The great facade of foreign aid

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Over the past 50 years,  The developed world has poured billions, if not trillions, of dollars in financial aid to assist the developing world to achieve higher  living standards and quality of life. Economists tend to define living standards as the quantifiable level of income, education, and access to necessities. To state the obvious, poorer, less developed countries are held back mainly as a result of their lack of finances. This, therefore, is why developed countries tend to assist in the development of living standards via the provision of financial government aid, which, in theory, is the most effective and reliable method of encouraging economic development. However, there is a growing movement against such aid, critics have argued that developmental aid has failed and its recipients are suffering as a result of it.

For the sake of balance, the conventional assumption was that in the developing world, ameliorating infrastructure was the most effective strategy for improving the general standard of life. As a result, this strategy has been adopted by large transnational organisations such as the OECD. The aid money is used to construct and maintain projects like roads and power lines which helps create jobs, and thereby provides income for workers. As incomes rise, more families will be able to afford to send their children to school, enabling them to find higher paying jobs in the future. This allows social mobility as gradually more families are lifted out of poverty, thus increasing living standards. Furthermore, aid-funded developments in infrastructure like roads and highways can make the nearby areas more accessible, facilitating the transportation of goods and people. For example, in Southern Laos, the OECD funded the upgrading of Champasak Road, a 200 km road that connected the regional capital of Pakse to the Thai border. Since the road’s completion, there was a 128% rise in tourism to the Champasak region due to the increased accessibility. This has since allowed for residents in villages to earn a greater income from selling textiles and jewellery to tourists rather than from their typical agricultural trade. Champasak road’s improved accessibility has also acted as a macroeconomic catalyst to the region, attracting foreign investment in schools and hotels; this further development has created more jobs and improved services, thereby increasing living standards as planned. In a survey conducted after the completion of the new road, 67% of low-income households said that they were earning more since the construction of the road, while 60% said that their access to education and healthcare had also improved. This is just one indicator of many showing that standards of living have improved as a result of aid-funded development. So, if aid works so well in achieving so many goals in modernisation and development – then why the backlash?

Behind the superficial prosperity and purported improvements to living standards, many critics have argued that aid, or the current provision of it, is dangerous and inefficient in helping LEDCs. Most outspoken of these critics, Dambisa Moyo, estimates in her controversial book Dead Aid that over the past 50 years, over $1 trillion has been sent to Africa in the form of aid, yet poverty rates have risen from 11% to nearly 70% in the same period. Paul Collier, another sceptic, reaches a similar conclusion in The Bottom Billion that in contrast to the exponential rise in living standards in countries such as China during the 1990s, the incomes of the poorest billion of the earth’s population actually fell by 5%, despite the huge levels of economic assistance being poured into LEDCs in Asia and Africa. Judging by the findings of these two famed economists and many others as well, it can be argued that rich countries cannot meaningfully help most developing countries improve living standards, regardless of the billions worth of aid provided. In many cases, living standards have remained stagnant or even deteriorated.

This is not to say that there hasn’t been a reduction in global poverty, as organisations such as the World Bank predicted that absolute poverty has been cut by as much as half over the past 30 years. However, it is the great efforts of China and India in poverty reduction schemes that have so dramatically lowered the global average, whereas other regions such as Africa are spiralling into a state of decline. In the case of China, such poverty reduction schemes required little to no foreign financial assistance. It is also important to state that the method used to calculate poverty levels varies between authors and organisations; Moyo, Collier, and the World Bank all use different methods, and therefore such findings are heavily disputed as they all want to promote a different message. Moyo and Collier argue the current system is flawed as they want to suggest a better solution, The World Bank would want you to think that aid is succeeding as they are the ones tasked with overseeing it. So, take these stats with a grain of salt as the truth probably lies in between with exaggerations on both sides.

