Does too much aid lead countries to become aid dependent? Clearly this is a possibility, and one that some aid critics believe is an inevitability. But I wouldn't say that aid is necessarily habit forming. The key issue is whether the aid is sustainable—in other words, whether the recipient country is taking the necessary steps to wean itself off aid over the longer term. And that means private sector development, without which governments will never have a tax base to replace development aid.
The World Bank recently released a new set of IDA at Work stories, and the success story of Rwanda's recovery is instructive. Private sector development has been part and parcel of the overall strategy of recovery that IDA has supported, including the development of an export promotion agency, reductions in red tape, and on-going privatization programs for coffee and tea companies and commercial banks. And in a country that is still heavily dependent on agricultural products, a real private sector development approach required one more thing:
IDA’s response to the 2008 food crisis financed by a special emergency grant...resulted in the country’s first fertilizer auction and voucher system, promoting private sector distribution. The program resulted in (i) a complete replacement of public with private distribution of fertilizer, improving access, particularly for food crops; and (ii) the vouchering of 26 percent of auctioned fertilizer to about 46,000 food farmers, most of whom gained access to fertilizer for the first time. Food production increased significantly in 2008, contributing both to growth and food availability per capita.
I'd suggest that those who are looking for development success stories should pay close attention to whether aid programs contain the kind of private sector development components that will make it possible for a country to kick the habit when it's ready.
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