Private Route Avoids the Aid Trap

American Enterprize Institute ^ | January 24, 2005 | Roger Bate

[Manfred Dog]

Private Route Avoids the Aid Trap

By Roger Bate, Richard Tren Posted: Monday, January 24, 2005

Gordon Brown, Britain's chancellor of the exchequer, has finally gone home after his African trip, no doubt with a glowing feeling in his soul. His efforts to forgive debt, increase government-to-government aid transfers and increase trade will win him many friends at home and abroad. Increasing aid transfers pleases Big Government supporters who believe the west's wealth came at the expense of African development.

Bureaucrats in Africa and in developed countries will be pleased, as they will have increased budgets and power.

However, the people that Brown thinks he is trying to help will rue the day he set foot on the continent. If history is anything to go by, increased aid transfers will only stifle economic growth, increase the size of government and hurt the poor even more.

Brown considers himself the new George C Marshall, coming to the rescue of Africa, as Marshall supposedly did for Europe after the Second World War. But Europe probably would have grown faster without the Marshall Plan, because the plan increased the size of government, thereby frustrating private enterprise. In any event, the new democracies of Europe had, by then, made firm commitments to protecting the institutions of a free society. These institutions, such as the rule of law, protection of private property rights and limited government, are the very foundation of economic growth. And it is economic growth, not handouts, that eradicates poverty.

It is a pity Brown didn't read a paper by economist Tomi Ovaska that lays bare the myths about the merits of government-to-government aid transfers. In his 2003 paper in the Cato Journal, Ovaska finds there is a negative relationship between aid and economic growth. Specifically, he says: "It was found that a 1% increase in aid as a percentage of gross domestic product (GDP) decreased annual real GDP per capita growth 3.65%."

So, far from helping poor countries, aid transfers actually slow economic growth and keep them mired in poverty. One reason for this is that aid transfers give all the wrong incentives to developing country governments. Governments can choose to adopt policies that increase growth and reduce poverty and thereby become less reliant on handouts. Or they can perpetuate policies that subvert the free market and undermine individual enterprise, from which the political elite is largely immune. So, the more a government can increase poverty and stifle growth, the more easy money, via aid transfers, might be made available.

Ultimately, more aid puts a country on a downward economic spiral. But pointing this out is hard to do World Bank economist William Easterly was encouraged to leave the institution after he continued to point out this truth.

Donor governments are trying to ensure that aid goes to responsible and democratic governments it is vitally important to stop the taxpayers of rich countries unwittingly funding torture and abuse in poor countries. Yet Ovaska finds that "aid given to countries with a better quality of governance was not found to improve the effectiveness of aid". So the harm aid does to work effort and in misallocating resources is present whether or not a government is responsible and democratic.

After decades of grandiose aid projects and one impressive-sounding rescue plan after another, Africa is poorer than ever and has an ever-diminishing life expectancy. Yet the problems of aid transfers should not mean that the citizens of rich countries should just sit back and watch African children die of preventable diseases. It merely means they should discourage their governments from giving their hard-earned taxes away to other governments that have clearly shown they cannot encourage growth and reduce poverty.

A far better solution is for the citizens of rich countries and investors to make private transfers. Private aid to poor countries is far more effective than state aid. When a U.S. citizen makes a direct transfer to a specific cause or charity in a poor country, he or she is much more likely to ensure it is used properly. Investors, with an eye on the bottom line, will be motivated to ensure their money is well used and will transfer skills and technology to areas where poor countries actually need it.

Brown likes to speak of the morality of his cause. Yet there is ample evidence that his efforts are deeply immoral in that they are destined to keep Africa poor and ever more reliant on the hapless taxpayers of rich countries. If African governments really wanted to help the poor, they would have sent Brown packing and made a real effort to get their own houses in order.

Richard Tren is director of the health advocacy group Africa Fighting Malaria; Roger Bate is a visiting fellow of AEI.

[Manfred Dog]

This is true not only in foreign affairs, but in domestic policy. Government Officials tend to give other people's money away to anyone (corrupt or not) who pretends to be near the problem and then to wash their hands. If I give my own money, I want to do good. I don't care about making my efforts or intent look good nor do I care much about playing to my drinking buddies from corrupt governments.

[lodwick]

Well reported, and well said.

Thanks, Dog. Good job.

[henderson field]

"...the West's wealth came at the expense of African development..."
We've all heard crazier statements but can't remember when. Africa has natural resources equal to or better than any of the industrialized nations. Yet the problems persis. Why? Not because of anything the West did. But because of a successsion of corrupt "leaders." Giving money to them is only a shortstop before it goes to a Swiss bank. Sadly, Africa has done it to itself.