|
In 2015, David Cameron’s
government enshrined in law the UK’s commitment to spend 0.7 per cent of
its gross national income on foreign aid each year. Ahead of last
month’s general election, Theresa May reaffirmed Cameron’s commitment,
which amounted to over 13 billion pounds in 2016. “Let’s be clear,” May
said, “the 0.7 per cent commitment remains and will remain.”
British charities, including Save the Children, Oxfam, Christian Aid and
Comic Relief, praised Mrs May’s decision, stating that “the aid should
be untied, focused on poverty reduction and spent through an independent
Department for International Development.” Yet many of the same
organisations are also concerned about what they perceive as the lack of
government spending at home.
“Grenfell Tower is a Hurricane Katrina moment, revealing the shameful
state of Britain,” wrote Oxfam’s strategic adviser Duncan Green
following the Grenfell Tower fire. “Austerity, which has seen the
budgets of local government cut dramatically with the greatest cuts felt
by the poorest areas,” was partly to blame for the disaster, he averred.
While the continued plight of the world’s poor and problems experienced
by the British underclass should not occasion jokes about “magic money
trees”, it is a simple fact of life that the UK, like most Western
nations, must economise. The British debt and deficit amount to 86 per
cent and 2.6 per cent of GDP, and while UK domestic spending is best
left to British economists to address, I would like to offer some
thoughts on foreign aid. And, in particular, the theory behind foreign
aid and its impact on the world’s poorest region, Africa.
The first question is whether aid is necessary. In the 1950s and 1960s,
many development economists believed in the “vicious cycle of poverty”
theory, which argued that poverty in the developing world prevented the
accumulation of domestic savings. People in poor countries consumed all
of their income and had nothing left to save and invest. Low savings
resulted in low domestic investment, and low investment was seen as the
main impediment to rapid economic growth. Foreign aid, therefore, was
intended to fill the apparent gap between insufficient savings and the
requisite investment in the economy.
Today’s calls for more foreign aid are often based on the same theory.
Thus, the UK’s Department for International Development (DfID) website
claims that it is “targeting British international development policy on
economic growth and wealth creation [in poor countries].” The United
States Agency for International Development (USAID) promises to work
“with private-sector companies to spur economic development, so that
citizens can participate in a vibrant economy that allocates resources
wisely.”
Yet experience contradicts the “vicious cycle of poverty” theory. Today,
many formerly poor countries enjoy high standards of living, while
others have stagnated or, in some cases, regressed. For example, the
1960 per-capita income in South Korea was $1,102. In Ghana it was
$1,053. By 2015 Korea had reached $25,022, while Ghana is yet to break
$2,000, only rising to $1,696 (the figures are in 2010 dollars). Yet, as
can be seen in the graph below, Ghana received much more in net official
development aid (ODA) per capita than South Korea between 1960 and 2015
(figures are in current U.S. dollars).
As New York University Professor William Easterly wrote, “It doesn’t
help the poverty trap story that 11 out of the 28 poorest countries in
1985 had not been in the poorest fifth back in 1950. They had gotten
into poverty by declining from above, rather than being stuck in it from
below, while others escaped. If the identity of who is in the poverty
trap keeps changing, it must not be much of a trap.”
Countries that improve their policies and institutions — by increasing
their trade openness, limiting state intervention in the economy,
building a business-friendly environment, and emphasising protection of
property rights and the rule of law — tend to grow faster than others.
Such countries also tend to attract foreign capital, which can help to
increase economic growth. Improvement in policies and institutions also
creates a suitable environment for growth in domestic investment. As
trust in institutions such as the rule of law and protection of private
property grows, people feel more confident investing in the local
economy.
Today, the size and the scope of global capital markets make Africa’s
access to capital potentially easier than at any time in the past.
Indeed, private capital flows to developing countries now dwarfs aid
flows.
According to Brookings Institution, ODA to African countries has fallen
from “62 per cent of total external flows in 1990 to 22 per cent in
2012,” and the disappearing aid has been largely replaced by private
capital. “The volume of external flows to the region increased from $20
billion in 1990 to above $120 billion in 2012. Most of this increase in
external flows to sub-Saharan Africa can be attributed to the increase
in private capital flows.”
Sub-Saharan Africa is the least economically free region in the world.
There is a general consensus among economists that Africa needs to catch
up with the rest of the world in terms of economic liberalisation. Aid
is often intended to promote policy reform, yet it has helped to create
disincentives to liberalisation for a number of reasons.
