Foreign aid policy offers a poor solution to problems of poverty

Whether some aid to some countries has had a positive impact, in any case, is not the issue. The Monterrey meeting should have considered the much more important issue of why the billions of dollars already poured into developing countries have not only failed to promote growth with equity, but also why they have been counterproductive.

Fifty years ago Peter Bauer, Milton Friedman and Harry Johnson argued that aid would be counterproductive. Funds are fungible, meaning that governments can use aid to supplement their own revenues to avoid measures donor 'conditionality' imposes, even while they pretend to abide by it.

This is most clearly evident in more than 30 African countries where aid has paid for armies, tanks and even missiles for civil and international warfare.

But though Mobutu and Mugabe have clearly been kept in power by aid, they are not the main beneficiaries. Middle Eastern and Latin American elites have been assisted by aid to pursue weak or even counterproductive economic policies for 50 years.

The 1997 IMF-led rescue packages for Indonesia, South Korea and Thailand enabled those countries to avoid reforms, continuing to stall their economies, and turning private into public debt that the low income earners of those countries have to repay. All 'structural assistance' lending has been stolen in this way.

Developing country governments have been improving policies to stay in power, there has been some growth, and the numbers of people in poverty have fallen, but progress has been much slower than if countries had been forced to do without aid.

Paradoxically, the more aid is directed toward such targets as poverty alleviation, mass health or literacy programs, the easier it is to steal.

Hard working, honest bureaucrats in developing countries look back longingly to days when aid came for power stations or steelworks. They could check that aid was spent on the hardware specified and report any delinquency to donors.

In the Philippines, the very city in which the Asian Development Bank with its dedication to poverty alleviation is located, aid for social purposes vanishes, with local people often taxed heavily to provide money for a so-called aid project, while elites appropriate the aid funds.

The World Bank last referred to fungibility – the fact that aid money can be diverted – in its 1949-50 Annual Report. It became a dirty word on both sides of 19th Street in Washington where the World Bank and the IMF sit.

Aid takes money from low income earners (who make disproportionately high contributions to taxes) in rich countries to give to high income earners in poor countries.