Africa’s citizens pay a heavy price for donor aid

The visit of the German Chancellor to Africa may be good for business and hopefully will lead to an increase in trade. No doubt many will be calling for increased development aid as well, in the belief that it will lift Africa out of poverty. Yet transfers of government to government aid in the guise of reducing poverty and improving health and welfare in poor countries does quite the opposite. As long as Africa is dependent on foreign aid, we will be mired in poverty and slow (or even negative) growth. If we want to grow and reduce poverty, we need to change our internal policies; and we need to spurn development aid.

The whole notion of development aid seems fairly simple and had enormous cachet after World War II. As Razeen Sally of the London School of Economics explains ‘the conventional aid wisdom held that poor countries were beset by huge market failures, particularly a structural gap between investment needs and low rates of domestic saving. Foreign aid was essential to bridge that gap; and it was used to buttress command economy-style planning, state led industrialisation, nationalisation and protectionism.’

Allowing leftist economists and those in favour of the planned economy to be in charge of government to government aid transfers did untold damage to African economies. The ongoing research produced by an international coalition of organisations, including South Africa’s Free Market Foundation, shows that big government leads to poverty. The more an economy is planned and the less economic freedom a country’s citizens have, the lower the economic growth and the greater the poverty. Unfortunately the many decades of government to government aid transfers has ensured that governments have grown and economic freedom has diminished.

A simple regression, using World Bank data, shows that there is no relationship between aid transfers and economic growth. A rich country can throw money at a poor country to bridge that ‘investment gap’ and it will have no effect.

Part of the reason that donor aid will not increase wealth is that it hampers the true source of wealth creation. When investment in a country is financed by aid, it comes under the auspices of the state and becomes a public asset. Aid therefore leads to the growth of the public sector and increases government consumption; two things that undermine wealth creation.

Aid also hampers behaviour change. Governments can continue to implement bad policies that reduce economic freedom, slow growth and increase poverty; only if outside subsidies help them to do so. Indeed most African governments have received such assistance. As a result they have not been compelled to realise that in order to become wealthy, those policies should change, and such governments therefore continue to finance themselves through aid transfers. In fact the more bankrupt a country becomes, the more likely it is to be bailed out by a rich country. The incentive is there not to implement positive changes, but to continue with bad policies.

There is a far greater emphasis now among the donor community, that aid should be channelled to those countries that have sound economic and political policies, such as observance of the rule of law and democracy. Uganda liberalised its economy and during the 1990s, average real per capita GDP growth was around 3 to 4%. Yet research done by a senior US economist, Harold Brumm and published by the Cato Institute suggests that Uganda’s economic growth may have been higher in the absence of aid. Brumm’s analysis of economic policy and donor aid concludes that ‘foreign aid has a negative growth effect, even where economic policy is sound.’ So aid is not just neutral, it is actually harmful to poor countries.

Apart from the fact that donor aid has exacerbated poverty, it has a dismal record when it comes to human rights. When politicians and bureaucrats can rely on foreign aid agencies for their salaries (and to fill their Swiss bank accounts), they are far less responsive to the needs of the citizens that elected them. Indeed aid can be used to suppress political rivals. This politicisation of aid has propped up some of the most vicious and corrupt governments in Africa. The great development economist Lord Peter Bauer couldn’t have put it better when he characterised aid as ‘the process by which poor people in rich countries subsidise rich people in poor countries.’

So it seems increasingly clear that aid harms economic growth, supports bad economic policies and props up brutal regimes. But many still believe that in the face of health problems, rich countries have a moral duty to help out and provide funding. It is appealing to argue in favour of targeted health aid, but as our own government has shown, there is no guarantee that aid directed to the public sector will ever reach its intended beneficiaries. If donor agencies are interested in improving health facilities in Africa, directing that aid to the private sector is probably a far better option.

If rich countries really want to help poor countries they should tie up their purses and get poor countries to liberalise their economies and increase economic freedom – the very things that made rich countries rich in the first place.

Author: Richard Tren is a director of the health advocacy group, Africa Fighting Malaria and is a freelance writer. 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\27 January 2004 - Policy Bulletin / 13 October 2009