Probably the most intuitive response to the plight of the bottom billion is for the wealthy to give aid to the poor. Poor people lack resources so let’s give them more resources. The left champions this approach as reparations for colonialism and the right tends to equate aid with welfare for those who won’t do what they need to do improve their lives. As Paul Collier observes in The Bottom Billion, there is a more sane perspective that realizes that it took the west 200 years to transition into prosperity and our aim should be to figure out how to accelerate the process elsewhere. While aid is important, aid alone is generally ineffective. In some cases aid can actually be destructive.
Collier reports that aid is subject to diminishing returns. That means that each additional dollar of aid does slightly less the good than the preceding dollar. At some point each additional dollar is wasted. Economists at the Center for Global Development report that when aid reaches about 16 percent of a country’s GDP, it ceases to be effective. That is not far from where aid is at in much of Africa. Thus, if this analysis is correct, then the much ballyhooed idea of doubling our aid to Africa is not likely to have a significant impact. Countries where governance and polices are already in good shape tend to do much better with the aid they receive but even here excessive aid can actually become counterproductive. Why?
There are few systems of effective accountability in most poor nations. Collier offers a recent example of unrestricted aid received by Chad from the European Union. Chad’s Ministry of Finance set aside money for rural health clinics. Less than 1 percent got to its intended destination. Meanwhile, Chad experienced considerable expansion in its military sector. Any guesses where that money might have come from? Collier estimates that about 11 percent of aid ends up funding military functions in Africa but aid as much as 40 percent of Africa’s military funding comes from aid.
Furthermore, consider a poor nation that is getting government to government aid. Most nations depend on their economic sector for funding government operations. Therefore, there is attentiveness to the countries business sector. When significant portions of a nation’s revenue come from aid, government officials turn their attention toward the source of the aid and neglect their local economy. Aid actually becomes a barrier to developing a growing sustainable economy.
With regard to the Conflict Trap, Collier acknowledges that aid can actually make situations worse. Those who control the government control the aid. Aid becomes a funding source for a patronage system where those with power solidify their control over society. Interestingly, Collier notes that while the Resource Trap tends foster popular rebellions, aid tends to foster coups. The difference is likely due to the fact that with resources you need only to capture control of the resources to win, while with aid you need control over the government.
That said, aid can also help with the Conflict Trap. To the degree that aid works to stimulate economic growth it can counter one of the principle causes of the Conflict Trap, namely a stagnant economy. Unfortunately, Collier’s studies report that the investment is usually not worth the results. He says this is primarily because aid is pumped into contexts of poor governance and weak policies. The big exception is when aid is used for security purposes in postconflict situations. Here the stability created by aid gives a more favorable environment for economic reforms to take root. Collier’s bottom line is that if aid is going to be effective, then it is going to have to be designed for implementation in societies with poor governance and poor policies.
Collier sees aid as ineffective for addressing the Natural Resource Trap, except in cases where a nation is undergoing significant reform efforts. By contrast, Collier believes aid is not only effective but essential for landlocked nations. He argues that there is not fast track for these nations and what these nations need is a sense of stability (even with dependency) until their neighbors improve.
Finally, with the Bad Governance Trap, Collier sees some important roles for aid. Aid must be used as an incentive for developing better governance. It should be conditional on quantifiable accomplishments. Collier writes that, “The key objective of governance conditionality is not to shift power from government to donors but to shift power from government to their own citizens.” (110) He also notes, “We have to accept that there are severe limits to what aid can do to improve governance. But we are not yet at those limits.” (111)
Collier champions aid in the form of skills transfers. Many poor nations are simply without the governance skills that are needed to effectively run governmental and societal institutions. While nations are in transition it makes sense to have skilled outsiders working for a time alongside the officials of poor countries to equip them with the skills they need.
Collier discusses other technical considerations at some length. He notes that aid can have the same detrimental impact to developing exports in poor nations that the Natural Resource Trap has. (i.e., The value of the currency goes up making exports more difficult to sell and excessive revenue from resources/aid diminishes incentives to develop export revenue.) He proposes that some of this effect could be offset by helping the export sector through the improvement of infrastructure at ports.
Wrapping up the chapter on aid, Collier writes: