Why Has the West Given Up on Aid?

If there was a time to be excited about economic development, it was the mid-2000s. Reasons for optimism were many, and compelling.

There was the 2005 Gleneagles Summit that set an explicit target for international development assistance by G8 nations (0.7 percent of national income); celebrity campaigns by Bono and Bob Geldof to cancel the debt of developing countries; and programs such as PEPFAR—President Bush’s Emergency Plan for AIDS Relief (PEPFAR)—that has since saved millions of lives by making antiretroviral treatments available to poor countries. In trade negotiations, the “Doha Development Round” had just got underway, with its aim of integrating the world’s poorest nations into the global economy.

Today, much of the enthusiasm is gone. In real terms, aid budgets have flatlined. Politicians and the public across the West have turned inward, pre-occupied with domestic concerns. In Africa, Latin America and parts of Asia, China has filled the resulting soft power vacuum with loans and infrastructure projects. Even among development practitioners, the focus on eradicating extreme poverty and promoting economic growth has been eclipsed by a plethora of other concerns–think climate change, or gender equality.

The interest in economic development in the mid-2000s mirrored an extraordinary transformation of large parts of previously poor regions of the world. In 1990, over a third of the world population, or two billion people, was living in extreme poverty, then defined by an income of less $1.25 per day. By 2005, that proportion fell to one fifth, or 1.4 billion, driven mostly by the economic rise of China and other Asian nations.

The mid-2000s were also a period of fascinating intellectual ferment. “Aid skeptics,” such as New York University economist William Easterly, provided a helpful corrective to earlier top-down visions of economic development, driven by technocrats, rigid planning, and big government programs. And no, the alternative to old “big-push” models of development was not some orthodoxy about unregulated markets. Rather, economists and policy practitioners were starting to see development through lenses that emphasized the primacy of institutions, the rule of law, and politics.

Around that time, Western aid agencies and multilateral organizations were also internalizing that foreign aid should not consist of throwing good money after bad. Rather, the proper method was to relax political constraints to economic growth by improving governance, curbing corruption, managing revenue from natural resources, securing central bank independence, and promoting regional economic integration.

Along many other initiatives, the World Bank’s “Doing Business” project, started in 2002, epitomized the institutions-first approach by providing a simple metric of costs faced by firms and entrepreneurs when starting a business, winding it down, hiring and firing workers, accessing finance, or seeking construction permits. Moving up in the eponymous ranking became a point of pride among reformers seeking to attract foreign investment. Left-wing activists worried about a putative race to the bottom, yet the actual competition was an overwhelmingly virtuous one.

Take Mauritius for an example, ranked thirteenth in the world on the final edition of the Doing Business report in 2019 (more on the survey shortly). Following two decades of reforms and strong economic growth, it enjoys a real per capita income of over $23,000 (comparable to Bulgaria), while its corruption levels are lower than Greece’s or Slovakia’s, according to Transparency International’s Corruption Perception Index.

To be sure, retrospective optimism is misplaced. There was a lot to criticize about the “development industrial complex” of the mid-2000s, including its groupthink, bureaucratic nature, lack of accountability, and the negative unintended consequences of aid programs in institutionally weak environments. However, even the flawed development policies of the past are preferable to no policies at all.

Not only can development assistance be an instrument for good around the world, it is also an important instrument of soft power. As the United States, its allies, and its multilateral institutions have stopped catering to the needs of developing countries—financing, expertise, or trade opportunities—such countries are turning to other, less benign actors. “Before the United States and its allies opened their eyes, the once insular China had reached out and established its presence on every continent,” Daniel F. Runde warns in his new book on development and soft power, The American Imperative. “Now I feel I must raise the alarm.”

