Aid and Discomfort

Liberals shouldn't be so quick to write off assistance to Africa.

| Tue Jul. 12, 2005 3:00 AM EDT

These days, it's not just conservatives and free-marketers insisting that aid to Africa is mostly useless, and that what the continent really needs is free trade to hoist itself out of poverty. Oh sure, during the recent G-8 conference in Gleneagles, the National Review published its expected article enjoining us to chant, "Trade Not Aid!" But even as world leaders pledged to double assistance to Africa by 2012, liberals such as Slate editor Jacob Weisberg and the New York Times' Nicholas Kristof were piling on, arguing that more aid would only encourage dependency and entrench corrupt regimes. "Expanded trade, by contrast, offers significant hope for African economic progress," wrote Weisberg. Over the pleas of, among others, Tony Blair and economist Jeffrey Sachs for more aid, a counter-conventional wisdom has emerged, and one the Bush administration seems eager to grasp.

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The anti-aid argument certainly has some surface validity. Africa, after all, received some $450 billion in aid during the Cold War, but its GDP declined 0.59 per year between 1975 and 2000. And as with Ronald Reagan's "welfare queens," horror stories abound: David Rieff recently published a piece in the British magazine Prospect explaining how $100 million in famine aid to Ethiopia in 1985 merely bolstered the country's Stalinist regime and prolonged civil strife and famine. Other arguments against aid typically surface: it only throws fattens the wallets of corrupt regimes, that there's not enough accountability, or that it's better to give countries a hand-up than a hand-out. Meanwhile, since World War II much of East Asia appears to have used trade, not aid, to launch itself on the high arc of prosperity.

It's a big mistake, though, to conclude that aid is either useless or harmful, and that free trade offers a panacea for what ails poor countries. For a start, it may be true that assistance to Africa over the past 50 years has not, in the aggregate, proved wildly effective. But it's difficult to disentangle this from the fact that the Cold War was raging during that time, and donor countries often dished out aid with little regard for making sure the recipient country was improving its governing institutions. French aid, for instance, was given to former colonies primarily to ensure continued French influence. According to Thad Dunning, a researcher at Stanford, "The end of the Cold War has marked a watershed in the politics of foreign aid in Africa"; recently Dunning showed that since 1987, with the end of the Cold War, donors have been much more selective about aid. So the geopolitical context matters. Meanwhile, it's hard to ignore the fact that aid has done an immense amount of good on some fronts: international donors gave nearly $100 million between 1967 and 1979 in a successful campaign to eliminate smallpox and saved millions of lives.

But as critics point out, the real test of effective aid is whether it can produce sustainable economic growth. Here the evidence is mixed. Over the past five years, a number of economists have been finding no relationship at all between aid and economic growth in Africa. But last year, three researchers from the Center for Global Development (CGD), a Washington-based think tank, argued that many of these studies wrongly lump together all types of aid in their measurements, including aid that's not meant to boost short-term growth, such as emergency famine relief and health spending. Looking solely at aid that's actually intended to stimulate the economy—including "balance of payments support, investments in infrastructure, and support for productive sectors" such as industry and agriculture—the authors found that a $1 increase in aid, on average, raised output by $1.64 in the short term. And contrary to the oft-cited idea that aid only works in squeaky-clean democracies, a positive relationship held regardless of governance, although better-run countries tended to grow more quickly. The data also suggests that there's a point of diminishing returns, after which aid no longer helps. But, the authors point out, "[T]he turning point is well above the amount of aid that most countries receive."

More recently, Raghuram Rajand and Arvind Subramanian of the IMF released a paper trying to figure out aid's long-term effect on growth. They found, again, that aid isn't detrimental to economic growth, as many have claimed. However, aid can produce a few unintended consequences that diminish its positive effects: aid inflows can, for instance, undermine the export sectors of a recipient country either by pushing up the price of critical resources—such as skilled labor—or by pushing up the nominal exchange rate. Far from suggesting that aid be abandoned, however, the authors suggest that donors figure out ways to reduce these adverse effects—one suggestion is to start slowly with aid inflows and then accelerate over time.

The critics are right about one thing, however: Development is almost always more successful in countries with good governance. While that is no excuse for ignoring badly-run governments completely—as economist Jeffrey Sachs points out, when the world set about eliminating smallpox, they didn't skip over the dictatorships—it does suggest the need to pay better attention to the corruption, graft, and dictatorships that are strangling Africa. Suggestions abound: Harvard's Michael Kremer, for instance, has proposed a system by which African regimes would be ranked by level of corruption, and companies that lend money to "corrupt" or "odious" regimes would be forced to risk losing their claims to repayment in the event of a government change. International efforts to reduce bribery in Africa by foreigners are also afoot.

