Does Foreign Aid Increase Growth?
We review the controversial question, does foreign aid increase growth? We revisit theories that subject foreign aid might be effective such as big push models and also models which are less optimistic such as the Solow model. We then look at the empirical evidence on foreign aid.
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There are different forms of official foreign aid such as tecnical assistance, knowledge transfer, capacity development etc., so talking about monetary aid is just one part of the puzzle. If we take the Solow model, we could also assume that foreign aid can move a country towards the steady state and not just beyond the steady state.
There are a curious and mostly unknown story of foreign aid who was extremely successful in Chile.. In the early 70s the multinational of communications ITT was involved in an illegal attempt against the late president Salvador Allende, funding actions to avoid he take office, this eas revealed and caused a big scandal. After the military coup, in 1976, ITT offered fund a non profit organization to promote and open new markets for no traditional exportations, they called it "Fundacion Chile" and opened Fundación Chile-an agency designed to develop firms in new areas, with the assistance of former best executives from ITT they opened offices in several key cities in USA, Europe and Asia. The success was huge, they "invented" the salmon industry that still give tens of thousands of jobs in south of Chile, agro-industrial and several other extremely successful business. Fundación Chile was the driving force under the so-called "milagro exportador chileno". In 1990 was transfered to the government and since then has never made one single useful thing, not even one. The key was the quality and experience of ex executives from the multinational, when they leave, Fundación Chile turned into another useless office of government
Many plans to support small business in my country are build under the assumption that their main problem is the lack of capital, and focus in give them a "seed capital" who -theoretically- will give them the big push needed. Most those programs end in failure because is a mis-diagnosis: it is not lack of capital but lack of productivity, expertise, capacity to sell and many other factors much more important than the big push of capital. Maybe analogous reasons explain why the foreign aid is so little effective for poor countries. It is not all about the money but about ingenuity, willing to work, perseverance and other qualities who are not for granted