By Fredrik Erixon
Chief economist, Timbro September 11, 2005
The aid sector is booming. In the last three years, foreign aid has risen by one third and today stands at $78.6 billion. In 2010, government spending on aid is projected to be
above $125 billion a year. What are we to expect from this new wave of aid spending? Will it, once and for all, lift people out of poverty or will it most likely achieve very little —
perhaps even be counterproductive? These are the core issues. Hardly anyone opposes the idea that first-world countries should assist developing countries, if that
assistance helps countries to develop. The question is: does it? I am afraid it does not.
Failure of the big push
The new ‘big push’ of development aid has been tried many times before but always with dismal results. The call for redoubling aid to eradicate poverty has been responded to many times over, but it has never delivered what it promised. In spite of more than
$1 trillion in aid to Africa over the last 50 years, the big push in development has yet to occur. Between 1970 and 1995 aid to Africa increased rapidly and aid dependency
(measured as the aid-to-GDP ratio) stood at nearly 20% in the early 1990s. Measured differently, the mean value of aid as a share of government expenditures in African countries was well above 50% between 1975 and 1995.
During the same period, GDP per capita growth in Africa decreased and was for many years even measured in negative figures. The unfortunate fact is that most African countries are poorer today than they were at the time of their independence from
colonial powers. If the idea of aid had been true —in particular the alleged link between aid, investment, and growth – many of those countries would today have eradicated extreme poverty and have a GDP per capita similar to that of New Zealand, Spain or
Portugal. If nothing else, aid to Africa seems to have lowered rather than increased economic growth.
Corruption and bad decisions
Why has aid failed to deliver higher economic growth for developing countries? Partly because aid has not been spent in the way it was intended. Instead of gearing up
investments, money was spent on current spending and public consumption – which, in
turn, led to a rapidly growing public sector in the economy. Needless to say, this strengthened other socialist tendencies in the economy and investment became, in
many developing countries, mainly a government activity. In addition, aid boosted fiscal budgets and led to a rapidly growing number of state-owned enterprises. Largely supported by the donor community at the time, these soon became arenas of corruption and this corruption spread like wildfire to other parts of the society.
The tragedy of aid, as been shown in numerous evaluations and by World Bank research, is that donors are part of the problem of corruption; aid often underpins
corruption, and higher aid levels tend to erode the governance structure of poor countries. In other words, donors have failed to follow the chief principle of the Hippocratic Oath: do no harm! However, the major reason for the low effect of aid has been policies detrimental to economic growth in the recipient countries.
Closed African doors
It is sound economic policies, not aid, that in the last decades have lifted hundreds of millions of Asians out of extreme poverty, and provided the resources to limit the extent of (or in some countries, eradicate) starvation, diseases, and other visible signs of
poverty. Inversely, it is bad economic policies that still keep millions of Africans in deadly poverty. When several Asian countries started to open up for trade and foreign
direct investment, the policies that created the ‘Asian Tigers,’ many African countries headed for a model of economic autarky, closed the borders, and regulated the domestic economy to absurd degrees.
It is hardly surprising that this strategy of development has failed bitterly. What is more, donors supported these policies. And many donors are still pouring money into
countries with policies detrimental to growth. Instead of focusing on the quality of aid and how to raise the output through a more productive use of aid, donor countries and others are solely occupied by increasing the quantity of aid. Regrettably, caution is
therefore warranted. Aid to countries that are not performing well tends to strengthen the factors of under-development, and increased aid to countries that have entered the
economic reform route runs the risk of derailing the reform process.
Trade in the aid
The question then is not if rich countries can afford to give more aid to developing countries. It is obvious that they can. The question is whether this aid can reduce
poverty by promoting economic growth. Sadly, the history of aid does not show that it can. Nor does it seem that world leaders, not to mention Bob Geldof and other campaigners, have any real idea how the aid given can be made more effective.
So, here is what donor countries should do.
Do not spend any more money on development aid.
Withdraw all aid to countries that are not pursing sound economic policies and that fail seriously to build institutions for democracy and transparency.
Countries that meet these high standards should, within a limited period of time, be assisted with ‘locking-in’ already accomplished reforms and, in particular, with
pursuing additional reforms.
Rich countries should immediately open up their markets for exports from poor countries.
Trade has proven to be instrumental to poor countries development. Aid has not.
Fredrik Erixon is the chief economist of Timbro, a Swedish think-tank, and author of Aid and Development: Will it Work this Time? (International Policy Network, 2005)