Africa’s Great Leap Forward

This is Africa’s year. Many powerful people are pushing for more aid and debt relief. The proposals of the UN and the Africa Commission headed by British Prime Minister and G8 host, Tony Blair, aim to achieve the Millennium Development Goals by guaranteeing to double aid over the next ten years. While this will surely be a boon to the aid industry, it merely repeats past mistakes on a grander scale and is similarly destined to fail. The failure will not stem from a shortage of good will on the part of policy makers and citizens of wealthy nations, but because the proposed aid model is fundamentally flawed. That is not to say that specific aid projects, especially humanitarian relief efforts, are not vital, but that systemic aid has not proven successful. And though it is likely that future aid can and will be done better than in the past, the perverse incentives that dog even the best designed aid projects remain.

The US Administration has gone further than other G8 nations in trying to ensure that incentives bound up with aid packages are positive. By requiring prudent institutional changes ahead of aid delivery, the Millennium Challenge Account avoids a common aid pitfall: assuming that aid can promote sustainable policy improvements in countries where domestic stewardship of such changes is absent. However, as the experience of the MCA has demonstrated, such a careful and targeted approach to aid is difficult, slow, and decidedly unglamorous. 

In reality, economic growth depends on qualitative, not quantitative factors, thus running counter to the theory underpinning the increased aid model. Growth depends on the structure of property rights, whether and how the rule of law is applied, how large government is and how effective it is at delivering public services, and how open the economy is to local and international trade. Having such information makes it easier to devise and target aid strategy, which should focus on short run, primarily humanitarian efforts, to governments that are already reforming.

Does aid improve growth?

Development economists, led by the UN’s Jeffrey Sachs, continue to promote the ‘poverty gap’ theory of development. This correctly observes that poverty prevents the accumulation of savings, which results in low investment and hence low growth, but proposes that foreign aid can 'fill the gap' between insufficient savings and the requisite level of investment in the economy. However, such an assertion confuses cause and effect. Many economists, notably Peter Bauer, compellingly argue that savings are the “result of economic achievement, not its precondition.” Unfortunately, the simplicity of the ‘poverty gap’ theory--and the critical role foreign aid can play in it--has seduced many, and aid has continued to flood into poor nations.

The experience of many years of this policy defies optimism. Inflation adjusted, Africa has received well over $400 billion in foreign aid since 1960. According to World Bank data, African GDP per capita fell on average by 0.6% every year between 1975 and 2000. In other words, official data show that individuals became poorer in the face of high levels of aid. Furthermore, in 1970 the US National Bureau of Economic Research estimated that of the world's poor who survived on less than $1 a day, one in ten lived in Africa. By 2004 that number was close to 1 in 2 as Africa was left behind while South Asia rose out of poverty.

Yet, between 1975 and 2000, the per capita foreign aid that South Asians received was equal to 21 percent of that received by Africa. According to development expert, Dr Marian Tupy of the Cato Institute, 'Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka performed much better than African countries. Between 1975 and 2000, South Asian GDP per capita grew at an average annual rate of 2.94 percent. The link between foreign aid and economic development seems quite tenuous.’

However, in 2000 a paper appeared in the prestigious American Economic Review by World Bank economists, Craig Burnside and David Dollar, which showed that “aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies.”[1] These results, based on data from the years 1970-1995, were influential in promoting aid and the MCA approach. The Economist magazine even stated, “there is now a strong body of evidence…that aid does boost growth when countries have reasonable economic policies.”[2] Certainly, UN Millennium Commission Director, Jeffrey Sachs, subscribes to this view.

But when William Easterly, himself a former World Bank economist, brought Burnside and Dollar’s data sets up to date (1970-1999), found no statistically significant interaction between aid and policy [3] (Easterly, Levine and Roodman 2003). In short, even in the most favorable of policy environments, there remains little support for the initial assertion that aid promotes economic growth.

Despite the apparent simplicity of the poverty trap theory, it doesn't square with common sense or historical reality, as it implies that no country can ever develop. Whereas obviously, nations have developed without massive infusions of aid, and continue to do so. All western nations have developed by hard work, saving small amounts at first, and good institutions like strong protection of private property and sensible, well defined and limited public sector regulation. Moreover, aid is often spent on projects that benefit political elites rather than citizens, thereby supporting corrupt regimes and often crowding out private sector initiatives.

