Global Policy Forum

by Sebastian Mallaby

People say that global poverty's a shame, but there's just no way to fix it. People say they'd welcome bigger aid programs, but aid is mostly wasted. Here is why these pessimists are utterly mistaken.

The doomsters say that pro-market policy reforms, supported by aid donors and especially by the World Bank, have been a failure. But two decades of reform have actually succeeded. Since 1980 the number of people living on less than $1 a day has fallen by about 200 million, even as the world's population has risen by 1.6 billion. That is a stunning achievement given that the ranks of the poor previously had swollen steadily at least since 1820.

The doomsters say that however much you throw aid at schools or health clinics, you never see much progress. But the adult illiteracy rate in the poor world has halved during the past three decades, and life expectancy has grown by 20 years during the past four. Again, a stunning achievement. The previous 20-year jump in longevity had taken since the Stone Age.

The doomsters say that even if some developing countries did well, there's no evidence that aid was the reason. But economists can measure aid's role by analyzing aid levels, growth rates and other variables across countries. The World Bank calculates that $1 billion in extra aid lifts more than 250,000 people above the $1-a-day line.

The doomsters say that even if aid has some effect, it's unproductive by the standards of advanced economies. Well, the World Bank's private-sector arm, which lends to businesses in the developing world, reports that the median project in its portfolio between 1998 and 2000 earned a post-tax return on capital of 10 percent. That compares well with the productivity of many multinational companies. At Alcoa, for example, the post-tax return on capital has averaged 9.6 percent during the past half-decade.

The doomsters say that the World Bank's private-sector arm is not representative of the aid industry. Well, public-sector aid can be even more productive. A new road, for example, can generate higher wages for workers who can get to better jobs and higher revenues for companies that can reach broader markets. The World Bank's independent assessors report that the median urban-development project in the past five years notched up an (untaxed) return on capital of 19 percent.

Or look at the returns from health projects. The eradication of West African river blindness has prevented an estimated 600,000 cases of the disease and added 5 million years of productive labor to the region's economy. A simple project in China to distribute iodized salt has reduced iodine deficiency in the target group from 13 percent to 3 percent, meaning average gains of 10 points to 15 points in children's IQ levels. In a recent study for the World Health Organization, Harvard's Jeffrey Sachs reports that eliminating high malaria prevalence boosts economic growth by a full percentage point.

If they know their history, the doomsters shouldn't be surprised. Britain's 19th-century economic takeoff was made possible by improved sanitation and diets; the early development of the American South was spurred by the elimination of hookworm and its attendant anemia, known as the "germ of laziness." Tucked away in the recent Sachs report, a table divides the poor countries of 1965 into groups, each reflecting the quality of public health as indicated by rates of infant mortality. During the ensuing three decades, countries with high mortality rates at the outset experienced almost no growth. Those with low mortality rates saw GDP per head rise by 3.7 percent annually.

The fact that billions of people remain poor does not mean that development has failed, because the numbers of poor are declining. The fact that Africa has stagnated during the past three decades does not mean that aid projects there are doomed; it means that successes have been balanced out by wars and AIDS and declining prices for commodities. And the fact that Africa has not done better may have something to do with the doomsters' own influence: Aid flows to the region declined steadily in the 1990s.

The truth is that aid does work, and aid could accomplish more if only there were more of it. That is why the United Nations, the World Bank and the British government are pushing to double aid. And that is why the United States should sign on to this campaign when President Bush attends this month's development summit in Monterrey, Mexico.

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