Several factors have contributed to a decline of America’s and the West’s relative clout in the developing world. Foreign aid budget is the easiest one to cut in times of economic trouble. As a result, only a handful of Western European, mostly Nordic, meet the 0.7-percent target set at the Gleneagles Summit—the U.S. foreign assistance budget, meanwhile, amounts to a puny 0.2 percent of its GDP. The UK closed its government department dedicated to international development in 2020, merging it with the Foreign Office. And, of course, not only has the “Doha Round” reached a dead end, but advanced economies around the world have seen a return of protectionism.

Of course, growth in poorer economies around the world has not come to a halt. Today, just 8 percent of the world’s population, or 685 million, live in absolute poverty, now understood as earning less than $1.90 a day. Research into the effectiveness of different policy interventions has seen extraordinary progress, too, thanks to the use of randomized control trials, ensuring that donors get a bigger bang for the buck. Partnerships with the private sector and creative approaches to financing have become ubiquitous in the “development community,” leveraging scarce public funds with other sources of money and catering to the corporate appetite for “socially responsible” investment.

Yet, the imperative of promoting prosperity in poor countries—arguably one of the most important tasks facing humankind—has been displaced in elite conversations by other subjects. For one, the West has become far more introverted and pre-occupied with the health of its own political systems. Since at least the Brexit referendum and the election of Donald Trump in 2016, fear of democratic decline at home has overshadowed interest in events beyond one’s own borders—with the possible exception of Russia’s war against Ukraine.

In the “development community” itself, the understanding of the aims of development assistance and related policies has become broader and more convoluted. From environmental sustainability and concerns over climate change to “mainstreaming gender” (an International Monetary Fund turn of phrase), it is hard to avoid the impression that the focus on economic development is not as laser-sharp as it could be.

Consider the Millennium Development Goals (MDGs) of 2000, which included targets for outcomes related to health, gender equality, and sustainability. The eight MDGs had the virtue of being clear and linked to measurable metrics that could be assessed by any layperson—unlike their seventeen successors, the Sustainable Development Goals (SDGs), which were adopted by the United Nations in 2015 and since then, have been informing decisions and strategies taken by donors, multilateral bureaucracies, and NGOs alike. There is something for everyone in SDGs—from “responsible consumption,” through “sustainable cities” to “peace and justice”—while the tools for evaluating progress have grown considerably more opaque.

A policy agenda aimed at improving everything risks improving nothing, particularly if trade-offs between its different components are never articulated. While climate change is a real challenge, the solutions are not always obvious, both in terms of mitigating its impact on vulnerable countries and in terms of facilitating a transition to non-carbon energy technologies. Neither right-wing denialism nor Greta Thunberg-style fundamentalism helps us to navigate through the conflicting imperative of facilitating an economic take-off in the developing world and helping it adopt low-carbon technologies.

The European Investment Bank’s (EIB) refusal to fund natural gas projects in Africa provides an extreme example of the muddled, if not hypocritical, thinking on the subject. For reasons that are understandable particularly in the context of Russia’s aggression, the European Union has approved new natural gas projects at home as eligible for its “green” financing—and yet through the EIB, it denies the benefits of the same source to the much more vulnerable countries on the other side of the Mediterranean.

That refusal has a twofold effect. First, it makes it obviously harder for Europeans to wean themselves off of Russian gas by boosting existing connections to, say, Algeria. Second, it makes Western institutions such as the EIB less relevant in the African context. In its quest for dominance, China is already the most important trading partner for Sub-Saharan African countries and the most important (if unreliable) lender to their public sectors.

More broadly, China has made considerable headway in Asia, the Western Balkans, and even in Latin America—to the point of rendering the collective West almost irrelevant in local political conversations. It is not a coincidence that, with isolated exceptions such as Morocco, the “global South” has essentially decided to sit out the war in Ukraine, staying as far away as possible from sanctions or weapons deliveries.

And while the West has not been looking, autocrats have been on the march through multilateral institutions. The UN Human Rights Council gets most of the bad press in this regard, but what happens within groups such as the International Telecommunications Union or the World Intellectual Property Organization is just as consequential. Not to mention: Could the COVID-19 pandemic have gone differently if the World Health Organization had not been led by a figure beholden to the Chinese regime, who ignored early warnings about the virus from Taiwanese authorities?