Perverse incentives of Aid

Aid creates perverse incentives for donor and recipient, incentives that are certainly not amenable to economic growth. As Harvard University historian David Landes in the Wealth and Poverty of Nations, writes: ‘History tells us that most cures for poverty come from within. Foreign aid can help, but, like windfall wealth, can also hurt. It can discourage effort and plant a crippling sense of incapacity…at bottom, no empowerment is so effective as self-empowerment’

In his testimony before the U.S. Senate Foreign Relations Committee in September 2004, Ghanaian Professor George Ayittey from the American University documented the following amounts of grand embezzlement among African leaders [4]:

* General Sani Abacha of Nigeria: $20 billion
* President Félix Houphoüet-Boigny of Ivory Coast: $6 billion
* General Ibrahim Babangida of Nigeria: $5 billion
* President Mobutu Sese Seko of Zaire: $4 billion
* President Mousa Traore of Mali: $2 billion
* President Henri Bedie of Ivory Coast: $300 million
* President Denis N'guesso of Congo: $200 million
* President Omar Bongo of Gabon: $80 million
* President Paul Biya of Cameroon: $70 million
* President Haile Mariam of Ethiopia: $30 million

In total, Nigerian President Olusegun Obasanjo estimated, “corrupt African leaders have stolen at least $140 billion from their people in the [four] decades since independence.” [5] Corrupt leaders do not discriminate between foreign aid and other revenue (such as oil wealth) when stocking their Swiss bank accounts, so it is nearly impossible to discern how much pilfered loot came directly from development funds. In many cases, however, it is clear that foreign aid’s only enduring gift to many Africans is a large debt burden, a fact that prompted Lord Bauer to quip that foreign aid was “an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”[6]

Professor Sachs, however, seems to dismiss thorough internal reform as a prerequisite for African economic growth. As he recently opined in The New York Times, “The poor are blamed for their problems. We say the poor are poor because they are corrupt or because they don’t manage themselves. But in the past two years I’ve seen exactly the opposite…. The idea that African failure is due to African poor governance is one of the great myths of our time.”[7]

But evidence is not on Professor Sachs’s side. African corruption has been getting worse not better over the past few years. Each year, Transparency International publishes its Corruption Perception Index (CPI). The CPI defines corruption as “abuse of public office for private gain.” It is measured on a scale from 0 to 10. The higher the number, the lower the corruption. In 2000, the average African CPI was 3.24. By 2004, the African CPI fell to 2.87.

Many Africans continue to see participation in the government as a means of becoming wealthy, and weak institutions allow them to succeed. “Very few people believe that it is possible to reform the system,” says Robert Guest, the former Africa editor of The Economist. “They do not believe that they can ever have a clean government, and because they do not believe it, they think the rational thing to do is to try to get their own people into office--people from their own ethnic group or preferably their own family--and then try to get them to steal as much money as possible and distribute it among their kinfolk.” Among the most damaging characteristics of long-term aid is that it encourages the brightest minds in a country to milk the system rather than do something productive

For example, Zambia held its first democratic elections in 1991. In the event, Frederick Chiluba defeated Kenneth Kaunda, Zambia’s ruler of 27 years. Chiluba promised to tackle the problem of corruption. But Chiluba himself became mired in a set of corruption scandals. Though Zambia is a country where three-quarters of the population live below the World Bank poverty threshold of $1 a day, Chiluba is standing trial for embezzling $35 million. As Cato’s Marian Tupy puts it, ‘in an absurd twist, President Levy Mwanawasa, Zambia’s current leader, promised to pardon Chiluba if the latter returned 75 percent of what he had stolen’.

A similar story can be told of Kenya and President Mwai Kibaki, whose early determination to clean up corruption left behind by the 24-year-long rule of Daniel Arap Moi, has completely atrophied. In fact, graft under Kibaki became so acute that Sir Edward Clay, the British High Commissioner in Kenya, in a move quite atypical of a British diplomat, accused the government of “massive looting,” and of ministers behaving “like gluttons” and “vomiting on the shoes” of donors. Clay was promptly declared an “enemy of the government” and threatened with arrest.

The iniquities of Robert Mugabe must surely be familiar to all. He has brought his country to the brink of destruction. The once prosperous Zimbabwe now suffers from 80 percent unemployment, rampant inflation and life expectancy that has plummeted from 55 years in 1980 to 33 years in 2005.[8] He has stacked the courts with government sympathizers, drastically curtailed freedom of expression and assembly, and silenced independent media and non-governmental organizations. Members of the opposition Movement for Democratic Change have been persecuted and, in some cases, murdered. Countless Zimbabweans have been jailed, raped and tortured by Mugabe’s secret police and youth militias, but the culprits were never brought to justice.

However, Mugabe’s election 'victory' last March was rubber-stamped by the African Union and by the Southern African Development Community (SADC). The leader of the SADC election observer mission in Zimbabwe, the South African Minerals and Energy Minister Phumzile Mlambo-Ngcuka, described the election as “conducted in an open, transparent and professional manner.”

