Article By: David McDonald
This question is regularly pondered by politicians and economists around the world, but at its core, is highly relative to a number of factors.
It’s impossible to say whether foreign aid to Africa – or any poor nation for that matter – can do more harm than good because aid comes in many different forms.
Before we make assumptions on whether foreign aid as a whole is detrimental, it’s important to know the different forms of aid that a poor country can expect to receive. Investopedia notes that there are three main types of foreign aid:
- Foreign Direct Investment
- Official Development Tools
- Foreign Trade
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describes these aids as,There are three primary forms of international aid, as well as various sub-types. The first primary type is private
There are three primary forms of international aid, as well as various sub-types. The first primary type is private from multinational or transnational corporations. For example, American companies may engage in FDI by buying a controlling interest in a Nigerian company. FDI reached a peak of approximately $3 trillion globally in 2007. Global FDI was approximately $2 trillion in 2015.
The second primary type is what people normally think of when they hear the term “foreign aid.” These are official development tools designed and funded by government agencies or international nonprofits to combat the problems associated with poverty. Humanitarian efforts spearheaded by governments are almost exclusively done by wealthier nations that are also members of the (OECD). Each year, OECD countries spend between $100 billion and $150 billion in foreign aid. In the 50 years between 1962 and 2012, wealthy countries contributed a cumulative $3.98 trillion with mixed results.
The third primary type, foreign trade, is much larger and much less intentional. By all accounts, openness to foreign trade is the single leading indicator for developmental progress among poor countries, perhaps because free-trade policies tend to go hand-in-hand with economic freedom and political stability. An excellent breakdown of this relationship can be seen in the 2016 provided by The Heritage Foundation.
But there are several other types of aid that poor nations may receive.
To start, Bilateral Aid is the dominant type of state-run aid. Bilateral aid occurs when one government directly transfers money or other assets to a recipient country. On the surface, American bilateral aid programs are designed to spread economic growth, development and democracy. In reality, many are given strategically as diplomatic tools or handsome contracts to well-connected businesses.
Military Aid is simply when one government sends funds to another country’s military in an attempt to further their geopolitical agendas. Multilateral Aid aid is like bilateral aid, except it is provided by many governments instead of one.
Humanitarian assistance can be thought of as a targeted and shorter-term version of bilateral aid.
For example, humanitarian aid from wealthy nations poured into the coastal regions in South Asia after a 9.1 magnitude earthquake triggered a tsunami in the Indian Ocean, killing more than 200,000 people. Because it tends to be higher-profile than other types of aid, humanitarian efforts receive more private funding than most other types of aid.
With such a wide variety of foreign aid packages, how do we decipher the good from the bad?
The idea that foreign aid can help alleviate poverty has played an integral role in the development of economic theory – and the thinking in many international aid agencies and governments – since the 1960s.
During this time, the idea of wealthier countries giving away financial aid skyrocketed in terms of popularity as the first humanitarian crises reached mass audiences on television. Americans watched through their TV sets as children starved to death in Biafra, an oil-rich area that had seceded from Nigeria and was now being blockaded by the Nigerian government.
There was a strong increase in economic and political arguments for helping poor countries during the mid to late 20th century. Economists widely believed that the key to triggering growth — whether in an already well-off country or one hoping to get richer — was pumping money into a country’s factories, roads and other infrastructure. So in the hopes of spreading the Western model of democracy and market-based economies, the United States and Western European nations encouraged foreign aid to poorer countries that could fall under the influence of the Soviet Union and China.
The mindset surrounding foreign aid has changed drastically over this time, but the viewpoints shared by original connoisseurs of the concept still hold. so, how have the results of foreign aid been? Not so good, actually.
Millions have moved out of 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 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.
Although humanitarian aid from foreign nations has risen in Liberia, but living standards fail to rise.
One could imagine that many factors have kept sub-Saharan Africa poor — famines, civil wars, political corruption. But huge aid flows appear to have done little to change the development trajectories of poor countries, particularly in Africa. Why? 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.
An article by notes this about extractive economic institutions,
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.
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.
We can conclude that it is not just the poor who are trapped. By throwing away a huge amount of potential talent and energy, the entire society condemns itself to poverty.
The Success of foreign aid depends on the governing body of the country receiving the aid
South Africa’s experience is instructive. Apartheid was established by the whites for the benefit of the whites. During this time, it was the whites who monopolized political power, just as they did economic opportunities and resources. These monopolies essentially impoverished the black population of South Africa and led to one of the world’s most unequal country’s.
The logic of poverty is similar all around the world.
The article goes on to explain
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.
Thus, once we recognize that poor countries lack wealth because they have extractive institutions helps us understand how best to help them.
This brings me back to my initial explanation of the different types of foreign aid. When we talk about foreign aid, we need to think about what objectives the aid itself aims to satisfy. In retrospect, when the US sends military aid to the Middle East, they are attempting to fulfill geopolitical objectives rather than help the poor.
On the other hand, the US has to Syria in an attempt to overthrow the corrupt Assad regime. An issue arises, however, when we try to decipher where exactly this aid has gone, and how helpful it has really been to the Syrian citizens.
