Foreign Aid

I don’t know of any country in the world where a bunch of foreigners came and developed the country. I don’t know one: Japan? Korea? No! No country did that. I know about countries that developed on trade and innovation and business.
- Herman Chinery-Hesse

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  • Malik Fal on Aid Delaying Development

    Aid tends to delay the development of business in Africa, modern business. It has kept Africa behind, or Africans behind in terms of getting the confidence they need, the experience they need to take a full part in the global economy, create businesses that compete globally and succeed globally. Aid has distorted markets in Africa. So the sooner, Africa can “graduate” from its dependence on aid, the better.

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  • Robert Woodson on the Poverty Industrial Complex

    There is a poverty industrial complex. You’ve got huge numbers of people who profit off our differences. You see, if you are problem oriented, you can write about the problem, you can lecture about the problem, you can consult on the problem. You can do everything but solve the problem.

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  • President Paul Kagame on Bad Aid vs. Good Aid

    There is bad aid and there is good aid. The bad aid is that one which creates dependencies, as we’ve known for a long time now. But good aid is that which is targeted to create capacities in people so that they are able to live on their own activities.… In the long-term they have to depend on themselves rather than depend on aid.

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  • President Paul Kagame on Dependency

    Aid leads to more aid and more aid and more aid and less independence of the people that are receiving aid.

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  • Kim Tan on Asian Tigers

    Growing up in, in Asia, [I saw] the Asian tiger economies—that thirty, forty years ago had a lower GDP than Uganda or Kenya—transform themselves through enterprise, not through aid, not through philanthropy.

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  • Kim Tan on the Unintended Consequences of Aid

    When we come into a country and provide a whole load of aid in the form of [for instance] grant money that a small country just can’t absorb, that has a whole load of unintended consequences to its economy. Or when we bring in goods that are manufactured here in the West, and unfortunately then that creates a real problem for local manufacturers and producers. It affects them in terms of their economics. So these are some of the unintended consequences.

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  • Carl Schramm on Destructive Foreign Aid

    When we think about the course of development for the last 50 years, we thought the only solution was for rich countries to give money to poor countries. That is the conclusion of Bono, for example, the rock star advances this idea, as do a number of intellectuals. That’s really the position of the United Nations. Now the empirical facts, the quantitative facts, the record of history, actually operates in quite the opposite way. For 50 years, we have seen essentially the suppression of free markets and capitalism as a result of aid and the record is awfully clear that virtually all of this aid supports corruption in the political regimes… Moreover, increasingly we’re understanding that this concept of just flooding a country with aid is actually destructive to the development of creative labor markets.

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  • Carl Schramm on Aid Applying Different Economics

    The most curious part of [aid], and sort of the tragic part of this, is, the rich countries have one form of economy, and they are hell-bent on expressing a different form of economy for poor people. And I think, in many ways, implicitly, the message in our aid program is, that the poor of the world can’t develop to be successful, they can’t be as smart as the rich of the world. It goes to the question of the dignity of the poor. And aid in many regards, while it’s terribly well meaning, the folks who advance this conception are the best of meaning people, but our record in the world is, is absolutely clear; with the best of intentions, we’ve often inflicted the worst of outcomes on unwitting people.

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  • George Ayittey on Empty U.N. Resolutions

    Every decade or so, the United Nations puts together a sort of a gathering and the whole gaggle of Western donors and African government and NGOs, they gather to announce grand initiatives to pull the world’s poorest continent out of its economic miasma. The pledges are made, delegates pat themselves on the back, you know, champagne glasses click, they go home, and then everybody forgets about it. Then another five years there is another conference and another summit.

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  • Ebow Graham on Desiring the Market

    The donors, we are tired of them. All those years, the aid, it has come, come, come. We are still poor… Give us the market; we will come.

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  • Bishop John Rucyahana on Existing vs. Living

    We need only to employ a system, which allows people to live with dignity. We need to be able to stop from existing to living.

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  • Bishop John Rucyahana on Abandoning Aid

    They perpetuate your misery by giving you a loan, make you slave… economic slave, and you also end up paying the raw materials because you are chained by the loan. So it becomes a way of colonizing the economies of the poor nations. But if the African nations today agree together to say, “No more aid. We don’t want aid.” I tell you, they can grow slowly, but they can grow.

