Last summer, the economist William Easterly published a book entitled “The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics,” in which he described how governments in many poor countries, particularly in Africa, have frittered away large amounts of aid money given to them by rich countries. People have written books critical of aid policy before, but the origin of this one was unusual: its author had spent sixteen years at the World Bank, the Washington-based international agency that runs many of the development programs he was criticizing.

Easterly’s book read like the testimony of a Mafia turncoat who knew not only where the bodies were buried but who had put them there and why. He pointed out that between 1950 and 1995 the developed world dispensed the equivalent of more than a trillion dollars in today’s money in economic assistance, yet many of the aid recipients remain poverty-stricken. Zambia, for example, received no fewer than twelve adjustment loans from the World Bank and its sister organization, the International Monetary Fund, between 1980 and 1994, yet it is still poorer, on a per-capita basis, than it was at independence, in 1964. Easterly listed dozens of countries that wasted significant amounts of aid, including Kenya, Tanzania, Somalia, Sierra Leone, Nicaragua, Haiti, and, most notoriously of all, Zaire (now the Democratic Republic of the Congo), where Mobutu Sese Seko and his cronies shipped money out of the country to their private bank accounts as fast as the World Bank and the I.M.F. could send it in.

Writing in the prologue, Easterly praised his employer for the fact that it “encourages gadflies like me to exercise intellectual freedom,” but it turned out that he had tested this tolerance to the breaking point. His book appeared at the same time that many countries were pushing for a big increase in the resources devoted to the World Bank and other aid agencies. In September, 2000, in a Millennium Declaration, the members of the United Nations committed to an ambitious set of international development goals by 2015, including halving the number of people living in extreme poverty, a two-thirds reduction in child mortality, a reversal of the spread of H.I.V./AIDS, and the provision of primary education for children the world over. In order to meet these targets, the U.N. members, including the United States, pledged to provide “more generous development assistance” to poor countries, particularly those genuinely striving to reduce poverty. Following the events of September 11, 2001, many countries stepped up the pressure for increased aid, arguing that, in the words of Gordon Brown, Britain’s Chancellor of the Exchequer, “what happens to the poorest citizen in the poorest country can directly affect the richest citizen in the richest country.” Easterly’s book amounted to a fierce assault on the case for more aid. Not surprisingly, many of his seniors didn’t like its timing or its contents, and they didn’t hide their displeasure. Last fall, Easterly went on indefinite leave from the World Bank, and he is now based at the Center for Global Development, a Washington think tank, where he is working on proposals to reform aid programs.

Easterly does not have a political agenda—”Economic development is too important to be left to politicians,” he told me a couple of weeks ago—but since he left the World Bank senior officials at the Treasury Department have picked up on his work. Some of Easterly’s arguments have started to show up in the speeches of Paul O’Neill, the blunt-talking Treasury Secretary. At the beginning of February, at the World Economic Forum, O’Neill repeated Easterly’s point that many aid recipients remain chronically poor. The international community, O’Neill argued, should concentrate on “learning and saying in a forthright way what hasn’t worked and why, so that we can agree to stop making such interventions.” Referring to the Bush Administration’s decision to cut off economic support to Argentina last fall, O’Neill said it was ridiculous to expect America’s “plumbers and carpenters” to pay for the mistakes of foreign governments.

These harsh words were accompanied by actions. Next week, President Bush will attend a United Nations conference on international development, in Monterrey, Mexico. The initial version of the communiqué to be issued at the conference included an unequivocal pledge from all advanced countries to raise the amount that they spend on overseas aid each year from the current average of 0.22 per cent of gross national product to 0.7 per cent. In late January, the United States insisted on making the aid target a vague aspiration rather than a firm commitment. Other U.N. members, fearful that the American President might pull out of the upcoming conference, reluctantly went along with the change.

Campaigners for higher aid spending now fear that the Monterrey meeting will be merely the latest in a long line of United Nations events that promised much and delivered little. Easterly agrees with that assessment, but he is not overly disappointed. “There’s been for decades a misplaced emphasis on the volume of money disbursed to poor countries as a measure of the success of aid policies,” Easterly said to me. “I’m afraid the Monterrey conference is very much in that tradition.”