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, create and distribute new vaccines, 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.
Trends In Foreign Aid Initiatives
The USA and other global powers have been sending aid to Africa since the method became popularized in the 1950s. However, many economists were noticing that an influx of foreign aid did not seem to produce economic growth in countries around the world. Rather, lots of foreign aid flowing into a country tended to be correlated with lower economic growth.
The countries that receive less aid, those on the left-hand side of the chart, tend to have higher growth — while those that receive more aid, on the right-hand side, have lower growth.
Even as the level of foreign aid into Africa soared through the 1980s and 1990s, African economies were doing worse than ever, as the chart below, from of New York University, shows.
Upon my seeing this graph, I had to wonder why this was happening. But after some thought, it comes to make perfect sense.
Governments should in essence, rely on the citizens in which they govern for tax revenue so that they can build infrastructure and provide the institutions that their citizens need to lead productive lives. The problem with African states is that many of their governments have yet to provide their citizens with adequate facilities.
We know that governments are not perfect – they can be downright evil at times – and we know that a governing body does not always act in the interest of its citizens, as we saw in Africa and Angola, where prejudicial commanders took authority on decisions that benefited the white elite rather than aiming to eradicate domestic inequality.
It might seem counterintuitive that having more money would not help a poor country. Yet economists have long observed that countries that have an abundance of wealth from natural resources, like oil or diamonds, tend to be more unequal, less developed and more impoverished, as the chart below shows. Countries at the left-hand side of the chart have fewer fuels, ores and metals and higher growth, while those at the right-hand side have more natural resource wealth, yet slower growth. Economists postulate that this “natural resource curse” happens for a variety of reasons, but one is that such wealth can both strengthen and corrupt a government.
Like revenue from oil or diamonds, wealth from foreign aid can be a corrupting influence on weak governments, turning what should be beneficial political institutions into toxic ones. This wealth can make governments more despotic, and it can also increase the risk of civil war, since there is less power sharing, as well as a lucrative prize worth fighting for.
Angus Deaton, the newest winner of the nobel prize in Economics, gives plenty of examples in which the United States gives aid “for ‘us,’ not for ‘them’” – to support our strategic allies, our commercial interests or our moral or political beliefs, rather than the interests of the local people. Deaton also writes that “aid can only reach the victims of war by paying off the warlords, and sometimes extending the war.”
Governments don’t like cutting their ties to dictators who create opportunities 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.
The Spectator notes
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 monopolizing power. Aid can help. But it needs to be used in such a way as to help civil society mobilize collectively, find a voice and get involved with decision-making. It needs to help manufacture inclusion.
A gentleman by the name of David Cameron answered a question about foreign aid perfectly. He says, “It is time to stop speaking simply about the quantity of aid and start talking about what [he] calls the “golden thread.” This golden threat, 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 – all of which are necessary for any country to thrive without aid, let alone with it.
It sounds foolish to say that foreign aid often hurts, rather than helps, poor people in poor countries, yet that is exactly the idea that has received worldwide attention, and is being considered right.
I believe that certain types of health aid – offering vaccinations, or developing cheap and effective drugs to treat malaria, for example — have been hugely beneficial to developing countries.
To continue, Angus Deaton, as mentioned earlier, believes that the rich world needs to think about “what can we do that would make lives better for millions of poor people around the world without getting into their economies in the way that we’re doing by giving huge sums of money to their governments.” Overall, he argues that we should focus on doing less harm in the developing world, like selling fewer weapons to depots, or ensuring that developing countries get a fair deal in trade agreements, and aren’t harmed by U.S. foreign policy decisions.
Deaton also believes that our attitude toward foreign aid – that developed countries ought to swoop in and save everyone else – is condescending and suspiciously similar to the ideas of colonialism. The rhetoric of colonialism, too, “was all about helping people, albeit about bringing civilization and enlightenment to people whose humanity was far from fully recognized,” he has written.
Instead, many of the positive things that are happening in Africa – the huge adoption in cell phones over the past decade, for example – are totally homegrown. He points out that, while the world has made huge strides in reducing poverty in recent decades, almost none of this has been due to aid. Most has been due to development in countries like China, which have received very little aid as a proportion of gross domestic product and have “had to work it out for themselves.”
Ultimately, Deaton argues that we should stand aside and let poorer countries develop in their own ways. “Who put us in charge?” he asks.
Deaton makes some considerable assertions about foreign aid in his book The Great Escape – a novel I would highly recommend reading (you can purchase it ).
If we really want to help Africa, we need to seriously consider the types of aid we are sending over there. Consider the fact that most aid to African states goes on to benefit the elite or satisfy a political agenda, and then consider what we can do to change this. Africa needs stability; vaccinations, schools, jobs, opportunities, and equality. These are the types of aid that will help Africa – because simply sending multilateral aid that will be pocketed by politicians in the form of investing in large corporations will not pave the road to any form of prosperous growth, but rather, aid to the growing inequality problem in Africa, and across the globe.
Aid to Africa can indeed do more harm than good, but it’s the type of aid we send that determines the future of this beautiful continent.
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