Foreign aid is often described as generosity made visible: money, expertise and manpower crossing borders in the name of helping the world’s poor. When a drought hits, foreign aid can look like salvation to the poor. Planes land with grain, hospitals receive new equipment and medication, and donors publish charts and data showing millions of lives ‘saved’. Yet in many of the poorest countries, the arrival of aid coincides with a troubling story – of governments answering more readily to foreign donors than to their own citizens, of projects that begin with fanfare but ultimately end in abandonment, and of communities that learn to navigate agencies rather than hold their state accountable. Aid can entrench the very inequalities it claims to be alleviating, and thus it appears as a confusing mix of lifeline and leash, rather than as clean moral good or harm.

This essay argues that foreign aid neither simply helps nor hurts poor people; it magnifies the institutions and power structure it enters. The same dollar of aid can improve lives, exacerbate tyranny, or very simply sustain the status quo. The decisive variable in determining whether foreign aid helps or hurts poor people should not be the volume of aid but the political and institutional landscape into which the aid is poured. A good institution therefore, in the development economics literature, is one that enforces property rights, constrains the arbitrary powers of government, provides rule of law, and aligns the incentive of political actors with the welfare of society – creating conditions under which both private investment and public resource allocation can be productive to achieve their intended purposes. It is under this environment that foreign aid will ‘help’ rather than ’hurt’ poor people.

Foreign aid is effectively defined by Britannica as ‘the transfer of capital, goods, or services from a country or international organisation for the benefit of the recipient country or its population’. This definition frames aid as an instrument whose intended and declared purpose is to assist countries in need and improve the welfare of their populations, rather than to inflict harm. Yet the language of ’benefit’ already leads to a controversial assumption: that the transfer of resources from rich states or organisations to poorer ones typically advances the interests of the latter’s citizens. Burnside and Dollar (2000) found that ‘aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies’ but has little effect when the country is plagued with ’poor policies’. This finding carries a quiet irony: it states that aid only benefits countries that are already well governed and have an effective institution. However, the countries most in need of development assistance are indeed those mired in institutional failure, corruption, and misgovernance. Thus, those who need aid most actually are those who are least equipped to convert aid into ‘benefits’.

Nowhere is this more visible than in Sudan. South Sudan is one of the world’s poorest countries and faces considerable governance challenges: it regularly ranks at or near the bottom of the Corruption Perception Index. Since 2023, aid efforts are being sabotaged by deep funding cuts and deliberate obstruction by the army and the paramilitary Rapid Support Forces – profiting from relief work, imposing fees on aid groups, extorting money at checkpoints – transforming aid from a transfer of benefits to society into a resource contested by the two conflicting parties. Similarly, despite substantial flows of aid into Haiti each year, amounting to 11.8 billion a year in 2024, the country remains a failed state with its development indicators among the lowest in the world. In 2009, the amount of aid Haiti received from multilateral and bilateral donors exceeded its own internal revenue added together. An overview of Haiti’s history reveals that the country has a drastic flaw – a social, historical and cultural context that has led to the domination by political and economic elites whose primary interest is on enriching themselves rather than advancing the country. For Haiti, any efforts in aid will be ineffective until these fatal flaws are addressed. Aid here did not magnify the prospects of development; instead, it magnified the conditions that made development in Haiti impossible.

On the other hand, the success story of foreign aid and economic development in Korea paints a different picture. Throughout South Korea’s rapid development period, foreign assistance played a critical role in producing the country’s miraculous economic growth. Korea borrowed from the IDA to build rail, highways, irrigation and many schools. In 2009, Korea became the first former aid recipient to join the OECD’s Development Assistance Committee, a forum for the world’s largest providers of development aid. South Korea’s remarkable success shows that aid can indeed successfully overcome various national challenges and support state-led development projects, spurring economic growth. Likewise, Rwanda was devastated by the 1994 Genocide against the Tutsi and became heavily aid dependent. In 2000 the UN agreed a set of goals with measurable targets, also known as the Millennium Development Goals (MDG), for Rwanda to be achieved in 2015. The targets included ‘reducing poverty and improving health, wellbeing, and quality of life of people living in developing countries.’ Despite high aid intensity, Rwanda has managed to develop strong institutions which are arguably essential for social and economic progress. The government’s priorities have centred on state-led investment for the development of the country, a rigorous suppression of corruption at all levels and mainly pro-poor policymaking that is evidence-based. Thus, Rwanda has been widely recognised as one of the most successful countries in Africa for its general social and economic progress (Collier, 2000) whilst reducing the gap between the poorest and the better off.