Simply put, African leaders have not done enough to convince the world that they are serious about good governance.

The truth is that there are no quick fixes to African poverty. Like so many times in the past, the grand utopian visions of well-meaning Westerners are likely to crash on the hard rocks of African reality. In the end, Africans will get it right and prosper, but, as Robert Guest points out, “they will not succeed by imagining that somebody else is going to solve their problems for them, that aid is a panacea, or that anyone other than Africans can make Africa rich.

The G8 Plan - Making Poverty History?

There are, however, ongoing complications arising from pre-existing bad debt. These debts are the precise consequence of the flawed aid model and perverse incentives discussed above. Money leant by the World Bank and IMF for development schemes often turned out to be poor investments. Variously, the schemes were too poorly designed to produce the benefits or returns that were claimed or the schemes cost more than the estimates. At worst, schemes were vehicles for graft or plain fraud.

The US has agreed to write-off $40 billion of largely unrecoverable debt from 18 poor countries which are deemed to be following good governance practice. All the OECD G8 countries have come to this agreement, which is to be finalized in Gleneagles, Scotland at the beginning of July. Compromising from an earlier position, the US agreed to help compensate the lenders (i.e. the IMF and World Bank) who will absorb the main cost of such a move. Showing fiscal responsibility, the US has held firm that the debt write-off should not be financed by the sale of IMF gold reserves, nor should new lending to forgiven countries begin atop the write-off. It aims to provide these countries with a balance sheet advantage so they can borrow more easily from the capital markets.

Yet despite the history of failed, large-scale development aid, the current push is actually the rhetorically pleasing but until now unrealistic target of donations and loans to poor countries totaling 0.7% of wealthy country GDP in foreign aid. Aside from the dubious rationale underlying this effort, it is hypocritical of world leaders to sign up to targets and timetables without real thought as to whether they are deliverable or not. In fact, wealthy nations have already promised and, with the exception of a few small Northern European countries, failed to deliver on the 0.7% pledge for the past two decades.

Major targets, especially those for health, are replete with failure (e.g. WHO targets - 1978 announcement of Health for All by 2000, which obviously has failed, the Roll Back Malaria announcements of 1998, which have been followed by increases in the malaria rate, and the 3 by 5 initiative to treat 3 million AIDS patients with antiretroviral drug therapy by 2005, which is also failing).

Indeed, in a rare moment of cogency, in 2004, WHO Director General Lee warned that “if we cannot reach 3 by 5, there is no reason to believe we will achieve the Millennium Development Goals.” And now that Dr Lee has confirmed that the 3 by 5 target will not be hit, we need only wait for the UN’s unfulfilled MDG’s to be replaced by another quixotic set of targets.[9]

As shown previously, there is little support for the idea that a poverty trap exists at the international level. No country has become wealthy from handouts from another. Lack of both good governance and rule of law, among other factors, keeps citizens poor and foreign aid that props up regimes which starve their people of these institutions is a sure way to starve them of bread, as well. For instance, many developing countries have tariffs and taxes on essential medicines, a self-inflicted, regressive and economically inefficient impediment to access to medicines that keeps their citizens from achieving decent health.

In the real world it’s the alternative approach of tailored aid to specific projects and marginal reform of institutions that is promoted by economists like Bill Easterly, author the Elusive Quest for Growth, which has proved most successful, especially among the Asian tigers. Despite beginning a half century ago with the same level of GDP, and receiving much less foreign aid than their African counterparts, the Asian nations have boomed.

The US has made great strides with this more sensible approach towards aid. In addition, to the MCA, support for humanitarian projects will certainly benefit many in poor nations. Initiatives like the $15 President’s Emergency Plan for AIDS Relief (PEPFAR), the over $1 billion already donated to the Global Fund to fight AIDS, Malaria, and Tuberculosis, and the recently announced $1.2 billion for malaria will bring needed assistance and save lives.

Unfortunately, not all of the humanitarian assistance that the US Congress has allocated to developing countries is being administered properly. Though the MCA is an excellent initiative, the United States Agency for International Development is still responsible for the vast majority of US foreign aid. As I have documented in a coauthored paper and testified about before both houses of Congress[10], during the past decade, USAID has largely squandered the over $400 million Congress allocated the Agency to fight malaria. USAID has consistently failed to account for its malaria spending, usefully measure its programs, and invest in the interventions proven to prevent and treat a disease that kills over a million pregnant women and children in the developing world each year. Most disturbingly, the Agency’s startling lack of transparency means that its other programs, which have not been subject to the same level of scrutiny, may be run just as poorly. And if the expected Presidential announcement today allocates more funding to malaria control, it would be unfortunate if it were to be handled by exactly the same people who have overseen past failures.

