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Reversal of Fortune

The high cost and low impact of foreign aid
The idea behind aid is basic at its core. Do unto others what you would have them do unto you. It is an elementary principle, but does it always work? For generations, Africa has been on the receiving end of foreign aid. There is an unquestionable need for help for people living in the poorest countries. However, in cases where aid is administered through businesses and governments, the effectiveness is being questioned.

African countries have been struggling with the greatest depths of poverty for many years. Most countries—if one will allow for broad stokes—have impoverished populations who have been so for decades. And for decades, the international community has been involved in humanitarian aid relief. The World Bank estimates indicate that in over the past 60 years, over $2 trillion (all figures in U.S. dollars) has been paid to Africa for development from wealthier countries. Yet today, children and adults are still dying of hunger and preventable diseases at a staggering rate. Clean water and food are still not readily available to many citizens. Education is a luxury only the minority enjoys.

This lack of improvement has lead to a small contingent of economists to question continuing, not the impetus to help, but the form that help is taking. It seems counter-intuitive to stop sending aid to countries that need it so desperately. It also seems counter-intuitive that ceasing foreign aid might ultimately do the most good, which is what is making a school of thought about foreign aid so provocative.

Dambisa Moyo is an economist who has worked as a consultant for the World Bank and in the debt capital markets for Goldman Sachs. In 2009, Moyo wrote a book on foreign aid policy entitled Dead Aid, which outlined her view that aid is the fundamental cause of poverty, and therefore its elimination is necessary to promote economic growth. Moyo is not the first to steer thinking towards foreign aid in this direction, but her book has generated a great deal of conversation and, in the words of former UN Secretary-General Kofi Annan, it “makes a compelling case for a new approach to Africa.”

Industry of aid

Aid is now an industry. Since 2006, foreign aid to Africa has risen by 33 per cent, standing at $78.6 billion, and is projected to reach over $125 billion by the end of 2010. Critics of this aid point to the rampant and institutionalised corruption as the reason aid money doesn’t get to its targets.
Bureaucracy is increased in parallel with aid, and puts a chokehold on money intended to get to those in need. In an article on foreign aid, Larry Krotz uses the example of Tanzania. The country is reportedly weighted down with the task of preparing 2,400 reports each quarter and holding a thousand meetings annually with donors—using money that is meant for food and medication. The organization called Transforming Foreign Assistance in the Twenty-first Century measures the effect of aid, and has concluded that the cost of receiving aid is the same as its benefit, essentially neutralising the effectiveness of the contribution.

Tanzania is just one example of many. On March 5, 2010, the Prime Minister of Chad resigned over embezzlement scandals after four of his ministers were suspended on allegation of siphoning some $5 million of public aid funds, funds allocated for citizens of one of the world’s poorest countries.

On the same day, World Bank country manager Kundhavi Kadiresan reported “an undeniable lack of government action to follow up on cases of grand corruption,” which has lead to donors withdrawing and retaining their contributions to Uganda unless it reins corruption. Kadiresan continued to say the failure of the government to control high-level corruption will result in “withholding [of] disbursements, reductions in aid or reprogramming away from direct budget support.” The World Bank official acknowledged corruption was “endemic” in Uganda—$27 million dollars disappeared during its hosting of the 2007 Commonwealth Heads of Government Meeting, for example, and Uganda is estimated to have lost as much as $100 million each year in shady procurement contracts.

A day earlier, the former governor of Nigerian state of Nasarawa was charged, along with 19 other former state officials, by anti-graft (anti-corruption) police for embezzling $100 million from 1999 to 2008. Examples like this are too easy to find.

Robert Calderisi, a former economist with the World Bank points to a $300 million malaria project as an illustration of what happens far too often with money sent with the best of intentions for helping. Of each dollar allotted for the project (of providing nets to keep out malaria-carrying mosquitoes), one solitary cent went to medicine, one cent went to insecticides, six cents went to mosquito nets, and the remaining 92 cents went to administration and evaluations. Granted, this is one example, but it illustrates a reality that is often times incalculable due to the very fact that those responsible for monitoring the money are those profiting. Clearly, this pattern of allocation is upside down.

The reason aid has failed to deliver more economic growth over the past few decades is partly because it has not been spent on its intended purpose. Instead of revving up investments, it was used to fuel public consumption and current projects. Time and again, money ends up in the pockets of those working under the guise of government and agencies and does not trickle down to those in need. There is also no motivation for corrupt organizations to do anything differently, since aid has been an open-ended system for so many years. This perpetuates taxation without representation, according to Moyo. Corruption is then shown to be socially embedded in logics of negotiation and aid redistribution. Any anti-corruption policy must face up to these realities.

The crux of Moyo’s argument is that aid may in fact perpetuate underdevelopment. She cites the International Monetary Fund (IMF) research that indicates the constant influx of aid can have “systematic adverse effects on a country’s competitiveness.”  Even pro-aid economist Jeffrey Sachs, in a rebuttal to Moyo, says “Aid has never been properly resourced or targeted for a focused period to end the poverty trap.”

Research from the IMF shows that, in the last 30 years, over half of the export markets for Africa were lost to other countries that are better set up to handle business. That loss represents $70 billion per year for the continent. What is needed is a long-term and sustaining solution, championed hopefully by home-grown initiatives. Moyo is an advocate for “smart-aid”, helping countries finance internal development and create jobs through trade and investment. She feels “history has shown...encouraging corruption, creating dependency, fuelling inflation, creating debt burdens and disenfranchising Africans” hurts more than it helps. Moyo cites statistics which say that today, over 70 per cent of Sub-Saharan Africans live on less than $2 a day, and over 60 per cent of Africans under the age of 24 are unemployed.

No sane person would oppose the notion that countries that can assist poor and developing countries ought to do so. Whether a proponent of foreign aid or one who wants to reorganise how Africa receives assistance from the world, the conversation is a worthy one. If countries tried to withdraw aid from countries without proper economic policies and transparency, would those governments bend to the pressure? Despite the pessimism stemming from corruption, aid can be beneficial and is needed. Aid should be used to break the cycle of poverty, to control disease, provide education and safe drinking water, rural development and create business, not to line the coffers of a corrupt few.
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