What was it about the Cold War (and its end) that had such a big impact on foreign aid effectiveness? Why did this change happen?
Foreign aid sent for reason X actually makes condition X better in that country
Debate over the effectiveness of foreign aid (effectiveness being “foreign aid sent for reason X actually makes condition X better in that country”), the Cold War has become an important variable.
How effective is foreign aid?
Foreign aid is controversial in development economics. Three distinct camps may be distinguish ed:
One believes that official assistance is ineffective, and has also harmed poor countries throughout the years.
This views official aid as creating dependency, fostering corruption, and encouraging currency overvaluation (Easterly 2014 and Moyo 2010). It also prevents countries from taking advantage of the opportunities provided by the global economy.
Another camp believes that aid levels have been too low, and that large increases would help reduce poverty.
This camp, however, believes we need a rethinking on the way in which aid is provided (Sachs 2009 and Stiglitz 2002). In particular, specific interventions, such as anti-malaria programmes, should be emphasised.
The third camp is less vocal, and includes authors such as Collier (2007), who has emphasised the role of a number of ‘traps’ in perpetuating destitution, and Banerjee and Duflo (2011) who argue that the use of ‘randomised control trials’ may help devise effective and specific aid programmes in the war against poverty and underdevelopment.
These schools of thought have historical precedents.
Foreign aid policies from a historical perspective
Foreign aid is a relatively new concept in economics. The classics – Smith, Ricardo, and Stuart Mill, for example – didn’t address the subject in any significant way. If anything, classical economists thought that the colonies would catch up – and even surpass – the home country quite rapidly. Additionally, in Chapter VII of The Wealth of Nations, Adam Smith provides a detailed discussion on the “causes of the prosperity of the new colonies.”