With conditionalities
Aid supporters also believe in conditionalities. This is the notion that the imposition of rules and regulations set by donors to govern the conditions under which aid is disbursed can ultimately determine its success or failure. In the 1980s conditionalities attached to African aid policies would become the mantra.
The notion of a quid pro quo around aid was not new. Marshall Plan recipients had been required to adhere to a strict set of conditions imposed upon them by the US. They had a choice . . . you take it or you leave it. African countries faced the same choice.
Donors have tended to tie aid in three ways. First, it is often tied to procurement. Countries that take aid have to spend it on specific goods and services which originated from the donor countries, or a group selected by them. This extends to staff as well: donors employ their own citizens even when suitable candidates for the job exist in the poor country. Second, the donor can reserve the right to preselect the sector and/or project that their aid would support. Third, aid flows only as long as the recipient country agrees to a set of economic and political policies.
With stabilization and structural adjustment in vogue, the adoption of market-based policies became the requirement upon which aid would be granted. Aid would be contingent on African countries’ willingness to change from statist, centrally planned economies towards market-driven policies – reducing the civil service, privatizing nationalized industries and removing trade barriers. Later democracy and governance would make their way onto the list, in the hope of limiting corruption in all its forms.
On paper, conditionalities made sense. Donors placed restrictions on the use of aid, and the recipients would adhere. In practice, however, conditionalities failed miserably. Paramount was their failure to constrain corruption and bad government.
A World Bank study found that as much as 85 per cent of aid flows were used for purposes other than that for which they were initially intended, very often diverted to unproductive, if not grotesque ventures. Even as far back as the 1940s, international donors were well aware of this diversion risk. In 1947, Paul Rosenstein-Rodin, the Deputy Director of the World Bank Economics Department, remarked that ‘when the World Bank thinks it is financing an electric power station, it is really financing a brothel’.
But the point here is that conditionalities were blatantly ignored, yet aid continued to flow (and a great deal of it), even when they were openly violated. In other research, Svensson found ‘no link between a country’s reform effort or fulfilment of conditionality and the disbursement rate of aid funds’, proving once again that though a central part of many aid agreements, conditionalities did not seem to matter much in practice.
Aid success in good policy environments
Faced with mounting evidence that aid has not worked, aid proponents have also argued that aid would work, and did work, when placed in good policy environments, i.e. countries with sound fiscal, monetary and trade policies. In other words, aid would do its best, when a country was in essentially good working order. This argument was formalized in a seminal paper published by World Bank economists Burnside and Dollar in 2000. (Quite why a country in working order would need aid, or not seek other better, more transparent forms of financing itself, remains a mystery.)
Donors soon latched onto the Burnside–Dollar result and were quick to put the findings into practice. In 2004, for example, the US government launched its US$5 billion Millennium Challenge Corporation aid campaign motivated by the idea that ‘economic development assistance can be successful only if it is linked to sound policies in developing countries’.4 In later empirical work, the Burnside–Dollar result failed to stand up to scrutiny, and it soon lost its allure. It was not long before the wider economic community concluded that the Burnside–Dollar findings were tenuous and certainly not robust; perhaps eventually coming to the obvious conclusion that countries with good policies – like Botswana – would tend to make progress unassisted, and that a key point of aid is to help countries with bad ones. But even setting aside empirical analysis, there are, as discussed later, valid concerns that, far from making any improvement, aid could make a good policy environment bad, and a bad policy environment worse.
On the subject of good policy environments, aid supporters are convinced that aid works when it targets democracy, because only a democratic environment can jump-start economic growth. From a Western perspective, democracy promises the lot.
There are, in fact, good reasons for believing that democracy is a leading determinant of economic growth, as almost invariably the body politic bleeds into economics. Liberal democracy (and the political freedoms it bestows) protects property rights, ensures checks and balances, defends a free press and guards contracts. Political scientists such as Douglass North have long asserted democracy’s essential links with a just and enforceable legal framework.
Democracy, the argument goes, gives a greater percentage of the population access to the political decision-making process, and this in turn ensures contract enforcement through an independent judiciary. Not only will democracy protect you, but it will also help you better yourself. Democracy promises that businesses, however small, will be protected under the democratic rule of law. Democracy also offers the poor and disadvantaged the opportunity to redress any unfair distribution via the state.
It is after all under democratic governments, the American economist and social scientist Mancur Olson posited, that the protection of property rights and the security of contracts, crucial for stimulating economic activity, were more likely. In essence, democracy engenders a peace dividend, introduces a form of political stability that makes it a precursor for economic growth. In Olson’s world, democratic regimes engage in activities that assist private production in two ways: either by maintaining a framework (regulatory, legal, etc.) for private activity or by directly supplying inputs which are not efficiently delivered by the market (for example, a road connecting a small remote village to a larger trading town). By their very nature, democracies have an incentive to provide public goods which benefit each and everyone, and wealth creation is more likely under democratic regimes than non-democracies, such as, say, autocratic or dictatorial regimes.
