A Broader View of Aid

THE SPRING meetings of the World Bank and the International Monetary Fund convene here this weekend against a background of a small boom in the aid business. Official development assistance came to $79 billion in 2004, up about a tenth in two years after adjustments for inflation and the decline of the dollar. This greater generosity is welcome, especially because recent increases in foreign assistance only partially reverse its steep decline, measured as a share of donors' gross domestic product, during the 1990s. But there is one legitimate worry about the proposed extra generosity. And there is one simple way to address it.

The worry is that the aid will be wasted. Some poor countries are in a Catch-22: They are poor because they lack skilled people; lacking skilled people, they cannot administer aid programs effectively. Generously financed aid experiments, such as the Gates Foundation's HIV-AIDS program in Botswana, show that even when money is plentiful, progress can be hard because health workers are few. Training more health workers is not a certain solution, because many may emigrate to Europe or the United States, where their skills are in demand and salaries are much higher. Moreover, aid flows tend to drive up the exchange rate for poor countries, harming exporters who represent the best long-term route out of poverty.

Proponents of aid reply, correctly, that aid works despite these risks. In countries with reasonably good economic policies, the lack of skilled personnel slows progress but doesn't block it. Aid drives exchange rates higher but also brings better roads, schools and an improved supply of electricity, offsetting a strong currency by boosting exporters' competitiveness. Although there probably is a ceiling to the quantity of aid that can be usefully disbursed, current aid volumes are a long way from it.

Yet the proponents of aid could make another argument, too. Assistance for the poorest nations does not have to take the form of projects in those countries, though that has to be a central component. As Jagdish Bhagwati of Columbia University argues in a recent paper, assistance can also take the form of research in rich or middle-income nations -- to find new drugs for tropical diseases such as malaria, to develop new seeds that could spur agricultural gains, and so on. If foreign assistance is defined this way, there are virtually no problems of "absorptive capacity" -- and, given the destabilizing misery that afflicts four-fifths of the world's people, no excuse for not increasing aid exponentially.

Some of this out-of-country aid happens already. For example, aid money finances malaria research by the Indian pharmaceutical company Ranbaxy; if Ranbaxy is successful, the poorest parts of Africa will benefit. But this model could be scaled up substantially. Rich governments are already considering an idea to sign commitments to purchase vaccines for AIDS or malaria if they are invented, thus sharpening pharmaceutical firms' incentives to invest in these products. This approach protects intellectual property, harnesses the talents of the private sector and costs nothing unless a vaccine is developed. Why not start there?