The Bush Administration has coupled its tough line on aid with a call for reform of the World Bank and the International Monetary Fund. It is pressing for changes in the way aid is distributed, with grants being substituted for loans in many cases. The Treasury Department is also demanding that future funding of the international aid agencies be tied to results. If aid programs don’t result in measurable improvements in developing countries, it argues, their budgets should be curtailed.

The history of overseas aid began with unrealistic expectations. Back in the nineteen-fifties and sixties, many economists believed it would be possible to mimic the success of the Marshall Plan, the aid program that the United States extended to Europe after the Second World War. According to the wisdom of the time, countries in Africa, Asia, and Latin America had plenty of investment opportunities, but they didn’t have enough savings to take advantage of them. Once this “investment gap” had been filled by an influx of foreign aid, the thinking went, the economies of countries like Zambia, India, and Brazil would start to grow rapidly, and eventually, sometime in the not too distant future, the gap with the developed world would be closed. In 1969, the Pearson Commission, an advisory panel to the World Bank, proposed a target of six-per-cent annual economic growth in the developing world over the next decade. The countries that reached this threshold and boosted their exports, the panel claimed, would become “self-reliant partners” in the international economy by the year 2000.

Of course, this didn’t happen. Aid spending increased—to a peak of sixty-one billion dollars in 1992—but many poor countries entered a prolonged period of economic stagnation, and some of them actually regressed. (In Ghana, for example, per-capita income fell at an annual rate of 1.6 per cent between 1961 and 1983.) The gap between the developed world and the underdeveloped world gets wider every year. About half the world’s population subsists on less than two dollars a day. One-sixth of the world’s population—about a billion people—lives on less than a dollar a day.

The increase in aid budgets didn’t cause these disastrous developments—in Africa, especially, the main culprits were corruption, civil war, and famine—but in many places it didn’t do much to foster economic development, either. In 1994, Peter Boone, at the London School of Economics, examined the historical record for a large number of developing countries and found no meaningful correlation between levels of aid and rates of growth—a result that was confirmed by subsequent studies. Given this evidence, it is perhaps not surprising that many rich countries cut back their overseas-aid budgets sharply during the nineteen-nineties. Between the beginning and the end of the decade, the total amount of economic assistance extended to poor countries fell by about a third in current dollars. Relative to the size of rich economies, the decline was even greater. In the United States in 1990, for example, the overseas-aid budget amounted to about 0.2 per cent of G.D.P. Ten years later, the figure had halved.

The reduction in aid budgets, understandable as it may be, has been too severe. Although much aid has been wasted, there are plenty of counter-examples where it has been well spent. During the nineteen-sixties and seventies, countries like Korea, Thailand, Botswana, and Chile used financial support and technical expertise from overseas to help them industrialize successfully. More recently, a number of poor countries, among them Mexico, Bolivia, and Ghana, have reformed their economies with the help of the World Bank and other international development agencies. In all these cases, the policy decisions of the governments concerned were key, but aid played an important supporting role. In some instances, the foreign money bought reformist governments enough time for their policies to work. In others, the know-how provided by aid agencies and foreign governments was at least as important as the cash.

As the World Bank pointed out in a 1998 survey of aid’s effectiveness, “It is ironic—and tragic—that just as economic reform has created the best environment in decades for effective assistance, donors have cut aid back sharply.” Uganda provides a good example of how aid coupled with policy reform can transform an economy. During the nineteen-sixties and seventies, two dictatorial leaders, Milton Obote and Idi Amin, plunged the country into famine, civil war, and economic chaos. But from the mid-eighties onward the donor community helped the reformist government of Yoweri Museveni to rebuild the country, controlling inflation and encouraging the development of private enterprise. During the past decade, Uganda’s economy has grown at an annual rate of about seven per cent. At that rate of growth, the economy will double in size every ten years or so.