Under this sky, democracy is seen as Africa’s economic salvation: erasing corruption, economic cronyism, and anticompetitive and inefficient practices, and removing once and for all the ability for a sitting incumbent to capriciously seize wealth. Democracies pursue more equitable and transparent economic policies, the types of policies that are conducive to sustainable economic growth in the long run.
Moreover, the Nobel Laureate Amartya Sen argues that because democratically elected policymakers run the risk of losing political office, they are more vigilant about averting economic disasters.5 Among mainly developing economies another study found that democratically accountable governments met the basic needs of their citizens by ‘as much as 70 per cent more’ than non-democratic states.6 But, perhaps most of all, donors are convinced that across the political spectrum democracy (and only democracy) is positively correlated to economic growth.
Although the potential positive aspects of democracy have dominated discourse (and aid policy), Western donors and policymakers have essentially chosen to ignore the protests of those who argue that democracy, at the early stages of development, is irrelevant, and may even be harmful. In an aid-dependent environment such views are easy to envisage. Aid-funded democracy does not guard against a government bent on altering property rights for its own benefit. Of course, this lowers the incentive for investment and chokes off growth.
The uncomfortable truth is that far from being a prerequisite for economic growth, democracy can hamper development as democratic regimes find it difficult to push through economically beneficial legislation amid rival parties and jockeying interests. In a perfect world, what poor countries at the lowest rungs of economic development need is not a multi-party democracy, but in fact a decisive benevolent dictator to
push through the reforms required to get the economy moving (unfortunately, too often countries end up with more dictator and less benevolence). The Western mindset erroneously equates a political system of multi-party democracy with high-quality institutions (for example, effective rule of law, respected property rights and an independent judiciary, etc.). But the two are not synonymous.
One only has to look to the history of Asian economies (China, Indonesia, Korea, Malaysia, Singapore, Taiwan and Thailand) to see how this is borne out. And even beyond Asia, Pinochet’s Chile and Fujimori’s Peru are examples of economic success in lands bereft of democracy. The reason for this ‘anomaly’ is that each of these dictators, whatever their faults (and there were many), was able to ensure some semblance of property rights, functioning institutions, growth-promoting economic policies (for example, in fiscal and monetary management) and an investment climate that buttressed growth – the things that democracy promises to do. This is not to say that Pinochet’s Chile was a great place to live; it does, however, demonstrate that democracy is not the only route to economic triumph. (Thanks to its economic success Chile has matured into a fully fledged democratic state, with the added accolade of, in 2006, installing South America’s first woman President – Michelle Bachelet.)
The obvious question to ask is, has foreign aid improved democracy in Africa? The answer to this is yes – certainly in terms of the number of African countries that hold elections, although still many of them are illiberal (people go the polls, but in some places the press remains restricted, and the rule of law fickle).
The real question to ask is, has the insertion of democracy via foreign aid economically benefited Africa? To this question the answer is not so clear. There are democratic countries in Africa that continue to struggle to post convincing growth numbers (Senegal, at just 3 per cent growth in 2006), and there are also decidedly undemocratic African countries that are seeing unprecedented economic growth (for example, Sudan).
What is clear is that democracy is not the prerequisite for economic growth that aid proponents maintain. On the contrary, it is economic growth that is a prerequisite for democracy; and the one thing economic growth does not need is aid.
In ‘What Makes Democracies Endure?’ Przeworski et al. offer this fascinating insight – ‘a democracy can be expected to last an average of about 8.5 years in a country with a per capita income under US$1,000 per annum, 16 years in one with income between US$1,000 and US $2,000, 33 years between US$2,000 and US$4,000 and 100 years between US$4,000 and US$6,000 . . . Above US$6,000, democracies are impregnable . . . [they are] certain to survive, come hell or high water.’ It is the economy, stupid.
No one is denying that democracy is of crucial value – it’s just a matter of timing.
In the early stages of development it matters little to a starving African family whether they can vote or not. Later they may care, but first of all they need food for today, and the tomorrows to come, and that requires an economy that is growing.
Aid effectiveness: a micro—macro paradox
There’s a mosquito net maker in Africa. He manufactures around 500 nets a week. He employs ten people, who (as with many African countries) each have to support upwards of fifteen relatives. However hard they work, they can’t make enough nets to combat the malaria-carrying mosquito.
Enter vociferous Hollywood movie star who rallies the masses, and goads Western governments to collect and send 100,000 mosquito nets to the a icted region, at a cost of a million dollars. The nets arrive, the nets are distributed, and a ‘good’ deed is done.
With the market flooded with foreign nets, however, our mosquito net maker is promptly put out of business. His ten workers can no longer support their 150 dependants (who are now forced to depend on handouts), and one mustn’t forget that in a maximum of five years the majority of the imported nets will be torn, damaged and of no further use.
