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January 30, 2006

Why doesn't foreign aid do more to eradicate poverty in the world? And what does it take to successfully overcome poverty? William Easterly, in "Planners vs Searchers in Foreign Aid" (available as a 273KB PDF document), offers his analysis of why foreign aid from wealthy nations fails the world's poor:

The current aid system is not working partly because the rich countries don’t care enough about making aid work for the poor, and are willing to settle for grand utopian Plans that don’t work. It is partly because nobody is actually held accountable for making THIS intervention work in THIS place at THIS time.

In other words, by focusing far too much on development projects that discount the role of individuals in favor of centralized plans, the bureaucrats of foreign aid programs only perpetuate the problems that they've been chartered to solve. Their incentive system only rewards them by continually channeling new aid money into questionable, if not outright wasteful expenditures that often generate little or no benefit to those most in need. In a nutshell, they're not being held accountable for the misuse of funding provided to the poorest nations of the world. Easterly provides a prescription for resolving these inherent deficiencies in foreign aid programs intended to relieve poverty:

(1) Have aid agents individually accountable for individual, feasible areas for action that help poor people lift themselves up.

(2) Let those agents search for what works, based on past experience in their area.

(3) Experiment with the results of the search...

(4) Evaluate, based on feedback from the intended beneficiaries and scientific testing, and learn what works.

(5) Reward success and penalize failure. Get more money to interventions that are working, take money away from interventions that are not working. Each aid agent should explore and specialize further in the direction of what they prove good at doing.

(6) Make sure incentives in (5) are strong enough to do more of what works, then repeat steps (4) on. If action fails, make sure incentives in (5) are strong enough to send the agent back to step (1). If the agent keeps failing, get a new one.

Truly empowering individuals is the key to reducing poverty - neither bureacracy nor bureaucrat, however well-intdend, are capable of doing the job as they lack the incentives to succeed. Easterly concludes:

The main hope for ending poverty is the homegrown development based on the dynamism of individuals and firms in free markets. Shorn of the sweeping Planners’ task of general economic development, aid can achieve much more than it is achieving now to relieve the sufferings of the poor.

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