It’s a question that has often crossed my mind: do donations from wealthy individuals or rich countries truly help alleviate poverty meaningfully?
Historical evidence suggests that this is a complex issue worth exploring. While well-intentioned aid programs can offer immediate relief to address immediate needs, their long-term impact on sustainable growth is often debatable.
The Impact of Short-Term Relief
Let’s consider the scenario of short-term relief. Suppose a charitable organization provides food supplies to a community in need. On the surface, this seems beneficial. People who were going to spend their limited income, say $100, on food can now redirect that money toward other needs and the aggregate demand goes up. So this kind of welfare scheme is, in nature, inflationary unless there is increasing in aggregate supply. In economics, when there is a demand for a good that exceeds its supply, the price of the good goes up. Inflation occurs when aggregate demand exceeds aggregate supply.
The Limitations of Aid and Sustainable Growth
The effectiveness of foreign aid has been questioned for its inability to foster sustainable long-term growth. According to a 2023 Official Development Assistance (ODA) report, $223.7 billion in global aid was distributed, yet significant poverty reduction was not always evident in the recipient countries. While aid can provide immediate relief, it often fails to build the necessary economic and institutional frameworks for sustained growth.
A crucial element for economic growth lies in improving access to capital and developing markets through sound governmental policies. Evidence from countries such as South Korea and Singapore shows that targeted investments in infrastructure, education, and technology alongside supportive policies can propel nations out of poverty. In fact, South Korea’s GDP per capita rose from $158 in 1960 to over $34,998 today. Initially, South Korea boosted public and private investment. In the 1970s, it shifted to an industrial policy that encouraged domestic firms to adopt foreign technology and advanced production methods. This success created a demand for skilled professionals. The government increased budgets and set targets for public universities to develop these skills. Similarly, Countries like Poland and Chile followed similar paths, the report says. Poland boosted productivity by adopting Western European technologies.
Can Aid and Market Solutions Coexist?
There’s no doubt that the desire to help is genuine. Yet, despite decades of aid, poverty persists in many parts of the world. Are we not being generous enough, or are the solutions found beyond traditional aid? The answer may lie in balancing aid with strategies that encourage local markets and governments to take charge of economic growth.
For example, in Rwanda, a blend of international aid and market-driven policies has shown promise. The country has seen impressive economic resilience, with an average GDP growth rate of 7.4% between 2000 and 2020, according to the World Bank, pulling millions out of extreme poverty. This success is attributed to the government’s focus on healthcare, expanding private sector engagement, strengthening human capital, and enhancing agricultural resilience, which is called aggregate supply. There is enough evidence that the growth of 1% GDP will bring 2-3 million people out of poverty because of the agglomeration effect, which will foster employment generation, but not always.
The Path Forward
While foreign aid should not be entirely dismissed, it must be part of a more comprehensive approach that includes:
- Investing in aggregate supply: Enhancing sectors such as healthcare, technology, education, structural reform, and infrastructure to boost both short-term and long-term supply. Short-term measures might include lowering taxes and reducing interest rates to stimulate economic activity.
- Policies focused on market-driven growth: policies must be focused on building infrastructures, encouraging trade locally and access to global markets.
- Adapting to modern education needs: Pushing universities to build, adapting to emerging needs in the market, and more practical-based exams in building the skilled labour force, Government roles in investing in or favouring policies in investing in Human Capital could lead to the creation of ample opportunities within its borders.
As history has shown, even the poorest nations can prosper with the right policies and improved access to capital. Aid should complement, not replace, strategies that promote sustainable economic development.
In conclusion, while short-term relief can provide immediate benefits, sustainable poverty alleviation depends on policies that empower local economies to thrive independently. Donations can be impactful, but their ultimate success hinges on how they are used and integrated into broader, growth-oriented strategies.
References
https://www.bbc.com/news/articles/c87r7kp55e3o