Foreign aid cannot really redound to benefit its target, the poor in poor countries. This is because foreign aid is government to government. Politicians and bureaucrats of rich countries give foreign aid money to politicians and bureaucrats of poor countries, either through bilateral (like USAID, OECF, CIDA, etc.) or multilateral (like ADB and WB) arrangement.
So if any of the party is corrupt, ie, the giver and/or the recipient government, then effectiveness of foreign aid is immediately reduced, if not evaporated.
A friend from ADB posted in one of my Yahoo! Groups, “ADB creating an army of entrepreneurs”, in reference to an ADB article in its website, “Chasing buses, chasing profits”, http://www.adb.org/Documents/Feature-Stories/2010/phi-chasing-buses-profits.asp
I jokingly replied, “ADB creating an army of bureaucrats.”
Notice that countries and economies that do not rely much on foreign aid are more developed: Singapore, Hong Kong, Taiwan, S. Korea, etc. It is capitalism, the desire for more and bigger profit -- by producing better quality goods and services in the face of endless competition -- that drives their people to work more, to produce more, and not rely on foreign loans on a government to government arrangement.
Compare them with countries that until now keep begging for more foreign aid -- Philippines, Indonesia, Vietnam, Sri Lanka, Bangladesh, Pakistan, India, etc. If the governance culture in a country is poor, that is, very corrupt, then foreign aid won't help much, for the reason given at the opening paragraph.
Someone suggested that it is not capitalism per se, but "industrialization driven by government direction... savings directed to industrial investments" that caused the development of Korea and other Asian “dragons”.
But which poor country government that remains addicted to foreign aid is not doing that?
Marcos did that, Suharto did that, the government of India, Pakistan, Bangladesh, etc. did that.
Dynamic capitalism means that a would-be entrepreneur and job creator is saying, "I want to put up a small food shop (or barber shop). I am willing to slug it out with a dozen other food shops (or barber shops) in the community. Government, do not give me one dozen or more business registration papers, do not make me wait 2 months or more to start my business, do not harass me with multiple taxes and fees when I start my business.”
So what do small entrepreneurs ask from government so that they can produce certain goods and services to society, so they can employ 1 or more workers in their shop? Nothing actually, except protection from robbers and extortionists, perhaps. So if VAT and income tax are enough to pay for government protection against extortionists and thieves, it is easier for them to pay. The problem is when government itself is the extortionist -- from a wayward policeman to city or municipal hall business permit section personnel to BIR guys.
The bottom line for an economy's rapid economic growth is dynamic capitalism and the promulgation of the rule of law. Not more foreign aid, not more business permits and bureaucracies.
When a country's law says "No stealing; Prosecution will be harsh", that's it. Governments should implement and promulgate it without exception to anyone, from the President down to the poor. Then people will have peace of mind to work even until midnight if they want, and go home past midnight, knowing that there are no robbers and extortionists to harass them and their family members in their house in a non-gated subdivision. Then there will be higher productivity and higher economic growth.
In the case of the foreign aid bodies like WB, ADB, UN, IMF, USAID, etc., they perfectly know that there are robberies and stealing going on in many governments of poor countries where they are lending money to. Meaning there is breakdown of the rule of law. And yet they keep lending, year after year, decade after decade, today and a century from now. See Africa in particular, about $10 billion/year of foreign aid for the past 50+ years, and poverty and underdevelopment persists with impunity.
About entrepreneurship, even from the ADB story of "creating an army of entrepreneurs" of ambulant vendors in Davao, it is safe to say that almost 100 percent of those micro-entrepreneurs that the ADB story proudly bannered, are informal. Meaning, they are not registered fully with a maze of government business registration requirements. From barangay clearance to municipal or city health and sanitation permit to Mayor’s permit to the BIR, DTI, SSS, etc. They maybe registered with the municipal or city hall but strictly speaking, they also need to register with the BIR and DTI. Single proprietorship like ambulant vending and “tiangge-tiangge” requires registration with DTI.
Allow capitalism, free market capitalism, coupled with the promulgation of the rule of law by the government, to unleash people’s energy, which will hasten fast economic growth. Let the people put up all sorts of shops they think they can handle. If they make bad decision, they lose their money. Fine, they accept that bankruptcy is part of capitalism. If they succeed, fine, they expect that expansion is also part of capitalism. Government business bureaucracies -- and foreign aid loans -- should keep out. One or two business registration form and payment should be enough.
Entrepreneurship and job creation is not a crime. Hence, it should not be penalized with a maze of business registration and compliance bureaucracies.
Foreign Aid 5: Failure in East Timor, May 31, 2006
Foreign Aid 6: IMF is Engineerable and Abolishable, September 05, 2006
Foreign Aid 7: Wolfowitzoellickation of the WB, May 30, 2007
Foreign Aid 8: Abolish the IMF, August 08, 2007
Foreign Aid 9: WB Wants Hike in Gasoline Excise Tax, July 10, 2009