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The flaws of foreign aid: A focus on Sub-Saharan Africa

BY ISABELLA ANTOLLINI, 27/11/2016

Women wheel their food rations, that have been donated by the Australian Governemnt, at a food distirbution point in Harare, Zimbabwe on the 23rd April, 2009.

Possibly, foreign aid’s most quoted flaw is corruption. In an alarming number of cases, recipient governments seem embroiled with aid-related corruption. For example, Malawi’s former President Muluzi was charged with embezzling $12 million from aid money. Zambia’s former President Chiluba was involved in a case revealing that millions of dollars were moved from health, education and infrastructure to his personal accounts (Moyo, 2009), and Nigeria’s former President Abacha stole up to $5 billion during his presidency (Scannell, 2016). Rhetoric holds that aid should also reward good and efficient policies and transparent governments, but there seems to be no evidence that aid goes significantly more to incorrupt governments :in fact the opposite seems to occur (Alesina and Weder, 2002). Interestingly, Alesina and Weder (2002) find that Scandinavian countries donate more to less corrupt governments and the US donates more to corrupt ones, though favouring democracies over dictatorships. It is also worth mentioning that aid may fuel corruption because it enlarges the amount of resources fought over by interest groups and factions (Alesina and Weder, 2002). Overall, Alesina and Weder (2002) seem to find that aid increases, or at best, does not affect, the level of corruption, so it does not enable growth through the improvement of government quality.

Another problem with aid is that often donations follow donors’ agendas and strategies when aid should, theoretically, be deployed based on need. Alesina and Dollar (2000) and Riddell (1999) find that the pattern of aid giving is determined by trends and political and strategic factors of donor countries. Riddell (1999) further explains that in the 1980s, aid has been growingly given as a reward for adopting donor-approved policies and withheld or withdrawn where recipients deviated from agreed policies. It is also interesting to note that inefficient, economically closed, poorly managed and non-democratic former colonies receive about twice as much international aid as democratic non-colonies (Alesina and Dollar, 2000). Hence, these donors’ aid allocations may be highly effective in promoting their own strategic interests but have poor pertinence with poverty, democracy and good policy in receiving countries. In the end, such aid may not serve the purpose of helping the recipient country and even contribute to maintaining poor countries poor while helping rich countries to further enrich.

Critics of foreign aid highlight that aid flows, particularly those indefinite in time, discourage behaviours that aid should promote in the first place. Moss, Pettersson and Van de Wall (2006) state that aid is meant to provide temporary assistance to encourage long-term behaviours like revenue collection, investment in physical and human capital and institutions and state establishment. However, a constant flow of “free” money is a great way to keep an inefficient government in power. As aid flows in, there is nothing more for the government to do, such as raising taxes, and as long as it can afford the army, the government need not deal with unhappy citizens (Moyo, 2009). Hence, a stream of aid, instead of catalysing improvements, can create a sense of complacency further stalling development. Deaton (2016) reinforces this by stating that large aid amounts disconnect leaders from the needs of their people, “making them like the autocrats who sit on mining and oil revenues”. Closely tied to this concept is the problem of poor governance associated with foreign aid. Bräutigam and Knack (2004) find that higher levels of aid are associated with larger decreases in the quality of governance and lower tax efforts. The authors also highlight that once governance begins to deteriorate, a vicious cycle of low morale, low performance and mediocre revenues is easily created. This suggests that poverty-stricken areas are paradoxically further trapped into their condition by bad governance fuelled by aid.  

There are possible solutions to mitigate aid’s flaws. Moyo (2009) believes that foreign aid cannot provide the foundations for long-term growth, illustrating this with an example that resonates even with good-intentioned donors: a mosquito-net maker in a small African town is suddenly put out of business by a foreign large donation of mosquito nets. When, after a couple of years, those nets are worn out, there will no longer be a mosquito-net maker to go to and more aid will be needed. Thus, a better solution could be initiating microfinance programmes that help build sustainable systems, setting the grounds for self-sufficiency. Moyo (2009) also calls for governments to attract more foreign direct investment by creating attractive tax structures, shedding complex business regulations and focusing efforts on trade. Riddell (1999) mentions that the way to free Africa of its poverty is to stop development aid (though rich countries should remain ready with emergency aid), as the market offers the best hope for the quickest end to poverty. Not as drastically, Bräutigam and Knack (2004) suggest that large-scale aid programmes should be seen as a temporary development tool rather than an indefinite stream of “free” resources, which should encourage recipients to prepare for self-sufficiency.

It is probably too extreme to endorse some critics’ proposal to stop aid altogether. After all, aid has helped rebuild post-war economies and pulled millions out of poverty. However, it would be time to review the modalities of aid-giving to achieve enhanced efficiency and results. After exploring some of the major flaws of aid, it seems that corruption weakens aid’s efficiency, that aid often serves donors’ strategies rather than the poor’s welfare and that indefinite aid paradoxically discourages the very behaviour it should promote. It would be overly utopistic to demand for a flawless aid system, but a serious review of the current aid-giving practices is needed to better meet the ultimate goals of aid: growth and development of poverty-stricken communities.

ISABELLA ANTOLLINI

is a recent graduate of the BSc in Business Management at King’s College London, and a current student of the MSc in Finance at the London School of Economics.

Reference List

Alesina, A. and Dollar, D. (2000). Who Gives Foreign Aid to Whom and Why? Journal of Economic Growth, 5(1), pp.33-63.

Alesina, A. and Weder, B. (2002). Do Corrupt Governments Receive Less Foreign Aid? American Economic Review, 92(4), pp.1126-1137.

Boone, P. (1996). Politics and the effectiveness of foreign aid. European Economic Review, 40(2), pp.289-329.

Bräutigam, D. and Knack, S. (2004). Foreign Aid, Institutions, and Governance in Sub?Saharan Africa. Economic Development and Cultural Change, 52(2), pp.255-285.

de Ree, J. and Nillesen, E. (2009). Aiding violence or peace? The impact of foreign aid on the risk of civil conflict in sub-Saharan Africa. Journal of Development Economics, 88(2), pp.301-313.

Deaton, A. (2016). There is a solution to the aid dilemma. Financial Times. [online] Available at: https://www.ft.com/content/89802828-588d-11e6-9f70-badea1b336d4 [Accessed 7 Aug. 2016].

Moss, T., Pettersson, G. and van de Walle, N. (2006). An Aid-Institutions Paradox? A Review Essay on Aid Dependency and State Building in Sub-Saharan Africa. SSRN Electronic Journal.

Moyo, D. (2009). Dead aid. New York: Farrar, Straus and Giroux.

Moyo, D. (2009). Why Foreign Aid Is Hurting Africa. Wall Street Journal. [online] Available at: http://www.wsj.com/articles/SB123758895999200083 [Accessed 22 Jul. 2016].

Riddell, R. (1999). The end of foreign aid to Africa? Concerns about donor policies. African Affairs, 98(392), pp.309-335.

Scannell, K. (2016). Corruption: Moving money out of purgatory. Financial Times. [online] Available at: https://www.ft.com/content/10d8679c-228b-11e6-9d4d-c11776a5124d [Accessed 11 Aug. 2016].

Tavares, J. (2003). Does foreign aid corrupt? Economics Letters, 79(1), pp.99-106.

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