Rethinking foreign aid

“We want Trade, not Aid” declared Ugandan president Yoweri Museveni in an article in the Wall Street Journal in 2003, pointing out that rich economies such as the United States and the European Union implement agricultural subsidies that hurt farm-based economies such as those in Africa, which have a comparative advantage in agriculture. On the other hand, they are generous with aid, which “is a recipe for permanent poverty”.

This thinking is echoed in two thought-provoking books, Dead Aid by Dambisa Moyo [Kindle Link] and The White Man’s Burden by William Easterly.

Ms Moyo is a Zambia-born economist who has worked for the World Bank and Goldman Sachs. Her premise is that aid is not only ineffective, but also responsible for a negative downward spiral in economies that have a large aid component. The inflow of huge amounts of aid is similar to the natural resource curse that plagues much of Africa, in that it supports rent seeking and allows governments to get their hands on ‘free’ money not derived from productive activities. The middle classes have no influence over their governments for there is no dependence on taxes. Thus aid ends up supporting corrupt governments, whose misgovernance makes investment unattractive, resulting in the need for more aid.

Moreover, because of the continuous inflow of aid, countries face economic pitfalls such as inflation and reduced export competitiveness. They are not compelled to do any long term economic planning and much of the aid money goes into consumption and not investment. Another charge laid at aid’s door is that it stifles entrepreneurship. A striking example is that of the mosquito net entrepreneur who goes out of business because aid agencies distribute malaria nets for free. Ms Moyo also finds it particularly galling that rock stars and celebrities such as Bono end up influencing policy for entire nations while the voices of sensible African policymakers are ignored. Poor Bono does get a lot of flak for his pains.

Photo: UNDP

The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly is a more wide-ranging book, addressing not only aid but also other forms of intervention by the West, such as IMF loans for economic development, as well as ‘benevolent’ military intervention in dysfunctional countries. Based on his long stint in the World Bank, he has come to be sceptical of utopian ideas for “the end of poverty”.

Mr Easterly believes that aid is dominated by “planners” who adopt a top down approach from their lofty perches that does not take into account recipient feedback or conditions on the ground. Thus, crucial initiatives such as delivering cheap medicines to the poor are botched due to a bureaucratic planning approach and compounded by lack of accountability. At the other end of the spectrum, effective logistical initiatives such as delivering Harry Potter books to children are undertaken by those he calls “searchers”, people who identify demand for a particular good and find a way to satisfy it. Mind you, searchers don’t necessarily belong only in the realm of private enterprise. Their approach of identifying customer needs and satisfying these can also be used effectively in the non-profit sector. However, even though Soviet-style five-year planning has been discredited, aid organisations insist on using the planning model for poor countries. They will not let the lack of results deter them from concocting utopian poverty alleviation plans such as the Millennium Development Goals.

Mr Easterly castigates aid proponents such as Jeffrey Sachs for their belief in the myth of the Big Push — that people are poor because of the poverty trap and need a big push in the form of aid to help them overcome the trap. Poverty is regarded as a technical problem that can be solved with sophisticated expertise and by having a lot of money thrown at it. This approach completely ignores the effects of bad governance, lack of property rights, and historical factors such as colonial exploitation, slave trade or external meddling. Thus huge amounts of money continue to be poured into poor countries with negligible impact.

Apart from aid, Mr Easterly also takes a look at IMF interventions and shock treatments in several markets and analyses what works and what doesn’t. The IMF works best when it focuses on short-term loans to countries to help them overcome immediate balance-of-payments problems. Its longer term market interventions and shock treatments have not been as successful. However the top down planner approach is often used by the IMF to impose free markets in countries that didn’t have any. Mr Easterly notes that “free markets work, free market reforms from outside don’t”. This is because markets are the product of bottom-up local networks, social institutions, custom, law and norms. They emerge organically and “the West cannot design comprehensive reform for poor countries”. Similarly, just as planned aid or planned free market reforms by outsiders does not work, neither does externally imposed military intervention.

With so much loaded against aid, what does work?

Ms Moyo’s solutions can at first seem a little alarming. She would like the West to cut off aid in the next five years and let Africa stand on its own feet. Instead of aid, African countries should access the bond markets and make it a point to repay the debt, for bond markets, unlike aid donors, are unforgiving of defaulters. She also favours financial innovation such as a combination of micro-lending and initiatives to unlock the value in unproductive assets such as gold or land. However, she does not make a strong case for whether such initiatives can help lift the poor from poverty on a large enough scale.

Ms Moyo also advocates a pragmatic, trade-based approach which is being increasingly adopted not by the condescending West but by many emerging economies. Key exhibit: China, which has made substantial investments in Africa and has especially helped build infrastructure such as roads and key railway lines across the continent. China is looking for commodities to power its growth, which Africa has in abundance, and in return is making huge investments and bringing economic development in its wake. To a lesser extent, India, Turkey and other emerging economies are also investing in and trading with Africa.

Ms Moyo believes that in such trade and investment based relationships lies the path for Africa’s development. But couldn’t this approach engender problems such as uneven trade relationships or natural resource exploitation by the emerging market partners? Trade partners can also end up supporting strongmen who will give them favourable terms and overlook rampant human rights violations, thus helping sustain dictatorial regimes. Ms Moyo tends to gloss over these potential pitfalls.

Mr Easterly, on the other hand, has no master plan — not surprising in someone who has seen the failure of big, overarching anti-poverty initiatives at first hand. Instead, he advocates narrowly targeted aid designed to solve specific problems by way of constant experimentation. Feedback from intended beneficiaries is important to help discard projects and ideas that do not work, while focusing on those that do. In contrast to grandiose ideas for ending poverty, this approach seems rather timid and anticlimactic. But it can be effective. Mr Easterly cites successes in public health, such as smallpox eradication, or improving school attendance in Kenya by supplying deworming drugs, both of which were targeted initiatives geared towards solving specific problems.

The sobering message is that outsiders cannot eliminate poverty for entire nations or build institutions or foster democracy on behalf of other people. Countries themselves have to keep experimenting to figure out which approaches work for them. For their part, rich donors would do the poor a huge favour by eschewing hubris and accepting that they cannot eradicate poverty by blindly throwing money at it. Free money, say Ms Moyo and Mr Easterly in unison, is a recipe for never-ending economic backwardness.

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