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Foreign aid and welfare January 23, 2007

Posted by Sharath Rao in economics, india.

Becker and Posner have 2 essays on the idea of foreign aid to developing countries not quite serving the purpose. Becker cites India as an example :

India is my favorite example to illustrate the failure of government foreign aid. From the fifties until the end of the 1980’s more private and government aid went to India than to any other country. Yet during that same time period, India had a very modest growth in per capita income of about 1 percent per year-sometimes resignedly called in those days the “Hindu rate of growth”. I am not claiming that foreign aid was the main source of India’s mediocre performance, but it clearly did not overcome the bad economic policies of its government. In fact, aid may well have encouraged these policies as the India government could always count on foreign aid to help it out of the worst aspects of any mess caused by its restrictions on foreign trade, severe controls over private investment even by Indian companies, and neglect of basic education, roads, and agriculture.

Fortunately, in the early 1990’s, the Indian government recognized that the real cause of its economic problems was not insufficient aid, but its own policies. Reforms at that time include opening up more investments to the private sector, greatly lowering tariffs, quotas, and other barriers to foreign trade, and changes in its thinking about relying on rich countries to help its development. Indeed, India can legitimately claim that now one important obstacle to its growth comes from the very same rich countries which had been important donors because of their import restrictions that hinder the access of Indian farmers and manufacturers to their markets.

I think lots of Indians would agree with that. So many things I read remind of me of this. [ Or read this ]

But Posner gets my points for being such an excellent writer. He also takes a chance to compare the effects of foreign aid to that of welfare payments – dependence on dole – and also explains what is marginal income tax. I wonder how long he took to write such a well-written piece. I look forward to being so good at at least one thing, one subject so that I can author a few well-written pieces on that topic. I think we should consider such a goal worth striving for.

I linked to Posner before.



1. On Bono’s campaign « Epistles - March 7, 2007

[…] See previous post on foreign aid here. […]

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