out of these traps for a stalled or failed state? The question is one of great importance to G-8 nations and the world. Collier calculates the average time a failed state remains in that status at 59 years and the cumulative costs of a failed state, to itself and its neighbors, to be about $100 billion compared to an estimated cost of $7 billion for a successful, well-timed, non-military intervention. Collier sets out four tools, or policy instruments, that can be helpful in finding a way forward for the countries and people trapped in the bottom billion. The first is aid. Often it is applied in exactly the wrong way - inundating a country at the end of a conflict or civil war. Applied so early in the recovery process, such aid actually has a negative effect on growth. What is needed immediately is technical assistance - feet on the ground, people helping build the elemental skills needed for a successful society, skills which a failed state usually lacks utterly. Ironically, such assistance is often dismissed by the aid community as a waste because it doesn't get directly to the suffering people in a failed state. In today's Iraq-infected political climate, military intervention is not likely to win many converts as a tool for rescuing failed states. And yet, as Collier points out, there have been successful interventions - notably in Sierra Leone - that helped stabilize the region, while the opposite could be said of Somalia or Rwanda where the failure to intervene in a timely manner had costly and tragic consequences. A third item Collier suggests for the tool kit is greater use of international laws and charters to frame and guide proper conduct and regulation for new democracies and to help bind them to good government practices. And the final one is trade policy - its inclusion is not surprising to those who advocate for freer trade policies, but dismaying to those who believe such trade only worsens the condition of people in poor countries. Opposition to open trading policies masked by a thin veneer of concern for the well-being of the poor may be popular with many, but it is still wrong. The trade policies of both the rich and the poor are to blame for the current state of trade in the bottom billion. U.S. and European agricultural subsidies on a massive scale distort the market for commodities which sub-Saharan African countries might otherwise be able to profitably export. It is a supreme irony that European sugar protection drains from the South African economy almost precisely the same amount as Europe transfers each year to South Africa in the form of assistance. Meanwhile, the U.S. collects more in tariffs from the exports of Bangladesh and Cambodia than it gets from French and UK exports, even though the value of the poor countries exports is less than one tenth that of the two wealthy countries! But the trade policies of poor countries are usually no less damaging. Although the U.S. and Europe are likely to give these countries a pass for their restrictive tariffs, arguing that they are of little consequence for the U.S. and Europe, the truth is that they play a major role in limiting development. High trade barriers in poor countries often are a way for a corrupt government to grant the favor of a protected market to a handful of cronies, while collecting the customs duties spawns an army of corruptible customs collectors. It is no wonder that when reformers come to power in these countries, lowering tariffs is usually one of the first changes made. Donor countries ought to care about policies that keep the bottom billion in poverty - even if they are not their own policies. Debating the effectiveness of aid and assistance has become the "flavor of the month" in the development community. But, saying that doesn't diminish the value or importance of the debate. Collier has added significant intellectual capital to the discussion about priorities and programs. The challenge now is to carry it to the next level, to have policy makers on both sides of the Atlantic actually agree on the objectives of foreign assistance, to agree on a standard set of definitions and measurements, to share the lessons learned with each other, and to apply assistance in a manner that actually begins to shrink the bottom billion of poor people. Then, perhaps when we celebrate the 75th anniversary of the Marshall Plan, we will have a truly fitting celebration, one that acknowledges that its dream of prosperity and democracy has come true not just for the people of Europe, but for millions of others around the globe. Jim Kolbe is currently a Senior Transatlantic Fellow at the German Marshall Fund of the United States. He served for 22 years in the U.S. House of Representatives.