$4.6 Trillion Later, Foreign Aid Remains An Economic Somnolent

Justin Yifu Lin, the World Bank’s chief economist and senior vice president for development economics.(Image credit: AFP/Getty Images via @daylife)

September 27, 2012 (Forbes) –The governments of the Western industrialized world have provided over $4.6 trillion (in constant 2007 dollars) to the world’s less-developed countries (LDCs) over the past 50 years, the equivalent of several Marshall Plans. Some of this has been extremely useful: Treatments for HIV/AIDs, food to prevent starvation, and support for immunization programs, for example, have saved lives and enhanced our universal humanity.

But the focus of much foreign aid, especially in the past two decades, has been aid for the purpose of advancing economic development. This part hasn’t worked very well.

The graph shows the relationship between the foreign aid received per capita in 131 developing countries during 2000-2005 (horizontal axis), and the rate of economic growth in those countries in the subsequent five years (2005-2010; vertical axis) as measured by the percent increase in gross national income. As you can see, there is a noticeable negative correlation, that is, increased flows of foreign aid are associated with somewhat lower economic growth. While this does not prove that foreign aid actually impedes growth, it is powerful evidence that such aid does little or nothing to improve it.

Economist Peter Bauer pointed out some of the reasons for this some years ago, including the fact that foreign aid tends to end up under the control of the elites in developing countries. A related reason is the fact that aid to LDC governments makes it possible for them to postpone necessary reforms. The leaders of a recipient country may know that they should free up trade, facilitate new business formation, streamline licensing procedures, and improve protection of private property. But if there’s enough donor money to keep things going, these steps can be postponed.

Haiti and Ethiopia are prime illustrations. No one produces mangos on much of Haiti’s good mango soil in large part because no one has clear and enforceable title to the land on which they can be grown. Ethiopia is so bad about granting land title to its own farmers (and agricultural productivity is so poor as a result) that the government is now issuing 99-year leases to foreign companies to come in and farm Ethiopia’s excellent soil.

Even when a benefactor like the World Bank imposes conditions that favor freer markets, those conditions seldom touch policy issues like land titles, and the flow of donor funds makes all such changes less urgent; reforms can be postponed indefinitely.

Donor funds also often work against economic development by causing government bloating at the expense of the private sector. When the government takes over much of the health or communications sectors, for example, private entrepreneurs are barred from those opportunities. Further, governments are often not very good at these functions, and cronyism is likely to creep in. Members of the chief minister’s own tribe or extended family are likely to get hired for those choice positions. Corruption is not uncommon. All of which exacerbate the initial inefficiency.

Democracy may be impeded as well. A government that depends more on foreign aid for its operating budget than on taxes paid by its own citizens becomes answerable, not to its own citizens but to the donor governments. Thus, when donor funds are flowing, the citizen-taxpayers often get short shrift. And barriers to free and responsive government are often barriers to economic freedom–and development–as well.

Foreign aid is best applied through private channels, for short-term emergencies, and/or for causes that are politically popular almost everywhere, like immunization. Propping up the finances of developing countries’ governments is likely to do more harm than good.

Philip D. Harvey heads DKT International, a nonprofit family planning organization. He has participated in foreign assistance programs since 1970.


China in Africa: Bad Influence or Bad Rep?

SEPTEMBER 26, 2012

For some time now, Western development aid has been criticized as ineffective. Over the past 60 years, the West has given an estimated trillion dollars in aid to Africa, and there is a growing body of evidence that this aid has actually made the continent worse off than before. Aid, argues Dambisa Moyo, in her book Dead Aid: Why Aid is Not Working and How There is a Better Way for Africais to African governments what oil is to Middle Eastern ones.  It perpetuates bad governance and enriches rulers at the expense of everyone else. Moyopoints out that Africa is more in debt and more impoverished than it was 40 years ago. She believes that aid is partially, if not mostly, to blame.

Over the last few years, China and the other BRIC countries have significantly increased their spending on international development projects, particularly in Africa.  These countries are supplanting Western donors as Africa’s major suppliers of foreign aid, and redefining the aid paradigm.

The vast majority of Chinese development in Africa is not aid, per se.  The Organization for Economic Cooperation and Development (OECD) breaks development finance down into two categories: Private and Official.  Private development finance includes remittances, FDI, private grants, and other instruments.  Official development finance, on the other hand, includes both Official Development Assistance (ODA), and Other Official Flows.  ODA is strictly defined as grants and concessional loans—what organizations like the Congressional Research Service commonly call “aid.” Other Official Flows are defined more broadly.  They include export credits, certain types of resource-secured loans, military aid, subsidies for private investment, and a slew of other government mechanisms.

The vast majority of Western aid to Africa is in the form of ODA, in other words, concessional loans, debt forgiveness and grants. Chinese development, in contrast, is not majority ODA but rather Private and Other Official Flows.  This fact is obscured, as Deborah Brautigam explains, by China’s lack of regular official reporting on its aid activities, and by the state-driven nature of the Chinese economy.

The difference is not merely technical.  It reflects a major difference in China and the West’s approaches to aid-giving in Africa.  China’s overall strategy is profit-driven and self-interested.  It seeks to acquire as many natural resources as possible, support Chinese businesses and promote Chinese diplomatic policies. Its apparent proclivity for propping up pariah states and its nonchalance towards human rights and environmental standards has led Western governments and African ones to label China as a bad influence in the region.

However, many argue that China’s strategy, despite its drawbacks, may benefit Africa in the long-run. Take natural resources, for example. China does not view African countries that are rich in natural resources as poor. Therefore, it is reluctant to give grants and concessionary loans and prefers to use resource-backed loans, such as the “oil-for-infrastructure” type loan it gave to Angola, instead. Many Africans prefer this approach and view China’s economic role in the region as beneficial. South African President Jacob Zuma, recently said “we are particularly pleased that in our relationship with China, we are equals and that agreements entered into are for mutual gain.”

Another major difference between Chinese and Western development in Africa is the focus on infrastructure.  Western donors focus more on emergency and humanitarian projects. In 2011, 61% of China’s total concessionary loans to Africa went to infrastructureprojects, most built by Chinese contractors.  The roads, ports and railways are meant to bypass South Africa and give China access to the wealth of oil and other resources in Africa’s interior.

China’s focus on infrastructure and commercially viable investments is starting to have a positive effect on Africa’s economy. It is also increasing Chinese influence in the region.  While China is unlikely to use its new found influence to pressure African governments to be more accountable on human rights issues, its investments will have tangible effects on African development.