For example, aid is often driven by foreign policy considerations, not
economics. For much of the Cold War, African countries were given
bilateral and multilateral assistance on the basis of their geopolitical
importance to the West and the Soviet Union. More recently, a 2015 study
by AidData revealed that Chinese aid to Africa is used to both “promote
Chinese foreign policy goals”, and advance “the economic interests of
the Chinese state as well as Chinese firms operating abroad.” Likewise,
American aid to African countries such as Ethiopia is often strongly
influenced by geopolitical interests. As a recent piece in the Harvard
International Review noted, American aid to Ethiopia was long driven by
a desire to prevent the spread of Islamic extremism in the country.
Aid has not led to economic reforms in Africa. In the 1980s, the World
Bank started to promote structural adjustment loans that were meant to
disburse aid to countries in exchange for their commitment to economic
reforms. Such conditional lending soon proved ineffective, in part
because aid agencies have no enforcement mechanism, and also because
they have a well-known bureaucratic incentive to lend, which undermines
the credibility of their conditionality.
In fact, aid may also actively retard policy reform. Between 1970 and
1993, for example, the World Bank and the IMF gave Zambia 18 adjustment
loans with little or no reform staking place, forcing World Bank
researchers to conclude that “this large amount of assistance sustained
a poor policy regime.” More generally, two World Bank researchers
concluded that “higher aid slowed reform [in the developing world] over
the 1980–2000 period.”
Even in those countries that follow sensible macroeconomic policies, aid
appears to have no positive effect and may go so far as to discourage
reform. Some World Bank research claimed that developing countries that
follow good fiscal, monetary, and trade policies benefit from foreign
aid. But that research has been difficult to independently corroborate.
Scholars who used updated World Bank data found no positive correlation
between foreign aid and economic growth in countries with “good
policies.” Research suggests that when governments do decide to
undertake economic reforms, they tend to do so because of domestic
factors, including economic crises.
In short, the theoretical case for foreign aid is, at best,
questionable, and aid’s practical impact on some of the world’s poorest
economies may well have been harmful.
The case against aid doesn’t stop there. There are also problems with
aid delivery and the negative impact of foreign aid on the spread of
democracy.
Official aid is disbursed in a plethora of ways. The European Union, for
example, gives aid through the European Commissioner for Development and
Humanitarian Aid. But individual EU member-states also have their own
aid agencies. Europeans also have a strong voice on the governing boards
of the World Bank and IMF, which also disburse aid. In addition to those
official agencies, there has been a massive increase in the number of
aid-promoting non-governmental organisations (NGOs), which also receive
and disburse the money of Western taxpayers.
The “aid industry” provides employment for many thousands of people.
Consequently, a large percentage of the money spent on foreign aid goes
to cover overhead costs, including administration, travel and
accommodation. Michael Maren, a former aid worker, writes that the money
spent on aid bureaucracies creates perverse incentives. “We have to take
advantage of this famine to expand our regular program,” argued one aid
official that Maren encountered in Africa. She saw hunger and poverty as
“a growth opportunity”. “Whatever the original intentions,” Maren notes,
“aid programs had become an end in themselves.”
Dealing with swarms of donors and aid agencies, all of whom require some
degree of attention, puts an enormous strain on African bureaucracies.
The time and effort spent on dealing with the needs of foreign donors
rather than concentrating on the population has further distanced
African governments from their electorates. Working with aid
organisations operating in Kenya, for example, became such a problem
that the “government and donors… agreed on some principles of
partnership that included a ‘quiet time’ between May 1 and June 30 each
year.”
Moreover, effective and efficient delivery of aid by a multitude of
actors has proved to be an insurmountable challenge. Often, it has
resulted in “duplication” of their efforts. Thus, “monitoring surveys
indicate that limited progress has been made toward coordination goals
by the United States or donors in general.” In Ethiopia, for instance,
government officials spend “half to one-third of their time”
participating in “coordination meetings” with a multitude of NGOs,
international aid agencies and bilateral donors.
Also, many foreign donors have their own agendas that may be detrimental
to the welfare of the very people they are supposed to be there to help.
Like the 19th-century European missionaries who went to Africa to spread
their idea of a “good life”, modern day aid missionaries have found in
Africa a fertile ground for social experiments that would never be
accepted in their home countries. Tanzania, for example, is still
recovering from an attempt to centrally plan the economy, the so-called
“Ujaama” policy of collectivisation that was bankrolled to the tune of
$10 billion by socialist governments in Scandinavian countries in the
1970s and 1980s. Similarly, some Western NGOs, like Oxfam, have urged
African countries not to liberalise their trade regimes even though
there is a general consensus among academics that free trade is an
important source of economic growth and prosperity.
Research also suggests that some aid ends up in the pockets of
government bureaucrats instead of reaching the intended beneficiaries.