These examples suggest that aid is neither inherently beneficial nor harmful. In both cases, success or failure depended not on the volume of transfers, but the pre-existing institutional capacity of the recipient state to direct resources to meet productive ends. South Korea and Rwanda were able to use aid to generate economic growth and poverty reduction because of strong institutional design and long-term development strategies that are enhanced by the delivery of aid. Sudan and Haiti, by contrast, demonstrate that the absence of the same conditions – compounded poor governance and the capture of aid resources by conflicting parties – ensured that transfers were either wasted, weaponised, or used to entrench the very inequalities they were intended to solve. The determinants of aid’s impact should therefore not be the generosity of the donor, but the quality of the institutional environment into which the aid is poured.

Burnside and Dollar (1997) gathered data on 56 developing countries from the years 1970–93 and found that ‘foreign aid accelerates growth and poverty reduction in developing countries that pursue sound economic policies.’ In low income countries with good policies, those receiving high amounts of aid experienced a 3.5% per capita growth per annum compared to 2% per capita growth per annum. This suggests that good policies are, in and of themselves, good for growth. On the contrary, when looking at developing countries with poor policies, Burnside and Dollar (1997) found ‘virtually no per capita growth’ regardless of whether the country was receiving large amounts of aid or small amounts of aid. This further supports the argument that foreign aid is not an independent force of good or harm – it is a transfer whose effects are mediated by the government structure, rulers’ incentives and institutional landscape.

To reinforce this idea, we explore the leaky bucket analogy, first coined by American economist Arthur Okun in his 1975 book Equality and Efficiency: The Big Tradeoff. His original argument was centred around wealth transfers by taxation from the relatively rich to the relatively poor. He argued that ‘the money must be carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that is taken from the rich.’ Okun attributed the leakage to administrative costs and incentive effects. His leaky bucket analogy translates with uncomfortable precision to foreign aid. Let’s picture foreign aid as water poured into a bucket. In a well-governed state, the bucket is intact – water reaches the bottom and most of it is directed to where it is needed – this bucket is Rwanda. In contrast, in a poorly governed state, the bucket is damaged, with holes representing corruption, bureaucratic delays and elite capture – this bucket is Haiti. In this bucket, not all the water poured into the bucket will reach the bottom, just like how not all foreign aid delivered to Haiti will benefit its intended recipients. World Bank research estimates that roughly 7.5% of aid to the average developing country leaks into offshore financial havens, and this figure rises sharply in more aid-dependent countries. Thus, similar to Okun’s analogy where some wealth transfers by taxation will inevitably disappear in transit, some foreign aid given to poor countries will inevitably be exploited.

Hence, we are invited to rethink the question ‘does aid help or hurt poor people’ from a binary yes or no to focusing on under what governmental design and condition foreign aid will relatively help the poor. Aid should be directed to where it can do good. Aid agencies should place conditions on loans and aid. These conditions could include ’macroeconomic stability (low budget deficits and inflation), noninterference with market pricing, privatisation of state-owned enterprises and openness to international trade.‘ Aid agencies should apply stricter standards of selectivity when giving aid to poor countries. However, in reality, the World Bank reviews only 5% of its loans after three to ten years, and aid agencies typically do not prioritise evaluating projects after they are completed. In 2002, the World Bank made recommendations on how to give aid to states convulsed by predatory autocrats and corruption. Rather than withholding aid from poorly governed states, donors created a parallel mechanism to continue transferring resources to these countries under a different label. The result was a system in which countries with good governance will be identified as a ’good performer’ and receive standard aid, whereas countries with bad governance will receive aid from the ‘bad performer’ fund. Either way, every outcome has become a justification for continued disbursement, rendering aid conditionality not a policy with consequences, but a wishful institutional hope. In the future, aid agencies should increase evaluation of aid projects, which may include little more than setting concrete objectives (e.g. percentage GDP growth per annum) in advance. Aid agencies could also engage in controlled experiments of particular interventions, e.g. launching a deworming programme to improve children’s school performance. These interventions will maximise the chances for aid to thrive, as they will allow aid to be placed in conditions where evidence suggests it can produce measurable gains and allow aid to be calibrated to the specific institutional realities of recipient states rather than applied indiscriminately across them.

Overall, aid does not inherently ‘help’ or ’hurt’ poor people, but it magnifies the institution or power structure it enters. The same dollar that builds a school in one country can be used to build a checkpoint in another. Aid cannot manufacture accountability when none exists, nor act as a substitute for the political conditions that make economic development and growth possible. However, aid can accelerate trajectories of growth and poverty reduction that are already institutionally viable. Thus, the question should be: into what kind of governmental design and condition should aid be poured, and does its delivery reinforce or undermine the institutional foundations on which long-term development depends? Until that question is answered, aid will remain for the world’s poor what it has always been – a lifeline and a leash, indistinguishable.