So we have heard all this talk of aid failing, but what are the arguments? Dambisa Moyo attributes this to two key flaws of large-scale international aid, namely how it creates a toxic image of the undeveloped world and how it distorts the market of LEDCs. She argues that as industrialised countries send yearly payments of aid, it creates a culture of dependency or ‘addiction’ to aid in developing countries. Moyo uses the example of Rwanda, where at one point, 70% of the national budget came from overseas aid. As aid is such an easy and simple form of income for developing countries’ governments, it may disincentivise such governments in seeking better ways of financing themselves and develop the country as a whole. This leads to stagnating economic growth and the poor living standards we see occurring in many LEDCs. This so-called ‘addiction’ to aid was perhaps most prominent in now-defunct Zaire (now the DRC) while under the control of dictator Mobutu Sese Seko, who purposefully stifled the development of infrastructure and services in order to garner more foreign aid. The aid money was then used to finance Mobutu’s luxurious lifestyle, rig elections in his favour, and purchase gifts for his equally corrupt subordinates. This not only bankrupted the country but also caused widespread unemployment within the stifled industries, leading to greatly reduced living standards that were further compounded by poor quality goods and services. The degradation of the economy and living standards was to such a degree that GDP per capita fell from $600 in 1978 down to $270 in 1984.

Furthermore, in order to garner more donations, large charity projects such as Live Aid and Comic Relief have depicted much of Africa as an expanse of failed, backward nations, festering with war, corruption, and poverty. Moyo believes this has alienated Africa from the international community, with potential investors, trading partners and tourists being swayed from the continent under such preconceptions. Subsequently, investment and development in the continent have been hindered, with a severely reduced number of opportunities for improvements to be made to living standards.

Paul Collier’s analysis of the failure of modern aid for LEDCs suggests that the development of living standards is considerably more nuanced than purely economic factors, with many other barriers that could potentially hinder the efficiency of aid (and by extension the increase in living standards) such as political stability, corruption, geography, and cultural attitudes. Collier argues the ineffectiveness of modern assistance to LEDCs is not rooted in the aid itself corrupting the economy, but rather in the hostile target environment that prevents the benefits of aid from reaching the poorest and neediest. In the example of Zaire, the corrupt Mobutu administration prevented the distribution of aid money, and therefore limited its effectiveness in improving living standards. Other barriers could be cultural, such as tribalism in Africa, where the ruling tribe would only divert aid and assistance to their own tribal regions, which would alienate other tribes and halt their developments to living standard. In The Bottom Billion, Collier believes that in order to overcome such barriers, much more than financial assistance is needed to meaningfully improve standards of living. Instead, they should offer military and political intervention and greater oversight in the long-term planning of the economy (like that of Marshall Aid to Europe from America in the 1950s). Such, arguably extreme, methods ensure that the political and social environment of LEDCs is stable before sending them financial assistance.

Dambisa Moyo argues that direct international assistance may not even be needed in the development of living standards in LEDCs, as is the case with China. Between the period of 1970 to 2010, China was able to become the second largest economy and raise 500 million people out of absolute poverty, while receiving very little direct foreign aid. Some economists, particularly Moyo, argue that if LEDCs in Africa and Asia adopt a similar model to that of China (where economic growth is driven by an openness to foreign trade and long-term economic planning in infrastructure and services) then such ‘China miracles’ can be replicated across the globe and can thus raise living standards. Rich countries can meaningfully make a difference by indirectly assisting LEDCs by trading and investing in them, rather than simply sending them billions in ‘easy money’.

However, what works for China may not necessarily work for much of Africa, as, unlike China, much of the continent is still struggling with the political instability caused by the rapid decolonisation of the region in the late 20th Century, with wars, famines and genocides disrupting any government attempt at modernisation. Furthermore, in an increasingly globalised and competitive world economy, it would be naive to assume that LEDCs could negotiate fair terms of trade with richer countries, increasing the risk of economic exploitation as LEDCs result to low-quality working standards in order to minimise costs and remain competitive.

Although aid, by nature, attempts to be useful, there are fundamental flaws rooted in the current provision. Aid drives dependence and over-reliance, it distorts the local economy and can be exploited by dictatorial regimes for their personal benefit. However, it is unfair to say that all types of aid are failing as much of that provided by NGOs has greatly benefited many communities and deprived regions, albeit on a small scale. But our current government to government provision of aid is flawed and requires significant reforms to ensure that its efficiency is maximised.