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Social justice
25 May 2012

The truth about foreign aid

Warning! If you believe that foreign aid is all about ‘taking money from poor people in rich countries to give to rich people in poor countries’, then this post is not for you. If, on the other hand, you’re convinced that the only thing wrong with foreign aid is that there’s not enough of it, then you can run along too.

Right, now that the children are out of the room, let’s focus on the facts.  In particular, what do we know about what works and what doesn’t? The answer to that is very little – unless we actually bother to measure the outcome of different kinds of assistance. This is exactly what a new generation of development economists are doing – and foremost among them is Esther Duflo, whose work is featured in the Economist:

  • “She and her colleagues evaluated a programme in the Indian state of West Bengal, where Bandhan, an Indian microfinance institution, worked with people who lived in extreme penury. They were reckoned to be unable to handle the demands of repaying a loan. Instead, Bandhan gave each of them a small productive asset—a cow, a couple of goats or some chickens.”

There were some additional measures to ensure that the recipients used their animals productively (instead of just eating them), but the donor expectations were modest – no more than a small increase in incomes:

  • “The results were far more dramatic. Well after the financial help and hand-holding had stopped, the families of those who had been randomly chosen… were eating 15% more, earning 20% more each month and skipping fewer meals than people in a comparison group. They were also saving a lot. The effects were so large and persistent that they could not be attributed to the direct effects of the grants: people could not have sold enough milk, eggs or meat to explain the income gains.”

And the explanation for this transformation? Duflo sums it up in one word: ‘hope’. It was actually measured in terms of mental health outcomes, hours worked and willingness to explore new income-generating activities. But, essentially, hope is what it comes down to.

This shouldn’t be surprising. In rich countries, economists use surveys of business optimism all the time – knowing that the confidence that people have in the future has a profound effect on their willingness to work hard, take risks and invest their money.

Whether on the issue of aid for other countries or welfare at home, conservatives are rightly worried about creating dependency. But perhaps a much better way of addressing the same concerns is to ask whether or not the help we give creates hope.


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