Money was an essential element in this success story—between 1987 and 1992, the World Bank alone lent Uganda more than a billion dollars—but it wasn’t the only one. Foreign experts provided Museveni’s government with invaluable advice in all areas of economic management, including monetary policy, tax policy, and poverty reduction. According to one account of the reform process, the I.M.F. and the World Bank turned the Presidential residence into a “macroeconomic classroom with the President.” Even Easterly agrees that the results were impressive. The Ugandan experience “shows what can be done by good leadership” in developing countries, he told me.

Many critics of aid policy try to dismiss Uganda as an isolated example, but some important recent research suggests that aid can be effective in any country where it is accompanied by sensible economic policies. Studying fifty-six middle-income and low-income nations, Craig Burnside and David Dollar, two economists in the World Bank’s research department, tried to identify the factors that determined how quickly their economies grew between 1970 and 1993. When Burnside and Dollar included all the countries in their sample, regardless of the economic policies their governments pursued, they found no link at all between aid and growth, thereby confirming Peter Boone’s negative findings. But Burnside and Dollar didn’t stop there. For each country in their study, they constructed an index of economic management based on how successful it had been in controlling inflation and the budget deficit, and how open to trade it was. When they redid their analysis to include that index as an explanatory variable, they found that aid “has a positive effect on growth in a good policy environment,” and that the effect is substantial. A one-per-cent increase in the amount of aid that a poor country with sound policies receives relative to its G.D.P. is associated with a 0.5-per-cent increase in its annual growth rate and a one-per-cent reduction in its poverty rate.Between 1970 and 1993, developing countries with good economic policies but low aid payments grew at an annual rate of 2.2 per cent per capita, whereas developing countries with good economic policies and high aid payments grew almost twice as fast, at an annual rate of 3.7 per cent.

Burnside and Dollar’s model doesn’t explain precisely how increases in aid promote faster growth, but there are several possible explanations. One plausible theory is that when a reformist government comes to power in a developing country most private-sector investors, both foreign and domestic, are dubious about its survival prospects, so they hold back. The announcement of an aid package reassures investors, and this leads to a surge in capital spending, which, in turn, leads to higher growth. Whatever mechanism explains the link between aid and growth, other economists have confirmed its existence. In a recent survey on the subject, the Paris-based Organization for Economic Coöperation and Development listed six studies that have confirmed that aid leads to positive results when accompanied by economic reform.

Perhaps the most surprising thing about Burnside and Dollar’s results is the number of countries in their study with policies that were good enough to allow aid to have a positive impact on growth. By 1990, it was more than half. Even among the forty poorest nations in the sample, fifteen satisfied the policy criterion, and many of them were hardly model economies. They included Mali, Gambia, Morocco, Tunisia, Ecuador, Bolivia, El Salvador, and Honduras. If aid can spur development and reduce poverty in troubled countries like these, it is indeed time for a rethinking of policy, but not in the direction that the Bush Administration is suggesting.

Even a modest boost in aid could have a big impact. Many developing economies are tiny relative to developed economies, and, as long as the recipient country had decent policies in place, an increase of, say, five per cent of the country’s G.D.P. would translate into a major alleviation of human suffering. According to the World Bank, a well-targeted rise in aid spending of ten billion dollars would lift about twenty-five million people out of poverty. The United Nations’ development goals for 2015 are much more ambitious—they include lifting five hundred million people above the poverty line—but the cost of achieving those goals would not necessarily be prohibitive. In December, 2000, Kofi Annan, the Secretary-General of the United Nations, appointed a panel of international luminaries headed by Ernesto Zedillo, the former President of Mexico, to advise him on aid policy. The Zedillo panel concluded that the 2015 development goals could be met by increasing the average aid budget in rich countries to 0.44 per cent of G.D.P.—well below the United Nations target of 0.7 per cent. Such a shift would involve devoting another fifty billion dollars a year to aid, which would almost double the amount that all the developed countries together currently spend.

