As Bush pledges more money for Africa, and Live8 will soon attempt to rally more support for throwing money at Africa's problems, it helps to remember that this is not a new approach to an old problem. In fact, it is the same approach to the same problem.

First, look at countries that didn't take the easy way out, and what happened. In today's (Thursday) WSJ, Richard Brookhiser noted that the United States's first Treasury Secretary, Alexander Hamilton, set the economy right not by repudiating debts as many in the US wanted, but by paying them (see the WSJ ). Hamilton also had to overcome congressional resistance to rewarding speculators who had bought up debt. But Hamilton knew that if the United States started picking and choosing among its creditors, its credit would go back into the outhouse. Penalizing speculators, or repudiating debts, merely would have delayed the adoption of good governance necessary for growth.

According to the Financial Times the IMF has released two extensive research papers that suggest aid flows to poor countries have not led to higher growth rates, the main driver of poverty reduction.

The research, which took into account duration, type of donor and governance record of recipient, found aid did not boost growth.

This conflicts with the findings of an influential World Bank study five years ago that found aid boosted growth in countries with good policy environments.

That World Bank study was critiqued pretty well by William Easterly in the Summer 2003 Journal of Economic Perspectives (see pdf here), where Easterly noted that the World Bank study offered the cautious conclusion (see Burnside and Dollar (2000) American Economic Review) that development aid can help when countries have good governance. This seemingly commonsensical result was quickly and widely adopted as gospel by policymakers such as Wolfensohn and Bush, and media such as The New Yorker and The Economist.

Easterly made small changes to the dataset period, its breadth, definitions of "aid", "policies", and "growth" (the main variables in Burnside and Dollar), all rendered the results insignificant. The very conspicuous conclusion was not robust to minor respecification--the aid showed no effect on growth under a variety of measures of good governance.

One example of a particular failure was Zambia. Notes Easterly,
"If Zambia had converted all the aid it received since 1960 to investment
and all of that investment to growth, it would have had a per capita GDP of about $20,000 by the early 1990s. Instead, Zambia’s per capita GDP in the early 1990s was lower than it had been in 1960, hovering under $500."

Adam Smith noted that "what is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom." This he applied to trade, but surely it holds for credit policy too. Think about your financially troubled friends and relatives. It is usually the case that the last thing they need is more money or pity, but rather bourgeois virtues that create prosperity.