Daron Acemoglu

David Cameron speaks compellingly about international aid. Eradicating poverty, he says, means certain institutional changes: rights for women and minorities, a free media and integrity in government. It means the freedom to participate in society and have a say over how your country is run. We wholeheartedly agree and were flattered to see the Prime Minister tell this magazine that he is ‘obsessed’ by our book on the subject, Why Nations Fail: The Origins of Power, Prosperity, and Poverty. But diagnosing a problem is one thing; fixing it another. And we don’t yet see the political will — in Britain or elsewhere — that could turn this analysis into a practical agenda.

The British government is strikingly generous in foreign aid donations. It spent £8.7 billion on foreign aid in 2012 — which is 0.56&nbsp;per&nbsp;cent of national income. This is to rise to £11.7 billion, or 0.7 per cent of national income, next year. But if money alone were the solution we would be along the road not just to ameliorating the lives of poor people today but ending poverty for ever.

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The idea that large donations can remedy poverty has dominated the theory of economic development — and the thinking in many international aid agencies and governments — since the 1950s. And how have the results been? Not so good, actually. Millions have moved out of abject poverty around the world over the past six decades, but that has had little to do with foreign aid. Rather, it is due to economic growth in countries in Asia which received little aid. The World Bank has calculated that between 1981 and 2010, the number of poor people in the world fell by about 700 million — and that in China over the same period, the number of poor people fell by 627 million.

In the meantime, more than a quarter of the countries in sub-Saharan Africa are poorer now than in 1960 — with no sign that foreign aid, however substantive, will end poverty there. Last year, perhaps the most striking illustration came from Liberia, which has received massive amounts of aid for a decade. In 2011, according to the OECD, official development aid to Liberia totalled $765&nbsp;million, and made up 73 per cent of its gross national income. The sum was even larger in 2010. But last year every one of the 25,000 students who took the exam to enter the University of Liberia failed. All of the aid is still failing to provide a decent education to Liberians.

One could imagine that many factors have kept sub-Saharan Africa poor — famines, civil wars. But huge aid flows appear to have done little to change the development trajectories of poor countries, particularly in Africa. Why? As we spell out in our book, this is not to do with a vicious circle of poverty, waiting to be broken by foreign money. Poverty is instead created by economic institutions that systematically block the incentives and opportunities of poor people to make things better for themselves, their neighbours and their country.

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Let us take for Exhibit A the system of apartheid in South Africa, which Nelson Mandela dedicated himself to abolishing. In essence, apartheid was a set of economic institutions — rules that governed what people could or could not do, their opportunities and their incentives. In 1913, the South African government declared that 93 per cent of South Africa was the ‘white economy’, while 7 per cent was for blacks (who constituted about 70 per cent of the population). Blacks had to have a pass, a sort of internal passport, to travel to the white economy. They could not own property or start a business there. By the 1920s the ‘Colour Bar’ banned blacks from undertaking any skilled or professional occupation. The only jobs blacks could take in the white economy were as unskilled workers on farms, in mines or as servants for white people. Such economic institutions, which we call ‘extractive’, sap the incentives and opportunities of the vast mass of the population and thereby keep a society poor.

The people in poor countries have the same aspirations as those in rich countries — to have the same chances and opportunities, good health care, clean running water in their homes and high-quality schools for their children. The problem is that their aspirations are blocked today — as the aspirations of black people were in apartheid South Africa — by extractive institutions. The poor don’t pull themselves out of poverty, because the basic ability to do so is denied them. You could see this in the protests behind the Arab Spring: those in Cairo’s Tahrir Square spoke in one voice about the corruption of the government, its inability to deliver public services and the lack of equality of opportunity. Poverty in Egypt cannot be eradicated with a bit more aid. As the protestors recognised, the economic impediments they faced stemmed from the way political power was exercised and monopolised by a narrow elite.

