Friday, June 08, 2007

The Aid Scam

The rock singer Bono has been making the rounds at the G-8 summit, trying to scold national leaders into keeping their promises to increase aid funding to poor countries. As an economist it is sad to watch this, because the ineffectiveness of such aid in improving the lot of people in such countries is one of the few things (along with rent control making apartments harder to get and a handful of other propositions) that most economists agree on. An interview with a Kenyan economist in the English language version of Der Spiegel (hat tip: The Belmont Club) pungently begs Western countries to stop sending foreign aid. Here are some choice excerpts:
The Kenyan economics expert James Shikwati, 35, says that aid to Africa does more harm than good. The avid proponent of globalization spoke with SPIEGEL about the disastrous effects of Western development policy in Africa, corrupt rulers, and the tendency to overstate the AIDS problem.

Mr. Shikwati, the G8 summit at Gleneagles is about to beef up the development aid for Africa...

Shikwati: ... for God's sake, please just stop.

SPIEGEL: Stop? The industrialized nations of the West want to eliminate hunger and poverty.

Shikwati: Such intentions have been damaging our continent for the past 40 years. If the industrial nations really want to help the Africans, they should finally terminate this awful aid. The countries that have collected the most development aid are also the ones that are in the worst shape. Despite the billions that have poured in to Africa, the continent remains poor.

SPIEGEL: Do you have an explanation for this paradox?
Shikwati: Huge bureaucracies are financed (with the aid money), corruption and complacency are promoted, Africans are taught to be beggars and not to be independent. In addition, development aid weakens the local markets everywhere and dampens the spirit of entrepreneurship that we so desperately need. As absurd as it may sound: Development aid is one of the reasons for Africa's problems. If the West were to cancel these payments, normal Africans wouldn't even notice. Only the functionaries would be hard hit. Which is why they maintain that the world would stop turning without this development aid.

SPIEGEL: The Americans and Europeans have frozen funds previously pledged to Kenya. The country is too corrupt, they say.

Shikwati: I am afraid, though, that the money will still be transfered before long. After all, it has to go somewhere. Unfortunately, the Europeans' devastating urge to do good can no longer be countered with reason. It makes no sense whatsoever that directly after the new Kenyan government was elected -- a leadership change that ended the dictatorship of Daniel arap Mois -- the faucets were suddenly opened and streams of money poured into the country.

Shikwati: Why do we get these mountains of clothes? No one is freezing here. Instead, our tailors lose their livlihoods. They're in the same position as our farmers. No one in the low-wage world of Africa can be cost-efficient enough to keep pace with donated products. In 1997, 137,000 workers were employed in Nigeria's textile industry. By 2003, the figure had dropped to 57,000. The results are the same in all other areas where overwhelming helpfulness and fragile African markets collide.

The whole thing is worth a read, as is William Easterly’s The White Man’s Burden, which readably documents the catastrophe that is foreign aid.
Let us be clear: the state of current economic research, whose practitioners agree on little, is that foreign aid does not work. Rather, it sometimes makes things worse in recipient countries. How can this be? Intelligent foreign aid, closely monitored, can be used for specific, socially productive tasks such as buying malaria nets or drilling wells. What could be wrong with that?

A lot, it turns out; aid has several disastrous flaws. It generates vast corruption among recipients – not just recipient governments but the development aid groups that oversee the use of the money. And the fact that so many have a stake in its success means that once aid begins it can never be truly cut off, as the endless procession of officials from countries like Côte D’Ivoire (over 20 IMF structural-adjustment loans since the early 1980s) to IMF headquarters can attest. Both pushers and takers of these loans become addicted to them. (See my sketch of the Palestinian territories, more destroyed by aid than anywhere else on the planet, here.)

But Easterly’s most compelling criticism is the ultimate futility of trying to manage development – radical transformation of preindustrial societies into societies of modern prosperity where people can be in charge of their own fate – through the drawing up of aid and loans from desks in Washington or Paris. Foreign aid would fail even if it weren’t stolen, even if it didn’t prop up cruel dictators, because it is central planning. It is no more sensible for the World Bank to decide, with taxpayer money, that a dam needs to be built in country X than it is for a Soviet agricultural planner to decide what the price of beans in Kiev should be. Those dams and wells, for all the good they do at a particular location, affect incentives and create a problem economists call path dependence, where decisions today require us to adopt a particular future tomorrow. (The classic example is the QWERTY typewriter. Despite its alleged inferiority to other keyboard designs, it is said to persist because it would be too expensive to switch because typists are all QWERTY-trained, which gives manufacturers and incentive to make more QWERTY keyboards, which gives typists an incentive to be QWERTY-trained.) In the foreign-aid context, the construction of a dam means decision-makers in that country now take the dam as given, and re-orient economic decision-making on that basis. Since the dam was not constructed based on local entrepreneurial initiative, capitalizing on local information about that society, it is likely to be a white elephant.

Development is a complex, far from entirely understood problem. But one thing we know is that it doesn’t happen by imposition from the center. It happens from the bottom up, one entrepreneur at a time in an environment, such as China since the early 1980s or India since the mid-1990s, in which people have a sense that their efforts and ambition will pay off. It is almost a problem of epidemiology – the spread of the (beneficial) virus of the mentality of self-sustaining growth into more and more regions – as much as economics. And foreign aid has nothing to do with whether that virus spreads; if anything, it is an antiviral agent.

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