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  • Bishop John Rucyahana on Aid vs. Production

    We need to be able to move from aid to production… a sustainable production. Think for a minute and realize this for a moment: Why is it that the policies of the World Bank and IMF and the world markets business eliminate Africa from the World Market?

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  • Bishop John Rucyahana on Perpetuating Dependency

    They want to perpetrate the poor Africans who cannot do it, be able to deal with them. It’s like the money in the powerful nations. They give it to the poor… But these poor, especially where you give money, they are given a system that doesn’t give work. “We give you this money, so continue to give you this money, but if you work, we stop it.” In other words, you create a permanent dependency. And they truly run into that system, and they truly become dependent on the system. And their grandchildren will remember that. That is a chain of economics which Africa should shake off its shoulders.

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  • Michael Fairbanks on Working for the Establishment, Not the Poor

    Aid, and World Bank aid and bi-lateral aid… they create a condition that’s almost the old Soviet-style economics… whenever you have an aid agreement, those consultants come into the country, and they don’t work for the country, they work for the foreign-aid establishment. And so what you find is that the aid establishment severs the sovereign link between the leader of a country and its people. Because you’ve got all these consultants running around doing their thing, purportedly to work for the people, but in reality, their masters are in Washington and Tokyo and London and Paris.

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  • Michael Fairbanks on Master-Slave

    Every time you do aid to Africa, you create that parental relationship. I’m helping you. You should be guided by me because I have a bag of money. The responsibility for your future is actually on me, not on you because I have the resources to develop you. It’s patron-client; it’s master-slave; it’s donor-recipient. It’s all broken.

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  • Michael Fairbanks on the Real Benefactors of Aid

    When you start to think who loses in a world where their locus of responsibility for poor nations’ futures rests on the shoulders of poor nations… who loses in that argument? It’s not First World consumers and taxpayers. They win. They don’t have to pay for it. It’s not poor nations, because they get to do their own strategy, develop their own ability, their own dignity, make their own way for better or for worse. You know who loses in that scenario? Bureaucrats. In the aid system… bureaucrats in the bi-lateral aid system, who, right now, have a lot of status, and high-paying jobs. And they get to fly around. And they get compensated extremely well. Even though sixty percent of the amount of money that the USAID spends in developing countries comes back to the U.S… The people who lose will be… are the ones who currently control the budget.

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  • Michael Fairbanks on Machiavelli

    Machiavelli said, “The reason there will be no change is because the people who stand to lose from change have all the power. And the people who stand to gain from change, have none of the power. Machiavelli was describing the global aid system today.

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  • Herman Chinery-Hesse on No Country Has Developed on Aid

    I have never heard of a country that developed on aid… I know about countries that developed on trade and innovation and business. I don’t know of any country that got so much aid that it suddenly became a first world country. I’ve never heard of such a country. So the, the track is wrong, that track ends to nowhere, it leads to nowhere.

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  • Marc Coleman on Foreign Aid in Ireland

    It’s undeniable that aid did play a role in the transition of the Irish economy from 1993 to 2007, in the form of structural funds and cohesion funds, where the aid was very, very well-targeted at building infrastructure. But the assistance, let’s call it, that preceded that, the common agricultural policy, it certainly put a lot of money into the economy, but it’s not necessarily clear that that money went in the right direction. And, we come back to the main qualification of globalization. You can use the same qualification for aid. If you’re going to bring aid into your economy, make very, very sure that you are targeting it at the right sectors. Because if you don’t do that, it can actually be extremely damaging. It can create a culture of dependency on handouts or, even worse, it can create a culture of corruption, whereby proximity to political decision-making and access to the funding that comes from aid can lead to the money going in the wrong direction. And that can stifle free enterprise, and it can stifle competitiveness, because it incentivizes people to be politically clever, rather than entrepreneurial and productive. I have huge admiration for Bono. He’s one of our biggest exports. And one of the reasons Bono and U2 have been so fantastic for the Irish economy is because they went out in there, into the global free market, and they competed.

