Aid and development: Will it work this time?

For fifty years, proponents of ‘aid’ have argued that poor countries are poor because they lack the funds to invest in the infrastructure that would enable economic activity to take place, which in turn means that they are unable to attract investment. Originally used to justify mega-projects, such as roads and dams, these arguments continue today in modified form, ostensibly justifying investments in schools and hospitals.

Donors have justified aid with various theories and political motivations, but its core justification, the ‘gap theory’, is fundamentally flawed. This theory assumes that poor countries are trapped in a vicious cycle of poverty because they are unable to save and hence have insufficient capital to invest in growth-promoting, productivity-enhancing activities. But there simply is no evidence that this savings/investment ‘gap’ exists in practice.

As a result, aid has failed to ‘fill the gap’. Instead, it has, over the past fifty years, largely been counterproductive: it has crowded out private sector investments, undermined democracy, and enabled despots to continue with oppressive policies, perpetuating poverty.