As it happens, the Bush Administration has proposed to increase the Pentagon’s budget by almost fifty billion dollars this year, subject to approval by Congress, taking it up to nearly three hundred and eighty billion dollars. Compared with that figure, the American aid budget, which currently runs about ten billion dollars a year, is a mere rounding error. In dollar terms, the United States spends more on aid than any other country except Japan, which spends thirteen and a half billion dollars. But, relative to the size of its economy, the United States has the smallest aid budget of any rich country: about 0.1 per cent of G.D.P. Italy and Greece are the only other Western countries that devote 0.2 per cent or less of their G.D.P. to aid. The most generous countries are Denmark (1.06 per cent), the Netherlands (0.84 per cent), and Sweden (0.8 per cent). The figure for Britain is 0.32 per cent; in Japan it is 0.28 per cent; and in Germany it is 0.27 per cent.

The Bush Administration is not responsible for the United States’ laggard position here—the aid-to-G.D.P. ratio fell fastest during the Clinton Presidency—but it is not making any attempt to change it. Instead, the Administration is demanding better value for the money currently being spent. Many critics dismiss the Administration’s calls for reform as an attempt to direct attention from how little the United States actually spends on aid. John Taylor, the Under-Secretary of the Treasury for International Affairs, sees things differently. “I think Americans are very generous people, but they are also people who want to be sure that their generosity is going to make a difference,” Taylor told me when I visited his office last month. “Charitable giving is very high in this country, but people are very cognizant of whether a charitable organization is being effective or not.”

Taylor, an economics professor on leave from Stanford, where he made his reputation in the field of monetary policy, reminded me that the Bush Administration, while keeping the over-all aid budget steady, has proposed to increase two areas of it substantially: the contributions that the United States makes to the International Development Association, an arm of the World Bank which lends money to poor countries, and to the African Development Bank. However, even these spending increases are conditional on improved results in individual aid programs. “You have to have certain standards of performance,” Taylor insisted. “If aid is given to countries which don’t match that standard, it is going to be squandered.”

It is hard to argue with Taylor’s point, but the United States is one of the biggest offenders when it comes to doling out aid according to political priorities, rather than directing it to where it will be best used. This year, Washington will send about seven hundred and twenty million dollars in economic assistance to Israel, six hundred and fifty-five million dollars to Egypt, a hundred and fifty million dollars to Jordan, and seventy-five million dollars to the West Bank and Gaza. The Middle East is far from being the poorest part of the world, but it gets much more American aid than any other region.

The money that Israel and Egypt receive is bilateral aid: the United States Agency for International Development transfers it directly to Jerusalem and Cairo. Bilateral aid makes up two-thirds of all aid, and it is notoriously inefficient, largely because countries that receive it feel little pressure to reform. Egypt, for example, has made scant economic progress despite all the cash it has received from the United States since making peace with Israel. In the past, some donor countries have insisted that bilateral-aid recipients spend the money on goods and services provided by the donor—a requirement that did more for businesses in the West than it did for the poor in the developing world. Other donors allowed colonial and cultural ties to sway their aid policies. The British government gave money to a succession of Nigerian dictators who promised, but failed, to deliver democracy. Sweden helped to keep Julius Nyerere, the Tanzanian socialist, in power long enough to wreck the Tanzanian economy. Multilateral aid—money pooled from more than one country and disbursed through international financial institutions—is often more effective than bilateral aid, but its disbursement is dominated by the World Bank and the I.M.F., and that is a problem for many people in Washington and elsewhere.

The international aid agencies tend to be criticized whatever they do. On the left, critics accuse them of carrying out the free-market agendas of multinational corporations and the United States government to the detriment of poor countries. On the right, critics like O’Neill and Taylor accuse them of throwing good money after bad at corrupt and incompetent regimes. In fact, the aid agencies are staffed with apolitical professionals who try to do their best in difficult circumstances. Although they have undoubtedly made many mistakes in the past, they have also changed their policies in the light of experience.

Forty years ago, the World Bank used to lend money for ambitious industrial projects, such as the Akosombo Dam, in Ghana, which created the world’s largest man-made lake, Lake Volta. Many of these ventures ended badly, and agencies changed course. Industrial investment is now largely left to the private sector. The aid agencies, often in partnership with nongovernmental organizations, spend most of their money on improving education, health care, and other forms of “social capital” which the free market fails to provide. That hasn’t solved all the problems. From the nineteen-eighties onward, the aid agencies made many of their loans contingent upon “structural adjustment programs” that involved sharp cutbacks in government spending. In Indonesia, Venezuela, and other countries, these policies led to bread riots. In parts of Africa, they undermined the aid agencies’ own efforts to improve health services, just as the AIDS crisis erupted. Recently, however, there has been a movement toward making adjustment programs more flexible.