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  • Andreas Widmer on Aid vs. Investment

    Consider this: Africa is 12% of the world’s population, yet it receives 29% of all aid in the world, yet only 1.4 percent of foreign direct investment. Africa doesn’t need more aid. Africa needs more investment.

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  • Andreas Widmer on Big Anti-Poverty NGO’s

    What I’ve seen is you basically have these huge organizations, these huge NGOs, coming to Africa in the name of solving poverty. And what ends up happening is that all those multinational corporations that are in the aid business, in essence they are in the poverty business. And like in any other business, if poverty is your business, more poverty is more business…. The World Bank recently made a study where they said something like sixty percent of all the aid money stays in the donor country, because it goes to all of these consultants and people and this and that. Sixty percent of the entire money stays in the country that pledged it in the first place. That is not aid! That is the business of poverty.

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  • Doug Seebeck on Aid Hurting Africa

    A voice from Uganda, Andrew, spoke at the leadership summit last August and he followed a compassion guy on child sponsorship, and he gave a startling message. He said, he said, “Why won’t you let Africa develop like you guys developed?” And he gave a powerful graph. At independence, Africa’s GDP was up here and then aid was down here. And then we all jumped on the bandwagon to help all these new countries and we just poured money in there and you can watch what happened. GDP went down and at the trough, at the bottom of GDP was the peak of foreign aid, and now it’s starting to come down and starting to come up, but he says, ‘That has killed us.’ He said, ‘Please,’ he said, “You see nine hundred million poor people in Africa. We see nine hundred million entrepreneurs.’

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  • Doug Seebeck on Poor’s Frustration with NGOs

    We talk about how many trillions of dollars we’ve put into the poor countries with aid, but you know what… the bulk of that money is paying for workers from the U.S. or other intermediaries to do what we found out the Bengali farmers didn’t need in the first place. And if you listen to the poor, to what they say … they’re sick and tired of another feasibility study, another training class, which makes the NGO feel like they are the ones with the power and to give them the information. What they want is the same opportunity you and I have to succeed.

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  • Doug Seebeck on NGOs Selling Poverty

    NGOs sell poverty. That’s how they stay in business. The NGOs ship this food aid. The United States gives subsidies to its farm industry. Not small farmers, farm industry. They get subsides, so they overproduce. Now the NGOs are shipping this aid, and you’re putting farmers all over the developing world out of business. But you’re also putting the U.S. small farmer out of business. And it gets bigger and bigger, and you’re squeezing out free enterprise. That’s not free enterprise. That’s big government, big corporation welfare.

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  • Eva Muraya on Converting to Trade

    I do not, in today’s day and age, believe that our solutions are embedded in aid. I think that we need to create markets for what entrepreneurs are producing on this continent, we need to address issues of quality, we need to address issues of packaging, we need to address issue of distribution, we need to address issues of brand building, and therein lies the solution that has often been tagged to be aid - we convert that to trade.

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  • Marc Coleman on Aid should assist with the preconditions for wealth

    Aid doesn’t make countries rich.  What aid does do and should do is it assists the creation of the preconditions for wealth ... That is where aid, if properly directed, for example, by an agency like the World Bank, can make a tremendous difference to a country. It won’t make the country wealthy, but it will make its population educated enough and healthy enough to enter the game of global competition. Then, I’m afraid, it’s not up to aid.  Then, it’s up to the native genius ingenuity and hard work of the people of that country. And as Thomas Edison said, “It’s actually five percent inspiration,” in that case, “and ninety-five percent perspiration.”

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Foreign Aid as Government Assistance

The term foreign aid may refer to any form of assistance that crosses national boundaries. In many policy discussions, including the following exposition, the term refers more specifically to government-to-government transfers of funds to developing nations. Such aid is also called official development assistance.

Promoted by celebrities, political leaders, and religious figures around the globe, foreign aid has become a popular—and controversial—subject. Proponents insist that wealthy nations have a moral duty to assist poor countries and must expand aid budgets, while critics argue that such aid is useless at best. Most analysts take up positions somewhere between unqualified approval and complete condemnation, suggesting that foreign aid can be effective in the right circumstances but is fraught with difficulties.


