The Shortcomings and Limitations of Foreign Aid

In our increasingly globalized world where information and news flows freely, the images of the unacceptable and appalling living conditions faced by so many millions of people is impossible to ignore. Unfortunately, the fight against poverty- specifically through foreign aid programs- has largely been a misallocation of our efforts and resources. Over the past 60 years, at least $1 trillion worth of aid has been sent to Africa yet per-capita income in Africa has declined. The number of people living on one dollar a day has doubled since the 1970s to more than 350 million people.  Huge loans have been provided to African governments with full knowledge of the corruption plaguing the system. Billions have been stolen and the burden of debt is borne onto the African people who pay $20 billion per annum despite the extensive debt-relief campaigns in the 1990s. Across Africa, over 70% of government spending now comes from foreign aid. In Ethiopia alone, aid covers more than 90% of the government budget. Even the International Monetary Fund, the organization responsible for many foreign aid and international loan schemes, has reconsidered its position when it published a report entitled “Aid Will Not Lift Growth in Africa.” The African Union estimated in 2002 that corruption was costing the continent $150 billion a year. The true costs are higher as this does not include the immeasurable opportunity cost of scaring away both foreign and domestic investment.

While foreign aid has been used for legitimate causes and not for the subsidization of corrupt regimes, we need to differentiate charity from attempts at economic development or nation-building. The nature of foreign aid is that bureaucrats and politicians send money on behalf of non-consenting taxpayers to overseas regimes who are largely unaccountable to their own people. In such a situation of perverse incentives moral hazards are the norm rather than the exception.

It has been argued that what Africa needs is its own Marshall Plan. I am very skeptical of any solution whose central theme is throwing resources at the problem but more importantly, I am skeptical that the Marshall Plan was what brought post-war Western Europe back on its feet in the first place. As economist Tyler Cowen has noted, the countries that received the most Marshall Plan money (Britain, Sweden, and Greece) grew the slowest between 1947 and 1955, while those that received the least money (Germany, Austria, and Italy) grew the most. In many ways the Marshall Plan was actually the obstacle. It was Ludwig Erhard, the Economic Director of occupied West Germany, who replaced the Reichsmark with the Deutschemark (reducing the money supply by 93 percent) and overnight eliminated the stifling price controls that had inflicted severe shortages on the German people against the orders of the Allied powers. It was here that the German Economic Miracle began with sweeping privatizations and deregulations, beginning in 1948. These swept away the regulatory controls and elaborate tax system of the National Socialists.

The economic miracle of Hong Kong defies the need of a Marshall Plan in order to economically develop. While Hong Kong was a colony of Britain, Hong Kong was not the recipient of any sort of Marshall Plan after the Japanese wreaked havoc onto the city in World War II. The same can be said about Singapore.  Both continue to pursue the most laissez-faire policies in the world and both boast among the greatest domestic growth and poverty reduction rates the world has ever witnessed.

Can the same really be said about Africa? Absolutely. What is often neglected by academia and the mainstream is acknowledgement of the growing achievements of Botswana, the fastest growing economy in world from 1966 to 1999. The government has consistently maintained budget surpluses and has kept extensive foreign exchange reserves. These are the result of Botswana’s monetary stability, prudent fiscal policy, and most importantly, a vigilant anti-corruption agenda. According to international corruption watchdog, Transparency International, Botswana is the least corrupt country in Africa.

The facts speak for themselves; foreign aid is simply not a viable option for sustainable economic growth. Often it fuels the problem. What is needed is for leaders, academics, and concerned citizens alike are to recognize the capacity and self-responsibility of people around the world to plan for themselves so that they may thrive in a free enterprise system. The ingredients are simple: respected property rights, sound money, and the allowance of market forces to coordinate economic activity. Any attempt to do otherwise is to reduce the self-determination of the poor to plan for themselves and place them under the whims of the politically privileged.

-Ian CoKehyeng

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