But it isn't always better to hold off until reform happens: Uganda, for instance, was a corrupt regime all through the 1990s and still managed to cut poverty by nearly 40 percent, thanks in part to World Bank assistance. Plus, as Sachs told Mother Jones, sometimes the hand-wringing over governance and corruption can seem a bit quaint: "Right now, we're not even helping the well-governed places." (Quibbling over governance is at the heart of the aid debate: Jeffrey Sachs' 2004 report to the UN identified two dozen nations, many in Africa, that were governed well-enough to receive a rapid influx of international aid; the Bush administration's Millenium Challenge Account, taking the aid-skeptic stance, has identified just seven qualified African countries.)

Aid isn't useless; it just needs to be handled properly. A number of critics, however, have suggested that this misses the main point—namely, that the current aid community is hopelessly bloated and flawed, and cannot fix itself. The German weekly Der Spiegel, in a recent broadside against the "more aid now!" approach, dredged up Graham Hancock's 1989 book, Lords of Poverty, which had famously declared: "Development aid is bad through and through, and it is impossible to reform it." But since the end of the Cold War the donor community has improved, and there's no reason to believe it can't continue to learn from its mistakes. To be sure, the flaws in the donor community are legion. Development expert Nancy Birdsall, of CGD, lists several main ones: impatience with institution building; a failure to exit from failed projects; a failure to evaluate effectiveness; a failure for donors to coordinate aid; and providing stingy or unreliable aid. But to walk away rather than try to fix these problems makes little sense.

To be sure, aid by itself cannot lift a country out of poverty. Poor countries eventually need to stand on their own feet. But the idea that free trade alone can accomplish this goal also seems wrongheaded. Many of the developmental success stories over the last fifty years have involved both trade and aid. Burgeoning export-driven economies, after all, often need outside help to build infrastructure and improve health and education. South Korea, an example often held up by trade advocates, still received $100 per person annually in aid between 1955 and 1972 as it was boosting its exports and growing rapidly. Botswana became one of the world's fastest growing economies between 1965 and 1995 by exporting its resources, but, again, it was also receiving roughly $125 per person in aid annually. Sometimes a mix is necessary. Then again, China and India, both rapidly growing, have received little aid over the years but also have bucked free trade when it suited them. Every country is different.

Meanwhile, trade advocates may be overstating the benefits of trade for eradicating poverty. One of the boldest claims has been made by William Cline of the Institute for International Economics, who argued that free trade would lift 540 million people out of poverty. But economists at the Center for Economic and Policy Research dispute these findings, noting that most of the people "lifted out of poverty" here would have their incomes raised from just below $2 a day to just above it. That's not nothing, but it's not a silver bullet either. Economists have also begun to question whether eliminating agricultural subsidies in the developed world would really help poor countries all that much: Most poor countries are, after all, net importers of food and would be hurt by the resulting higher prices. As for those countries that would be helped, they likely wouldn't be helped by all that much: Both the IMF and the World Bank have shown that agricultural prices would rise by only modest amounts, and these price rises would have an equally modest effect on poverty.

Indeed, those who want to help Africa would do well to heed the warning of Harvard's Richard Freeman, who has long argued that, in the grand scheme of things, trade just isn't all that important, and other aspects of globalization—immigration, capital flows, and technology transfers—have far more impact on countries. To that end, several innovative approaches to development might suggest themselves. Spending public money in the developed world on new technologies and medicines could, for instance, end up having a colossal effect, as it did with the "green revolution" that was developed in the West and exported to Asia and Latin America in the 1960s. Likewise, as a recent article in Foreign Affairs suggests, boosting labor mobility—by granting Third World workers "guest visas" and allowing them to immigrate to developed countries temporarily—could transfer some $200 billion to poor countries, no to mention skills, experience, and a middle class that could help agitate for better governance. Developed nations should also pay closer attention to the harmful provisions they often stuff inside trade deals—such as the patent protections in CAFTA, or the dangerous demands that poor countries open their capital accounts—that can offset the already-modest gains from trade liberalization.

Nothing about Africa is easy. Virtually every country needs to be handled differently—examples as diverse as Botswana and Uganda prove that success in development comes in all shapes and sizes. As such, it would be nonsensical to write off the value of foreign aid, or declare free trade the last best hope for Africa. And approaches that involve neither trade nor aid deserve more attention. But first and foremost, international donors must learn from mistakes of the past—and the success of the United Nations' Millenium Development Goals will largely hinge on whether they can do this—but it's hardly foreordained that their efforts will fail.

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