This is by no means a phenomenon confined to the Arab world. That the poor people in poor countries themselves understand their predicament is well illustrated by the World Bank’s multi-country project ‘Voices of the Poor’. One message that persistently comes across is that poor people feel powerless — as one person in Jamaica put it, ‘Poverty is like living in jail, living under bondage, waiting to be free.’ Another from Nigeria put it like this: ‘If you want to do something and have no power to do it, it is talauchi [poverty].’ Like black people in South Africa before 1994, poor people are trapped within extractive economic institutions.

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But it is not just the poor who are thus trapped. By throwing away a huge amount of potential talent and energy, the entire society condemns itself to poverty.

The key to understanding and solving the problem of world poverty is to recognise not just that poverty is created and sustained by extractive institutions — but to appreciate why the situation arises in he first place. Again, South Africa’s experience is instructive. Apartheid was set up by whites for the benefit of whites. This happened because it was the whites who monopolised political power, just as they did economic opportunities and resources. These monopolies impoverished blacks and created probably the world’s most unequal country — but the system did allow whites to become as prosperous as people in developed countries.

The logic of poverty is similar everywhere. To understand Syria’s enduring poverty, you could do worse than start with the richest man in Syria, Rami Makhlouf. He is the cousin of President Bashar al-Assad and controls a series of government-created monopolies. He is an example of what are known in Syria as ‘abna al-sulta’, ‘sons of power’.

To understand Angola’s endemic poverty, consider its richest woman, Isabel dos Santos, billionaire daughter of the long-serving president. A recent investigation by Forbes magazine into her fortune concluded, ‘As best as we can trace, every major Angolan investment held by dos Santos stems either from taking a chunk of a company that wants to do business in the country or from a stroke of the president’s pen that cut her into the action.’ She does all this while, according to the World Bank, only a quarter of Angolans had access to electricity in 2009 and a third are living on incomes of less than $2 a day.

Recognising that poor countries are poor because they have extractive institutions helps us understand how best to help them. It also casts a different light on the idea of foreign aid. We do not argue for its reduction. Even if a huge amount of aid is siphoned off by the powerful, the cash can still do a lot of good. It can put roofs on schools, lay roads or build wells. Giving money can feed the hungry, and help the sick — but it does not free people from the institutions that make them hungry and sick in the first place. It doesn’t free them from the system which saps their opportunities and incentives. When aid is given to governments that preside over extractive institutions, it can be at best irrelevant, at worst downright counter-productive. Aid to Angola, for example, is likely to help the president’s daughter rather than the average citizen.

Many kleptocratic dictators such as Congo’s Mobutu Sese Seko have been propped up by foreign aid. And it wasn’t foreign aid that helped to undermine the apartheid regime in South Africa and got Nelson Mandela out of prison, but international sanctions. Those sanctions came from pressure on governments — including the British government — that would have preferred not to see them implemented.

Today it is no different. Governments don’t like cutting their ties to dictators who open doors for international business, or help their geopolitical agendas. Pressure needs to come from citizens who do care enough about international development to force politicians to overcome the easy temptation of short-run political expediency.

Making institutions more inclusive is about changing the politics of a society to empower the poor — the empowerment of those disenfranchised, excluded and often repressed by those monopolising power. Aid can help. But it needs to be used in such a way as to help civil society mobilise collectively, find a voice and get involved with decision-making. It needs to help manufacture inclusion.

This brings us back to David Cameron. When answering a question at New York University almost two years ago, he put it perfectly. ‘There is a huge agenda here,’ he said. It is time to ‘stop speaking simply about the quantity of aid’ and ‘start talking about what I call the “golden thread”.’ This, he explained, is his idea that long-term development through aid only happens if there is a ‘golden thread’ of stable government, lack of corruption, human rights, the rule of law and transparent information.

As the Prime Minister says, this is a very different thing to setting an aid spending target. Promoting his golden thread means using not just aid but diplomatic relations to encourage reform in the many parts of the world that remain in the grip of extractive institutions. It means using financial and diplomatic clout (and Britain has plenty of both) to help create room for inclusive institutions to grow. This may be a hard task — far harder than writing a cheque. But it is the surest way to make poverty history.