What Can Aid Do?

Under normal conditions, devoting more resources to X’s produc-tion produces more X. This follows from the nature of the physical world, which positively relates quantities of outputs to quantities of inputs used in their production. In principles of economics classes, it is common to highlight that this relationship has nothing to do with the economic problem. The economic problem asks how to produce X in the least-cost way, whether to produce more or less X, and indeed, whether to produce any X at all given the alternative uses of the inputs required to produce it. Solving the economic problem determines whether a country’s economy develops. It is strange, then, that professional economists have had trouble distinguishing the positive relationship between inputs and outputs from solving the economic problem when it comes to evaluating foreign aid.1 The purpose of this article is to make this distinction, and in doing so to clarify what aid can and can-not do