Although the White House and the Treasury Department don’t seem to have noticed, the World Bank and the I.M.F. have also introduced elaborate monitoring regimes, which have improved the performance of individual loans. During the eighties, the World Bank classed about sixty per cent of its development projects as successful. These days, the success rate is about eighty per cent.

This is not enough for the Bush Administration. Taylor was openly dismissive of a recent British call for a new Marshall Plan for the developing world. He recalled how after the Berlin Wall fell many people called for a Marshall Plan for Russia. “A lot of money was poured in, and a lot of it wasn’t used very effectively,” he said. “Now Russia is working a lot better. You don’t have the big aid programs. You have some good people in there working on reforms, and that is really what is going to make a difference.” Taylor and his colleagues believe it is up to other developing countries to follow Russia’s example, in which case they will be rewarded by more aid, but also, more important, by more money from investors in the developed world. “We need to reverse the decline in private-sector flows in the past few years,” Taylor said. “That means the countries themselves are going to have to take some actions to make themselves more attractive to capital.”

I asked Taylor if he wasn’t concerned about the political message that the Bush Administration was sending, especially abroad, by using such strong language toward what are, after all, the poorest nations on earth and the agencies that are trying to help them. “When you demand more of people or institutions, it doesn’t mean that you don’t like them,” Taylor replied. “It means you love them, you want them to do better, so you demand more of the things you are responsible for. These calls for better performance are not calls to do less. They are calls to do more and do it better. I sincerely believe that.”

Despite the Bush Administration’s unyielding stance, an eventual increase in the level of financial assistance to poor countries is not completely out of the question. Ultimately, history suggests, aid policy is driven by broader considerations than cost-benefit analysis. In a message to Congress, in 1961, the newly elected President Kennedy described existing aid programs as “bureaucratically fragmented, awkward and slow,” but he nonetheless proposed a big increase in the aid budget, for reasons that sound eerily modern. “Widespread poverty and chaos lead to a collapse of existing political and social structures, which would inevitably invite the advance of totalitarianism into every weak and unstable area,” Kennedy said. “Thus our own security would be endangered and our prosperity imperiled. A program of assistance to the underdeveloped nations must continue because the Nation’s interest and the cause of political freedom require it.”

Substitute “terrorism” for “totalitarianism” and the same argument can be advanced today. Robert Rubin, the former Treasury Secretary, who is now a senior executive at Citigroup, is perhaps the best-known figure to have taken it up. Last month, he told a conference at the Carter Center, in Atlanta, that defeating “poverty in poorer countries seems to me as critical to our national interest as defeating the spread of Communism in Western Europe after World War II.” Rubin was a member of the Zedillo panel, which called for an international campaign to build public support for increased aid budgets, especially in the United States. Polls regularly show that Americans greatly overestimate how much money the country spends on aid programs. Unless voters gain a proper appreciation of the aid budget’s size relative to other spending programs and the nation’s G.D.P., there is little prospect of Congress’s increasing it.

A number of European countries, including Britain and Greece, have already sharply increased their aid budgets. Italy, the United States’ fellow-laggard in the international-aid league table, is expected to announce a big increase at Monterrey. If this happens, the Bush Administration will look even more isolated. Of course, it has already demonstrated on many issues, missile defense and global warming among them, that it is willing to act alone when it believes its policies are in the best interests of the United States. However, some leading figures in the development world have not given up hope that the President and his national-security team will eventually conclude, notwithstanding opposition from the Treasury, that extending a helpful hand to poor countries is an essential part of the war on terrorism. “I genuinely think that Washington doesn’t know it yet, but it is going to increase aid by very large amounts in the next few years—just as before September 11th it had no idea that it was going to increase public spending generally,” Mark Malloch Brown, the head of the United Nations Development Program, told me. “This is part of the new global arrangement post September 11th. If security is to be maintained, then development policy is going to be just as important as counter-terrorism.”

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