Table of Contents

  • Foreign Aid as Government Assistance
  • The Magnitude and Track Record of Foreign Aid
  • Current Debates on Foreign Aid: Jeffrey Sachs and William Easterly
  • The Drawbacks of Foreign Aid: Peter Bauer
  • Foreign Aid Misdirected
  • Open Trade as Aid
  • Direct Investment as Aid
  • Smart Aid
  • Foreign Aid in the View of the Recipients
  • Foreign Aid in Time of Disaster
  • Foreign Aid, Charity, and Almsgiving
  • Christian Advocacy for Foreign Aid
  • Foreign Aid and the Zero-Sum Game Fallacy

The Magnitude and Track Record of Foreign Aid

The total amount of foreign development aid from official sources over the last fifty years is about $2.3 trillion. About $1 trillion of that has gone to Africa; developed nations now direct roughly $50 billion per year to the continent. Despite this significant outlay, there has been little evidence to suggest that foreign aid has actually stimulated economic development. Botswana, for example, increased its per capita income thirteen fold from 1950 to 2001, while many other countries in the same region experienced static or negative economic growth. There is no difference in the amount of aid to explain this difference. Instead, Botswana’s progress was more likely due to its relatively stable rule of law.

A 2008 paper for the National Bureau of Economic Research corroborates the idea that aid is not a good predictor of economic progress. It found “little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth.”

The difference between the regions of East Asia and sub-Saharan Africa is striking in this respect. Nations such as China and South Korea have developed rapidly since 1970, while most African economies have stagnated. Yet, African countries have received far more aid than China or South Korea.


Current Debates on Foreign Aid: Jeffrey Sachs and William Easterly

Columbia University economist Jeffrey Sachs is one of the foremost proponents of development aid. While he is aware of the abuses it is prone to, he believes that foreign aid is an indispensable tool for freeing developing nations from the “poverty trap.” Without aid, he argues, the poorest nations are unlikely to establish the infrastructure and institutions necessary to reach the first rung of the economic ladder and begin their climb to prosperity.

New York University economist William Easterly is a fierce critic of the aid that Sachs defends. Easterly argues that foreign aid is but the latest chapter in Western imperialism: the citizens of rich nations naively believe that they can, by their superior wealth and know-how, lift poor nations out of their poverty. Self-assured in their good intentions, donor nations are oblivious to the fact that the aid can actually stunt economic growth by perpetuating corruption and bad policy in recipient nations, even as the aid is used to manipulate developing countries in the interest of developed countries and their favored industries.

Although Sachs and Easterly disagree on many points, their work exhibits areas of consensus. For example, Sachs admits that private sector development—not government spending—is the ultimate path to economic progress. Easterly, meanwhile, concedes that government aid likely will continue, and thus he, like Sachs, proposes ways to improve the odds that it is more beneficial than harmful. 


The Drawbacks of Foreign Aid: Peter Bauer

Development economist Peter Bauer (d. 2002) was one of the earliest and most vocal critics of government development aid. He presciently warned wealthy nations of the harmful effects likely to result from a robust policy of development assistance. Bauer identified several negative effects. He argued that aid would prop up dictatorships that might otherwise collapse under the weight of its own incompetence and corruption. He also observed that aid aggravated the conflict between developed and developing countries, with the latter’s dependence actually increasing the sense of division between “haves” and “have-nots.” He further cautioned against the tendency of developed nations to use aid to as a form of imperialism by, for instance, by placing family planning conditions on the distribution of aid. (See Population and Poverty.)

Similarly, Bauer argued that to be both effective and ethical, assistance must encourage rather than inhibit the self-determination of recipient communities. In contrast, government aid tends to be imposed in a top-down fashion. His observation on this score, as much as on the others, has proved discouragingly accurate. Instead of encouraging the rule of law and a culture of entrepreneurship, aid often has fostered harmful dependency. Dambisa Moyo, an economist and a native of Zambia, lamented in 2009 that “no serious efforts have been made to wean Africa off this debilitating drug.”


