List Forum für Wirtschafts- und Finanzpolitik

This paper examines the debate on the design and the effectiveness of current development policy and offers a prospect for its future. Particular attention is dedicated to the role of markets in the combat against poverty, on one hand, and on the role of states and public subsidies, on the other. So far, the demarcation line between these two approaches is drawn along the classical camps of supply side and demand side economic policy. While the one camp advocates massive subsidies in order to reduce poverty, the other camp considers subsidies as a source of distortions and misplaced incentives. The latter camp rather proposes the establishment of institutions that primarily ease private initiatives and market-based activities. Beyond this partly very ideological debate, this paper joins the so-called Third Way and promotes a new paradigm in the combat against poverty: effective approaches shall first be identified via evidence-based scientific methods and then be expanded. Such a paradigm shift would ideally result in a new form of performance-based conditionality.