Easy vs. effective aid - don't give in to distractions

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Angelinajolie_2When Ms. Jolie appears on the screen calling for more aid, she not only distracts our attention toward her obviously good looks, she may also be distracting our attention away from the search for more effective solutions to helping the poorest around the world.

Arvind Subramanian explains that many celebrities "aren't up on the economic literature":

Aid, especially in large amounts, can damage governance and make an economy uncompetitive. […] When foreign resources come pouring in and are spent domestically, wages tend to rise, especially for those in scarce supply such as managers, supervisors and entrepreneurs. Factories that export will find themselves becoming uncompetitive and go out of business.

In research with Raghuram Rajan, we find that in countries that received more aid, exportable industries systematically underperformed.

In a recent op-ed Nicholas Kristof argues that though not all aid projects work, we should not cut aid funding. For Mr. Subramanian research is the way out:

mobilizing more money to provide incentives for greater research and development devoted to addressing poor country health and agriculture problems (the green revolution in Asia was made possible by research on high-yielding varieties of wheat, and Africa hasn't had a similar revolution of its own) […].

Giving aid is like looking for the lost key under the lamppost because that is the easiest thing to do.

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