09Sep
NewsStudent contributions

Fewer boondoggles, more hedgefunds: the dismal record of foreign aid in Africa

By Daniel Press

A top professor of public health and income inequality, Sir Michael Marmot, recently proposed a thought experiment in third-world development on the ABC’s Q&A. He posited transferring a year’s income of New York Cities top 25 hedge fund managers to the African country of Tanzania, which has an equivalent income of $25bn. By his logic, this would flow through to investments in health, education, and infrastructure, propelling them into the developed world, whilst “the hedge funds wouldn’t miss it because they’ll make another billion next year”.

 

Putting aside the complete and utter disregard for private property and the damage that a 100% tax on income would do to wealth creation, the statement is particularly ridiculous in that it completely neglects the reality of the development experience felt by African countries. Sir Michael suggests that aid transfers to impoverished nations would lead to an incredible social and economic flourishing. There are several problems with this well wishing. Perhaps none more obvious, however, is the fact that we have already attempted this on a much grander scale and failed miserably.

 

Over $1 trillion USD of development aid has been transferred from wealthy nations to the African continent over the past 60 years, with little to show for it.  It’s widely accepted that most of the Millennium Development Goal’s have been missed, whilst more than a quarter of the countries in sub-Saharan Africa are poorer now than they were in 1960.  Large-scale aid transfers have clearly had little-to-no tangible effect on outcomes for these nations. To more directly compare Marmot’s thought experiment, a former World Bank economist found that if Zambia had converted all of its aid grants into investment and growth, then by 1990 it would have had a per capita GDP of around $20,000 USD. Zambia’s GDP instead fell under a measly $500 USD.

 

How have such supposedly noble means created such disastrous consequences? The aid-development model is a textbook example of good intentions leading to unintended consequences. Injections of aid, rather than spurring growth, have corrupted incentives to develop and perpetuated a political framework in opposition to freedom. Instead of leading to investments in infrastructure, the channeling of large aid flows through malfunctioning governments often consolidates power within the hands of oppressive, despotic leaders. Many African governments have therefore transferred their attention to courting unelected foreign donors rather than their own population for votes and tax dollars. This allows them to effectively neglect any pressures to efficiently allocate resources and establish long-term development plans.  Aid checks have created a virtually unlimited budget for unaccountable governments.

 

The issue of funded incapability, unfortunately, runs deeper than the rampant corruption and neglect of service provision popularized in the media. By infiltrating nearly every sector of the economy, aid money crowds out domestic businesses and jobs that would otherwise exist. Take for example the solar powered lamp post producer in Haiti, which was directly hurt following the influx of solar energy by foreign NGOs; or the mosquito net producer whose small business is displaced by the good intentions of others. Aid money has manipulated the marketplace and thrown those who would have typically been employed back into the very poverty we are looking to eliminate. This perpetuates the cycle rather than solving it, and partly explains the reason that African poverty is so particularly persistent.

 

Many proponents of aid point to the Marshall plan’s role in Europe’s staggering post-World War II recovery. It is true that Europe benefitted greatly from this aid funding, but these interventions were relatively small, focused and finite. The African experience, in contrast, has seen virtually unlimited commitments, ingraining governments with a sense of entitlement in neglect of private innovation. If the left were truly serious about ending global poverty, they would reject this international welfare state narrative. Instead of dreaming up grand experiments, they would do better to look towards historically proven policies that seek to empower rather than patronize.  History is littered with examples of nations who have dramatically increased their prosperity through implementing robust and credible institutions, based on a strong rule of law, property rights and free markets. Africa doesn’t need the pity of the top 25 hedge fund managers, but the politico-economic framework necessary to create them. It needs economic freedom and accountable institutions built from local knowledge, rather than imported via foreign institutions offering one-size-fits-all solutions. But most of all, there is a dire need to believe that Africans are capable of their own development, and aren’t helplessly awaiting the saviour by a guilt-ridden elite.

Daniel Press

Daniel Press graduated with a BA from the University of Western Australia. His research focuses on the economics of development and international trade. He currently resides in Washington DC.

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