This is the micro–macro paradox. A short-term efficacious intervention may have few discernible, sustainable long-term benefits. Worse still, it can unintentionally undermine whatever fragile chance for sustainable development may already be in play.
Certainly when viewed in close-up, aid appears to have worked. But viewed in its entirety it is obvious that the overall situation has not improved, and is indeed worse in the long run.
In nearly all cases, short-term aid evaluations give the erroneous impression of aid’s success. But short-term evaluations are scarcely relevant when trying to tackle Africa’s long-term problems. Aid effectiveness should be measured against its contribution to long-term sustainable growth, and whether it moves the greatest number of people out of poverty in a sustainable way. When seen through this lens, aid is found to be wanting.
That said, the approach to food aid (launched at the 2005 Food Aid conference in Kansas City7) has tried to push aid in a new direction, one which can potentially help African farmers. The proposal would allow a quarter of the food aid of the United States Food For Peace budget to be used to buy food in poor countries, rather than buying only American-grown food that has to then be shipped across oceans. Instead of flooding foreign markets with American food, which puts local farmers out of business, the strategy would be to use aid money to buy food from farmers within the country, and then distribute that food to the local citizens in need. In terms of the mosquito net example, instead of giving malaria nets, donors could buy from local producers of malaria nets then sell the nets on or donate them locally. There needs to be much more of this type of thinking.
Between 1950 and the 1980s, the US is estimated to have poured the equivalent of all the combined aid given to fifty-three African countries between 1957 and 1990 into just one country, South Korea. Some have alleged that this is the kind of financial lift that Africa will need; essentially an equivalent of its own Marshall Plan.
Advocates of aid argue that aid works – it’s just that richer countries have not given enough of it. They argue that with a ‘big push’ – a substantial increase in aid targeted at key investments – Africa can escape its persistent poverty trap; that what Africa needs is more aid, much more aid, in massive amounts. Only then will things start to truly get better.
In 2000, 189 countries signed up to the Millennium Development Goals (MDG).8 The eight-point action plan was aimed at health, education, environmental sustainability, child mortality, and alleviating poverty and hunger. In 2005, the programme was costed. An additional aid boost of US$130 billion a year would be needed to achieve the MDG in a number of countries. Two years after the MDG pledge the United Nations held an international conference on Financing for Development in Monterrey, Mexico, where donors promised to increase their aid contributions from an average of 0.25 per cent of their GNP to 0.7 per cent, in the belief that this additional US$200 billion annually would finally address Africa’s continuing problems. In practice, most of the donor pledges have gone unmet and proponents of aid have latched on to this failure to meet the pledged commitments as a reason for why Africa has been held back. But the big-push thinking brushes over one of the underlying problems of aid, that it is fungible – that monies set aside for one purpose are easily diverted towards another; not just any other purpose, but agendas that can be worthless, if not detrimental, to growth. Proponents of aid themselves have acknowledged that unconstrained aid flows always face the danger of being egregiously consumed rather than invested; of going into private pockets, instead of the public purse. When this happens, as it so often does, no real punishments or sanctions are ever imposed. So more grants mean more graft.
One of the most depressing aspects of the whole aid fiasco is that donors, policymakers, governments, academicians, economists and development specialists know, in their heart of hearts, that aid doesn’t work, hasn’t worked and won’t work. Commenting on at least one aid donor, the Chief Economist at the British Department of Trade and Industry remarked that ‘they know its crap, but it sells the T-shirts’.9
Study, after study, after stu
dy (many of them, the donors’ own) have shown that, after many decades and many millions of dollars, aid has had no appreciable impact on development. For example, Clemens et al. (2004) concede no long-term impact of aid on growth. Hadjimichael (1995) and Reichel (1995) find a negative relationship between savings and aid. Boone (1996) concludes that aid has financed consumption rather than investment; and foreign aid was shown to increase unproductive public consumption and fail to promote investment.
Even the most cursory look at data suggests that as aid has increased over time, Africa’s growth has decreased with an accompanying higher incidence of poverty. Over the past thirty years, the most aid-dependent countries have exhibited growth rates averaging minus 0.2 per cent per annum.
For most countries, a direct consequence of the aid-driven interventions has been a dramatic descent into poverty. Whereas prior to the 1970s most economic indicators had been on an upward trajectory, a decade later Zambia lay in economic ruin. Bill Easterly, a New York University professor and former World Bank economist, notes that had Zambia converted all the aid it had received since 1960 into investment, and all of that investment to growth, it would have had a per capita GDP of about US$20,000 by the early 1990s.10 Instead, Zambia’s per capita GDP was lower than in 1960, under US$500. In effect, Zambia’s GDP should have been at least thirty times what it is today. And between 1970 and 1998, when aid flows to Africa were at their peak, poverty in Africa rose from 11 per cent to a staggering 66 per cent. That is roughly 600 million of Africa’s billion people trapped in a quagmire of poverty – a truly shocking figure.
Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa Page 6