Bibliography

Abbott, Pamela. “Aid Effectiveness in Rwanda.” January 2012. https://rwanda.actionaid.org/sites/rwanda/files/publications/AideffectinessinRwanda20121.pdf

Acemoglu, Daron, Simon Johnson and James A. Robinson. “An African Success Story: Botswana.” 11 July 2001. https://economics.mit.edu/sites/default/files/publications/An%20African%20Success%20Story%20Botswana.pdf

Banerjee, Abhijit V. and Esther Duflo. Poor Economics: The Surprising Truth about Life on Less Than $1 a Day. Penguin Books, 16 April 2011.

Britannica Money. “Foreign aid.” https://www.britannica.com/money/foreign-aid

Burnside, Craig and David Dollar. “Aid, Policies, and Growth.” The American Economic Review, Vol. 90, No. 4, September 2000, 847–868. https://users.nber.org/~rdehejia/!@$devo/Lecture%2002%20Aid/supplemental/Burnside%20dollar.pdf

Burnside, Craig and David Dollar. “Aid Spurs Growth – in a Sound Policy Environment.” 1 January 1997. https://www.elibrary.imf.org/view/journals/022/0034/004/article-A001-en.xml

Buss, Terry F. and Adam Gardner. Haiti in the Balance: Why Foreign Aid Has Failed and What We Can Do About It. 2008. https://www3.carleton.ca/cfpj/Without%20subscription/15-2Thompson.pdf

Deaton, Angus. “Development aid is cynical.” Swiss Television SRF, 21 September 2015. https://www.youtube.com/watch?v=3yFNFt8LDX4

Dollar, David and Victoria Levin. “Sowing and Reaping: Institutional Quality and Project Outcomes in Developing Countries.” World Bank Policy Research Working Paper 3524, February 2005. https://documents1.worldbank.org/curated/en/573271468778801852/pdf/wps3524.pdf

Easterly, William. “Can Foreign Aid Buy Growth?” Journal of Economic Perspectives, Vol. 17, No. 3, Summer 2003, 23–48. https://pubs.aeaweb.org/doi/pdfplus/10.1257/089533003769204344

Finckenstein, Valentina. “How International Aid Can Do More Harm Than Good: The Case of Lebanon.” LSE IDEAS, February. https://www.lse.ac.uk/ideas/Assets/Documents/updates/LSE-IDEAS-How-International-Aid-Can-Do-More-Harm-Than-Good.pdf

Hayman, Rachel. “‘Milking the Cow’: Negotiating Ownership of Aid and Policy in Rwanda.” June 2007. https://www.geg.ox.ac.uk/sites/default/files/GEG%20WP%202007_26%20Negotiating%20ownership%20of%20aid%20and%20policy%20in%20Rwanda%20-%20Rachel%20Hayman.pdf

Kim, Jiyoung. “Foreign Aid and Economic Development: The Success Story of South Korea.” Wiley Online Library, 2 August 2011. https://onlinelibrary.wiley.com/doi/10.1111/j.1976-5118.2011.01065.x

Kleinfeld, Philip. “Sudan in-depth: Aid efforts blocked and weaponised amid sweeping cuts and army gains.” The New Humanitarian, 11 April 2025. https://www.thenewhumanitarian.org/analysis/2025/04/11/sudan-depth-aid-efforts-blocked-and-weaponised-amid-sweeping-cuts-and-army

Okun, Arthur M. Equality and Efficiency: The Big Tradeoff. 1975. (Biography: The Library of Economics and Liberty.) https://www.econlib.org/library/Enc/bios/Okun.html

Rajah, Roland and Alexander Dayant. “Avoiding the wrong lessons on aid and corruption.” 19 March 2020. https://www.lowyinstitute.org/the-interpreter/avoiding-wrong-lessons-aid-corruption

Ramachandran, Vijaya and Julie Walz. “Haiti: Where Has All the Money Gone?” Center for Global Development, CGD Policy Paper 004, May 2012. https://www.cgdev.org/sites/default/files/1426185_file_Ramachandran_Walz_haiti_FINAL_0.pdf

World Bank. Assessing Aid: What Works, What Doesn’t, and Why. Published for the World Bank by Oxford University Press, November 1998. https://documents1.worldbank.org/curated/en/612481468764422935/pdf/Assessing-aid-what-works-what-doesnt-and-why.pdf

World Bank Group. “Worldwide Governance Indicators.” 18 March 2026. https://datacatalog.worldbank.org/search/dataset/0038026/worldwide-governance-indicators