Investing scarce resources in terrible diseases like HIV/AIDS and malaria is a good idea, but the US Congress must demand that the agency it entrusts to handle these funds is fully accountable and spending the money properly. Before the MCA begins to operate on a larger scale, Congress would be wise to ensure that the MCA has the proper mechanisms in place to operate transparently and with fully accountability to US taxpayers

Economic Freedom Will Save Lives

Popular support for assisting those in poor countries is gaining momentum through the Make Poverty History campaign. The group creditably wants to end world poverty, and part of the purpose of the Live8 pop concerts will be to influence the July G8 summit.
 
There is a lot about Make Poverty History's agenda that makes sense. It opposes export subsidies as they distort trade at the expense of the developing world's poor. It also advocates the cancellation of debt, which makes sense in some cases, as discussed above.
 
Yet Make Poverty History advocates that developing countries adopt protectionist policies even as developed countries open up their markets. The campaign deplores free trade as 'unfair' as it sees the exchange of goods and services in an open market as merely shifting wealth from the poor to the rich rather than create wealth for all. But 200 years ago the Edinburgh economist Adam Smith observed that trade promotes economic progress and that the invisible hand of the market directs buyers and sellers towards activities that promote the general good. Nothing has changed to make that basic observation less true today. The trade protectionism for developing countries that Make Poverty History recommends is itself a trap for the world's poor. Consider that, for decades, India was one of the countries caught in the trap, seeing its living standards fall during the 60s and 70s as it implemented the exact strategies recommended by Make Poverty History. Since India began to liberalize, its economy is growing at 8%-10% a year and its poor are becoming less so.

Conclusion

The US approach to aid and trade development is broadly correct. As the MCA rolls out the grants to countries (currently Madagascar, Honduras, Nicaragua and Cape Verde), and assuming the approach remains steady and thoughtful, and continues to measure performance relationships with GDP, we may see whether aid really does lead to development. After 50 years of widespread failure, this is more important than throwing billions at non-implementable projects of often dubious value.

There are many sensible policies which may be dull but have shown success, such as trade liberalisation and research into increasing agricultural output in unfavorable conditions. If large trading blocs were to remove their export subsidies and import tariffs, they would allow underdeveloped countries fairer access to their markets. Economic history shows that all parties win from open trade (with the exception of those formerly receiving financial protection in order to remain solvent). Agricultural research can do much to make food sources more resilient and productive in warmer, drier climates. This would also enhance water security, since by far the greatest proportion of fresh water currently consumed in developing countries goes for agricultural use.

Poverty will not be made history by aging rock stars and good will, but by sound institutions and domestic growth. Aid has a role to play, especially in humanitarian relief, but it is a minor one, and can be counter productive if not done carefully.

Thank you Mr. Chairman,

Roger Bate is a resident fellow at AEI.

Notes

[1] Burnside, Craig and David Dollar. 2000. “Aid, Policies, and Growth.” American Economic Review. 90 (4): 847-68.

[2] “Help in the Right Places”, The Economist, March 14, 2002.

[3] Easterly, William, Ross Levine and David Roodman. 2003. “New Data, New Doubts: A Comment on Burnside and Dollar’s ‘Aid, Policies, and Growth’ (2000).” American Economic Review. National Bureau of Economic Research working paper No. 9846,  July 2003.

[4] George B.N. Ayittey, Ph.D.  “Corruption, the African Development Bank, and Africa’s Development” (testimony, U.S. Senate Foreign Relations Committee, Washington, DC September 28, 2004

[5] Basildon, Peta.  “Africa’s Leaders Stole $140 Billion.”  The Independent (London).  June 14, 2002

[6] Dorn, James.  “P. T. Bauer’s Market-Liberal Vision.”  The Freeman: Ideas on Liberty.  October 2000

[7] Eiatar, Daphine.  “Spend $150 Billion Per Year to Cure World Poverty.”  The New York Times.  November 7, 2004

[8] See Tren and Bate, Despotism and Disease http://www.fightingmalaria.org/research.php?ID=32

[9] Allen, K. HIV drug target ‘will not be met’, 29th June 2005. BBC World.  http://news.bbc.co.uk/2/hi/health/4629933.stm

[10] Bate, R. and Schwab, B. “The Blind Hydra: USAID Policy Fails to Control Malaria.”  Working Paper, The American Enterprise Institute.  http://www.aei.org/publications/pubID.22355/pub_detail.asp