To take another example closer to economic development itself, consider the demise of the Doing Business project in 2021, under fire from the left-leaning activist class. Under pressure to stop rewarding countries with light regulatory burdens, the then-president of the World Bank, Jim Yong Kim, authorized a process that made a what had been straightforward data collection and comparison exercise far more complex and dependent on expert judgment, and thus prone to manipulation.

Fast forward to 2021: Both Kim and the World Bank’s former CEO, Kristalina Georgieva (now the managing director of the IMF) were alleged by the Bank’s own investigation to have pressured the report’s authors to award higher scores to China and to Saudi Arabia than they would otherwise have deserved. Setting aside the question of personal accountability, what has the World Bank done in response? It has killed the project, which can only be conducted—due to its size—by a large multinational institution, and not by a think tank or a university.

To be sure, the picture is not altogether depressing. The United States and its allies can still act nimbly and effectively when necessary. Consider the magnitude of ongoing military and non-military assistance to Ukraine, or the creation of COVAX in the wake of the pandemic. Yet there is also a long way to go to “enable a better alternative to all that China is offering to the developing world as a means of preserving the multilateral system that sustains prosperity,” as Runde puts it.

The several billion people who have been lifted from lives in extreme poverty since the 1990s are by no means affluent—a daily income of $5 or $8 still leaves societies vulnerable, not to speak of the “middle-income trap” that awaits them further up the economic ladder. Yet the point is not just to alleviate poverty and to kick-start economic growth in poor countries around the world for their own sake, though both are laudable aims and aligned with U.S. foreign goals. The point is also to use development tools, in addition to the promotion of good governance and economic integrations, as instruments of our soft American power to build coalitions that can help us confront our autocratic adversaries—together.

Taking the logic of the Marshall Plan seriously and applying it to countries that are of vital importance to us today—Ukraine, for instance—would be a good start. Contrary to popular imagination, the Marshall Plan was far too small to make a macroeconomic difference. It also arrived too late in the game to rebuild most of the Western European infrastructure that had been destroyed by the war. However, its range of instruments—including, as Runde notes, “loans to private industry, infrastructure projects, and public health initiatives, but also what might be called soft economic assistance and a form of strategic planning, management advice, and training at all levels”—strengthened political constituencies for democratic capitalism against their Stalinist opponents. Support for non-communist labor movements, for instance, was critical in taming Europe’s political Left and in building a shared commitment to markets, democracy, and an alliance with the United States.

With limited aid budgets, today’s policymakers must also pick and choose, even while enjoying the flexibility needed to navigate complex political environments. Both at the national level and within multilateral institutions, U.S. development assistance ought to focus on narrow, well-defined goals and do so consistently over time—instead of embracing new progressive pet causes at regular intervals. In the case of USAID, Runde notes, that would mean changing the budget rules in ways that are conducive to setting longer-term priorities and planning that would make the United States a reliable partner.

The success of Ukraine’s post-war reconstruction will be an important test case. In principle, the job should be an easy one. Ukraine is not a developing country. Prior to the war, Ukrainians had already made tremendous progress with reforms to clean up their country from corruption, to meet EU standards, and to create an economic and political level playing field—all driven by a desire to join the West. Whether Europeans and Americans can build on that progress and turn Ukraine into the next Poland—or whether Ukraine will spend the decade after the war in a Balkans-style limbo, tempted by Chinese loans, will provide a good indication of whether we can put our development policies back on track at all, or not.

Dalibor Rohac is a senior fellow at the American Enterprise Institute in Washington, D.C. and a contributing editor with the American Purpose. Twitter: @DaliborRohac.

Image: In Herat, Afghanistan, women line up to collect bags of split chick pea, wheat, and cooking oil being distributed by the UN World Food Programme. (United Nations)