Foreign Aid Misdirected

One major reason that aid often does not accomplish its intended purpose is that its method of provision permits misapplication. Although unrest, civil wars, and other conflicts are an important contributing factor in the failure of developing economies, foreign aid often supports, unwittingly, the continuation of such strife.  Oxford development economist Peter Collier reports that forty percent of African military spending is financed by aid from developed nations. In 2010, a government audit found that $1 billion of United States aid money to Afghanistan had ended up in the hands of the Taliban; only 10 percent reached the suffering Afghan people whom it was intended to help.

According to corruption watchdog agency Transparency International, Zaire’s President Mobutu Sese Seko (in power from 1965 to 1997) is reputed to have stolen at least $5 billion from the country—this while the nation received billions in foreign aid.

Donor nations have attempted to address these problems, without much success. Placing controls on the way aid is used within recipient countries is often ineffective. The problem is that foreign aid is fungible, meaning that even when recipient governments use aid money to fund acceptable projects, that frees up other government money to be used for less noble causes. Paul Rosenstein-Rodin, a former deputy director of the World Bank Economics Department, expressed the essence of the fungibility problem: “When the World Bank thinks it is financing an electric power station, it is really financing a brothel.”


Open Trade as Aid

There is increasing consensus that developing nations can thrive long term only by participating more fully in the global marketplace. Even among economists such as Sachs who view foreign aid as a necessary spur to economic development, there is recognition that development can best be sustained if developing nations can enter global markets, suggesting that an effective way for wealthy nations to promote development in poor nations is to permit developing nations’ products to compete on a level playing field. Policy measures that prop up prices or otherwise favor domestic producers, such as agricultural subsidies and import tariffs, discriminate against goods produced in the developing world. Opening the markets of developed nations to goods and services from developing nations is an approach that carries with it none of the harmful side effects of corruption and dependency that government-to-government aid entails.

This is another area in which foreign aid can be counterproductive. In a paper for the National Bureau of Economic Research, economists Raghuram G. Rajan and Arvind Subramanian observed that foreign aid inflows raise exchange rates within recipient nations, making exports less competitive and thereby inhibiting the benefits of globalization for developing nations.


Direct Investment as Aid

While African countries are flooded with aid, they suffer from a lack of foreign direct investment (investment from private companies headquartered abroad). The difference between foreign aid and foreign investment is the difference between government projects and private projects. When foreign direct investment is free from the market manipulations that often accompany foreign aid packages to developing countries, market factors rather than political factors dictate the direction of resources. A growing number of development economists are emphasizing what they see as a particularly promising but under-utilized area of foreign direct investment, which is investment in small and medium enterprises, with at least one university study showing that for every dollar invested in an emerging market SME, some $10 is generated in the local economy (See SMEs).  

Standing in the way of foreign investment in many developing nations are unstable legal regimes. (See Rule of Law.) Companies are reluctant to build factories where violence is a constant threat or where the protection of property is weak. If assistance could help to build rule of law, then it could play a positive role in long-term development of local, wealth-generating businesses in emerging markets.


Smart Aid

Paul Collier book The Bottom Billion (2007) documents the persistence of poverty despite decades of significant attention and aid from the developed world. Collier identified various “traps” that keep nations locked in poverty: conflict; over-reliance on natural resources (which prevents development of domestic industry); lack of access to markets due to geographical factors; and bad governance (See Poverty Traps).

In light of these factors, Collier argues for a more sophisticated approach to aid—“smart aid.” His guidelines include: targeting aid to countries with good institutions and policies, promoting reform not by placing preconditions on aid but through investment in the capacity for self-reform, funding basic services only in the most desperately needy places, and targeting aid to prevent armed conflicts.

Collier notes, however, that these guidelines themselves rely on effective implementation by development aid agencies, and yet experience suggests that “people within these agencies will not have incentives to take up these suggestions.” Therefore, the first order of business is “to reconfigure the incentives of workers within the aid agencies themselves.” Whether and how this can be done is thus a critical question related to the feasibility of effective government-to-government aid. 


Foreign Aid in the View of the Recipients

One of the major problems with aid debates is that they take place within donor countries, and yet the voices of the citizens from developing nation citizens are frequently ignored.
In recent years, however, there has been a growing chorus of voices from the developing world speaking out against aid, arguing in some cases that it has delayed rather than promoted development.

