Foreign Aid Is No Path To Prosperity

Our analysis of the drivers of increasing material wealth highlights the crucial role of invested capital in producing longterm economic growth: wealth that is turned into productive capital assets, such as factories, offices, and machine tools, can create more wealth. This finding, one of the most longestablished principles in economic analysis, provided the original rationale for foreign development aid. It was thought that poor countries, which by definition had little material wealth to invest, would benefit greatly if they received transfers of wealth from the rich world.

Unfortunately, things did not go as planned -- as the graph below illustrates, the amount of wealth that was transferred to poor countries bears little relationship to the amount of capital these countries actually invested. Some of these funds were lost to corruption, some were spent on consumption of goods rather than investment, and some were tied to services provided by rich country firms and therefore simply went back to the rich countries (so-called “boomerang aid”). In the final analysis, the data point to the conclusion that poor countries hoping to obtain capital must do so through their own initiative: by attracting flight capital back home, by capitalising repatriated earnings of their overseas workforces, by establishing sound property rights for the poor, and by attracting foreign investment. As the data show, dependence on foreign aid is no path to prosperity.