Reading David Dollar's article ("Eyes Wide Open," Spring 2003) made me feel as if I were in the company of an alert old English sheepdog. Like so many establishment economists, Dollar was trying to see and indeed thought he was seeing everything in his purview, but actually he was seeing only a small fraction of what was staring him straight in the face.
What Dollar did see is that foreign aid over the past two decades largely failed to make a dent in the growing income differentials between the world's wealthiest and poorest states. His only clear exceptions were China and India. While correct, Dollar neglected to observe that rapidly growing China and India, from the beginning, received exceptionally low levels of per capita foreign aid compared to the world's other poor countries. Thus, while Dollar saw the past lack of success of foreign aid to poor countries, he displayed a sheepdog-like blind-spot regarding the possible perversity of such aid.
Dollar has, of course, sometimes thought about this possible perversity. This undoubtable fact raises a second similarity between old English sheepdogs and economists. Again because the eyes of a typical old English sheepdog are covered by fur, an outside observer has to rely on quite indirect evidence to determine what the dog is really thinking. Is the dog feeling aggressive or benevolent? The fact that Dollar, a leading World Bank economist, is ignoring existing evidence on the perverse nature of foreign aid to the world's poorest countries preliminarily shows that his underlying, doubtlessly subconscious, intentions are more self-serving than society-serving.
Dollar is suggesting either advice-accompanied unconditional grants or a new, more custom-tailored form of conditional grants. Unconditional grants to very poor countries are a disaster. The supported leaders rationally pocket such grants and work to make their countries poorer in order to qualify for even larger grants in the future. Moreover, increasing the profit to leadership in these countries increases the temptation to acquire leadership and thereby increases the extent of civil war and repression, the costs of which are perversely born by the intended beneficiaries.
Dollar's proposal for new, more custom-tailored, conditionality stems from his assertion that modern studies suggest the importance of institutions (including local institutional persistence and regional particularism) and financial assistance for constructing social overhead capital. However, influential development economists writing 20 years ago largely shared the same view. Although Dollar is appropriately negative concerning the establishment-economics-inspired conditionality that has increasingly dominated the past two decades, he displays no understanding of the reasons behind its economically disastrous nature. His argument reveals no substantial insight that economists did not have 20 years ago. There is simply no wisdom in sending developing countries back to their dangerous sheepdog tailors for a more customized fit. It would be far more promising to change tailors altogether.
One salient fact that establishment economists have traditionally overlooked regarding economic development is their own failure to generate a Pareto-relevant explanation of what makes some economies so much poorer than others. A market failure that Dollar emphasizes is "weak property rights." This traditionally emphasized variable apparently means high transaction costs. But then why have high-legal-cost countries like Great Britain and the United States been the world's richest two countries over the past two centuries? …