Kenyan communications executive Michael Joseph argues that aid has failed because it is not targeted to building private enterprise. “If you look in Kenya—and we've had 40 or 50 years of aid, mostly from the European governments and NGOs—it has made very little long-term impact,” he explains. “If we had put that into investing in factories, building infrastructure, creating jobs, I think we would have a much better impact than what we have today.”


Foreign Aid in Time of Disaster

One question that is often raised is about the use of foreign aid during times of disaster. Even most observers critical of government aid see such aid is an exception to the rule that government assistance is usually ineffective. There are at least two reasons for this exception. First, emergency humanitarian aid is, by definition, desperately needed. People’s lives are in direct and immediate peril. Second, disaster aid is by nature temporary and focused. This fact minimizes many of the dangers associated with normal development aid (e.g., the funding of massive public works projects that become pits of corruption).

Even so, it is true that emergency aid is also subject to some of the same abuses as other development aid. Bureaucratic mismanagement can lead to significant waste, for example. Political considerations rather than merit can dictate where resources are applied. Also, short term emergency aid has a way of stretching out into longer term aid that may impede development in some ways. Nonetheless, in the case of emergency relief, the benefits of aid tend to outweigh the risks.


Foreign Aid, Charity, and Almsgiving

Many people support foreign aid initiatives out of deep concern for the poor, and one can point to foreign aid initiatives that have been beneficial. At the same time, it’s important to distinguish foreign aid from charitable giving and justice for the poor. Charity and almsgiving are central tenets of the Christian faith, and while smart foreign aid can have an independent value, the call to charity and almsgiving cannot be answered by government-to-government transfers or by lobbying a government to spend more GDP on foreign aid. 

Some proponents of aid argue that assistance would be more effective if government aid money was funneled through private organizations. This arrangement certainly holds advantages over government-to-government aid. Private non-profit organizations often have closer relationships with local communities and can recognize need and target assistance more effectively. Non-profits are less able and less likely to channel development funds to political allies rather than the intended recipients.

But there are dangers here, too. Charitable organizations are often driven by religious or altruistic motives, but when government money is a large source of their funding, their motives can be compromised as the organization becomes a political player. Non-profits that are accountable to private donors rather than to government officials are less likely to be tied by cumbersome bureaucratic regulations and political pressures and more able to adapt to particular, local circumstances.

Nor is purely private charity without pitfalls. Churches and communities in recipient nations can become dependent on charitable giving even as governments and institutions become dependent on foreign aid (See Charitable Giving).

Nonetheless, because of its significant advantages over government aid, private charity is normally to be preferred. When in certain cases charity and assistance are needed, we need to encourage more giving of private money through churches and other voluntary organizations where there is greater accountability and more personal involvement. This approach conforms to the principle of subsidiarity and requires deeper solidarity since citizens will be using their own money to help voluntarily. (See Subsidiarity)


Christian Advocacy for Foreign Aid

Some religious organizations argue that opposing government-to-government foreign aid measures is uncaring or even immoral. They argue that there is a moral responsibility for rich nations to help the poor through aid. Even among those who agree that the moral responsibility to help the poor is central to the Gospel message, the question remains as to whether foreign aid is the best means to accomplish this end.


Foreign Aid and the Zero-Sum Game Fallacy

Many of the policies that dominate development discussions are based on an economic fallacy called the zero-sum game. This basic misunderstanding leads to serious problems. The zero-sum fallacy sees the world economy as a largely static amount of goods and resources—a fixed pie, if you will. The implication is that poor countries are poor because rich countries took such big pieces of the pie. In this view, it is naturally a requirement of justice for wealthy nations to transfer resources to poorer nations. This view tends to eclipse the fact that humans can create new wealth given that right conditions, and that poor countries that have been able to enter the global market through trade have tended to grow much faster than poor countries that are isolated from the global market. The zero-sum fallacy also tends to encourage population control thinking, since it tends to view humans as primarily consumers of the fixed pie of wealth rather than as creatures capable of creating new resources.


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