On Foreign Aid

Know-it-all Sir Bob Geldof is the former front man of the Boomtown Rats, a one hit wonder band from the seventies, and therefore qualifies (in his eyes) as an expert on foreign policy and development. Well, Leonardo De Crapio thinks he’s an expert on the science of global warming, so why not?

Two years ago Sir Bob called Australia ‘one of the meanest countries on the planet’ saying our level of foreign aid was amongst the lowest in the world, as a proportion of GDP.

That would be a moral issue worthy of consideration if there was any evidence that foreign aid, other than emergency aid, did the slightest bit of genuine good. If it could be shown, say, that countries which received development aid actually developed more than those that didn’t.

But as Fredrik Erixon, chief economist with Timbro, a Swedish think tank and book publisher, has shown, development aid to developing nations does not work. The more aid a country receives, the more likely it is to be locked into a cycle of increasing poverty. The graph below (taken from the BBC article linked above) shows that when aid received is high, economic growth is at its lowest. 

Aid to Africa and Growth Inversely Proportional

Kenyan economist James Shikawati explains why this is so in an interview with Der Spiegel. In essence, providing free food and clothes undermines any local industry, and encourages corruption and a passive expectation of rescue, which then leads to increasing resentment.

SPEIGEL: 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.

What works to bring nations out of poverty, as South Korea and Taiwan have demonstrated, is open trade, democratic government, and reward for effort and invention.

For related insights see Hal G.P. Colebatch’s article ‘Giving It Away’ in this month’s Quadrant magazine.