Africa’s poor nations need trade – not aid

Government leaders at the G-8 meeting next month in Gleneagles, Scotland must resist the pressure to pour significantly increased aid into Africa. They must do so for the sake of Africa’s people.

Intergovernmental transfers have done more harm than good. They have 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 economic efficiency have been papered over with aid funds. Inefficient and loss-making government enterprises have been retained instead of being sold off, unjustified subsidies have continued, as have harmful import barriers and bureaucratic red tape.

African countries have received billions of dollars of foreign aid, yet the continent remains the world’s poorest. The Commission for Africa initiative calls for an extra $25 billion in annual aid for the continent, rising to $50 billion by 2015. The United States alone has in the past given billions of dollars, currently provides approximately $6 billion per annum, and would double to $12 billion under the Blair proposal. Fortunately, the world’s most generous donor seems to be reluctant to agree to the proposition.

History has shown us that the best way to move from poverty to prosperity is to reduce barriers to trade. Adam Smith noted this over 200 years ago, showing that trade is the engine of economic growth. Yet recent trade statistics show that Africa’s trade with the rest of the world has been declining. UNCTAD reports that Africa’s share in world exports fell from about 6 per cent in 1980 to 2 per cent in 2002, and its share of world imports from about 4.6 per cent in 1980 to 2.1 per cent in 2002. The substantial decrease in trade is almost entirely attributable to trade barriers, including domestic subsidies that prevent African countries from exporting to the very countries that provide them with aid.

Developed countries, particularly the U.S. and the E.U. nations, have persistently prevented access to their markets for those commodities in which African countries have a comparative advantage. Subsidies to their own producers often result in subsidised agricultural products crowding out developing country produce on foreign markets. For instance, it is estimated that every cow in Europe receives almost $2 a day in subsidies, twice the average African’s income. According to Kimberly Elliot of the Centre for Global Development, 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 of their own cotton farmers, who are paid twice the world market price for cotton, threatening the livelihoods of an estimated 10 million West Africans.

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.

Under protectionist regimes, government officials decide which industries are to receive protection and to what extent they are to be protected, a task that no one can have the necessary information to perform without causing harm to the economy. In open trade regimes it is domestic and foreign consumers that decide which industries will prosper and the increased competition leads to greater efficiency overall. Corruption is inevitable when government officials control valuable instruments such as import licences, which has negative social and economic consequences. Apart from avoiding corruption, there are considerable potential economic gains from eliminating trade barriers. The World Bank estimates that if we were living in a tariff free world, income around the globe would increase by $832 billion as a result of increased trade in all goods. Most of these gains ($539 billion) would flow to developing countries.

Economic aid is usually transferred from one government to another. However, non-governmental aid could be created by rich-country governments giving tax breaks to corporate and individual taxpayers for investments and philanthropy in designated developing countries. Donor nations could leverage earmarked aid funds by multiples of three or four, and the efficiency of the aid by similar multiples, merely by changing the method of delivery. Poverty relief, if made by private organisations and individuals, would be real, identifiable and quantifiable. Investments in recipient countries and donations to deserving causes would go directly to areas where they would make the most difference in providing jobs and relieving poverty. Bureaucrats would not absorb a large percentage of the funds in administration costs. .

Private investors and donors have a personal interest in ensuring that their investments are productive and their donations used for their intended purposes. They would consequently oversee the process more efficiently than governments are capable of doing. Investors would invest their capital in viable businesses producing goods and services that the consumers of the developing countries want. Tax breaks would reduce the investment risk and provide incentives for them to do more of it.

The eight richest countries are therefore faced with the following decision next month. Either they can continue to make aid a regular fixture on their budgets or they can simply allow poor developing countries access to their markets in those sectors where they have a comparative advantage. If they insist on some form of aid, they should encourage people-to-people aid by giving their own citizens tax breaks for investment and good works in developing countries. The only way these countries can break out of the poverty trap is through trade and export-led growth. Lower import barriers and substantially fewer subsidies is the key to this type of growth. Without reductions in these barriers to trade, poor developing countries will never escape the poverty trap.

Author: Jasson Urbach is an economic researcher 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/ 7 June 2005