Africans hold the key to their own prosperity

The African continent has received over $400 billion worth of aid since the 1970’s. Despite these significant transfers it remains the poorest continent. Indeed, the African continent is the only one that has ‘grown’ poorer in the last 25 years. As a result, average life expectancy has declined to a mere 51 years. Injecting as much foreign aid as possible into Africa has proved futile yet the process continues.

Challenging the simplistic but seductive view that increased assistance from rich countries is likely to put many poor countries on the path to prosperity, a new study on the impact of foreign aid finds little evidence that it ever has a positive effect on economic growth. Co-authors of the study, Rajan and Subramanian, conclude that: “Regardless of the situation – for example, in countries that have adopted sound economic policies or improved government institutions – or the type of assistance involved, aid does not appear to stimulate growth.”

Rather, intergovernmental transfers have done more harm than good. Foreign aid has allowed recipient governments to postpone much-needed reforms. Crises that would otherwise have forced reluctant governments to take unpopular corrective measures for purposes of improving efficiency have been avoided due to the receipt of aid funding. Inefficient loss-making government parastatals have been retained instead of being sold off, unjustified subsidies have continued, as have harmful import barriers and bureaucratic red tape.

African countries have compounded the problems of their citizens by erecting myriad protectionist barriers, motivated by infant industry arguments, to protect their local producers from foreign competition. But the evidence shows that protected infant industries never grow up, never become internationally competitive, and persistently appeal for extensions of protection. These import-substituting policies have imposed substantial costs on African consumers and greatly reduced the well-being of its citizens. The extra cost imposed on domestic consumers by protective barriers is in most cases a deadweight loss to the economy. This is confirmed by the dismal performance of the Latin American countries that religiously followed import substitution industrialisation strategies, compared to the success of the South East Asia countries that followed more outward-orientated trade regimes.

The encouraging news is that more people have been lifted out of poverty in the past decade than in any other decade in world history. This has been mainly due to internal reform in countries such as India and China, which has resulted in rapid economic growth. These countries have recognised the importance of trade and investment and changed their inward-orientated policies in order to promote economic growth. Neither aid nor external interference from world leaders caused them to initiate the changes. African countries have the same potential to grow largely through actions by Africans themselves. The most important contribution developed country governments can make is to allow developing countries access to their markets.
Developed countries, particularly the United States and the European Union nations, have persistently prevented access to their markets for those commodities in which African countries have a comparative advantage. Subsidies to developed-economy producers often result in subsidised agricultural products crowding out developing country produce on foreign markets. According to Max Borders of the National Centre for Policy Analysis, farm subsidies cost developing countries approximately $24 billion in lost agricultural income. For instance, it is estimated that every cow in Europe receives almost $2 a day in subsidies, twice the income of many Africans.

Kimberly Elliot of the Centre for Global Development reports that the U.S. sugar programme transfers $120 million a year in subsidies to two companies alone, harming the export efforts of poor sugar producing countries such as Brazil and South Africa. Furthermore, the U.S. subsidises 25,000 cotton farmers, who are paid twice the world market price for cotton. Oxfam notes that the American cotton subsidies cost sub-Saharan Africa $302 million in 2001-2002 alone. The International Cotton Advisory Committee (ICAC) estimates that ending U.S. cotton subsidies would raise world prices by 26 per cent. The results for African countries dependent on cotton exports would be substantial. For example, Burkina Faso, Benin and Mali would gain $28 million, $33 million and $43 million respectively in export revenues.

Developed countries are therefore faced with the following dilemma: they can continue to spend millions of their taxpayers’ dollars on funding inefficient governments that have no incentive to reform their policies or they can stop the aid and allow the developing countries access to their markets. Opening the markets would be beneficial to both producers in developing countries and consumers in developed countries. However, the changes that will have the greatest poverty-reducing effects in Africa lie predominantly in the hands of Africans themselves. Poverty will be eradicated mainly through the achievements of poor individuals. African politicians have the task of establishing institutional environments in which enterprising poor people can raise themselves out of poverty.

Author: Jasson Urbach is an economist at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 11 April 2006 FMF Policy Bulletin/ 17 November 2009