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Department of Unintended Consequences — Part V August 23, 2007

Posted by federalist in Diplomacy, Economic Policy.
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Arvind Subramanian summarizes research confirming what free-market thinkers have always suspected:

[Foreign] Aid, especially in large amounts, can damage governance and make an economy uncompetitive.

The problem is that development and long-run growth are less about resources than about the environment for generating and sustaining private sector investment. Two key aspects of this environment are decent public institutions or governance — the essential “software” for running a market economy, for creating rule of law and protecting property rights — and incentives that encourage the private sector to export, especially manufactured products.

Giving aid is like looking for the lost key under the lamppost because that is the easiest thing to do. But it is not obviously the most effective way that outsiders can help.

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