During a 2012 panel on economic and social policy, then World Bank
President Ban Ki-moon claimed that 30 per cent of development aid
“failed to reach its final destination”. A leaked 2009 cable from the
U.S. embassy in Nairobi revealed that $1.3 million in aid for schools
was “misappropriated” and another $17.3 million worth of textbooks
purchased with aid dollars was “lost” by government officials.
Aid also encourages rent-seeking in recipient countries. Special
interest groups and individuals focus their efforts not on being
productive, but on lobbying government officials in order to get access
to aid. In that way, aid reduces potential economic output and
encourages corruption and political conflict.
Moreover, by transferring resources to the favoured projects of
government officials, competition among domestic producers is
undermined. As a result of government favoritism, parts of the domestic
consumer base may become captive to firms that provide shoddy and
expensive goods and services.
Similarly, aid can undermine the international competitiveness of
African exports by artificially strengthening the local currency. As
researchers at the IMF found, “aid inflows have systematic adverse
effects on a [recipient] country’s competitiveness, as reflected in a
decline in the share of labour intensive and tradable industries in the
manufacturing sector. We… [found] evidence suggesting that these effects
stem from the real exchange rate overvaluation caused by aid inflows.”
Making these matters worse is the lack of accountability and feedback in
the aid industry. Very few aid agencies and virtually no individuals are
directly responsible for specific outcomes. Independent evaluations of
the effectiveness of donor efforts to alleviate poverty or to arrest the
spread of disease, for example, are very rare. Moreover, the donors
often determine what they will supply without much regard for what is
actually needed. This top-down approach has most spectacularly failed to
alleviate poverty in Africa where government accountability is weak and
institutional deficiencies extensive.
But does aid, in spite of the many problems with its delivery, promote
democracy? Many people, including former UN secretary general Kofi
Annan, have argued that it does. Researchers from the World Bank,
however, found no evidence that aid promoted democracy between 1975 and
2000. In fact, the aid agencies have repeatedly bankrolled some of the
world’s most unsavoury regimes. According to one study, “The world’s 25
most undemocratic government rulers (out of 199 countries the World Bank
rated on democracy) got a sum of $9 billion in foreign aid in 2002.
Similarly, the world’s 25 most-corrupt countries got $9.4 billion in
foreign aid in 2002.”
Other research goes further, suggesting that aid may hurt democratic
development in developing countries. That may be the case for several
reasons. Aid helps to undermine democratic accountability in Africa,
because African governments find themselves increasingly answerable to
the donors, not to the public. Government spending proposals, for
example, allocate funds in accordance with the advice of foreign experts
rather than the wishes of the electorate.
Aid encourages military spending. Since aid is fungible, it helps some
recipient governments free up resources for military purchases that
would otherwise be spent on roads and education, for example. Consider
the World Bank’s recent contribution of $180 million toward the building
of the Chad-Cameroon oil pipeline. Fearing that the oil revenue would be
misspent, the World Bank got the Chadian government to commit to
spending it on education, health, and infrastructure. What was the
result? “The first $4.5 million received as a signing bonus from the oil
companies was used to buy weapons—and it is estimated that as much as
$12 million may be diverted to buy arms.”
In fact, Professor Paul Collier of Oxford University found that
“something around 40 per cent of Africa’s military spending is
inadvertently financed by aid.” Aid may also fuel armed competition for
resources. There is some evidence, for example, that Somalia’s civil war
was prolonged by the competition between different factions for the
large amounts of food aid that the country was receiving.
A growing number of Africans question the effects of foreign aid on
economic growth and democracy in Africa. President Paul Kagame of
Rwanda, for example, has urged Africans “to be honest about the
consequences of aid dependence,” for “what really matters most for
socio-economic transformation is private capital.” He has called on
African governments to create policy environments in which entrepreneurs
can flourish.
Others, like Ugandan journalist Andrew Mwenda, have pointed to the
negative political impact of aid. According to Mwenda, “foreign aid… is
providing the government with an independent source of ‘unearned’
revenue. That allows the government to avoid accountability to Uganda’s
citizens.” Unfortunately, when Mwenda spoke out against further aid at
the 2007 TED Conference, the enraged Irish musician Bono heckled Mwenda
with shouts of “Bollocks!” and “That’s bullshit.”
Not only has aid failed to deliver growth in Africa. It hasn’t helped
democracy either. Western donors, including the United Kingdom, should
re-evaluate their commitment to further disbursements of aid to the
continent.
Marian L. Tupy is senior policy analyst at the Cato Institute's Center
for Global Liberty and Prosperity. |
