What Does Foreign Aid Acheive?

2 03 2010

This is the third of three articles I published earlier. I think the three raise the serious issues associated with poverty and corruption, and give evidence of the reasons why they must tackled together as one policy not as two separate issues.  I first published this article on the 9th August 2008.

According to Andrew Mwanda, a leading Ugandan commentator the answer is very little in terms of economic growth. The evidence supports his arguments.

“Over the last 40 years, Africa has received over $600 billion in foreign aid and debt relief. For most of this period, the continent sustained zero to negative growth; positive growth was only occasional and sporadic, depending on international commodity price fluctuations.” reports the Guardian newspaper.

The article continues, “Why has aid been antithetical to growth? There are many reasons, including mismanagement and miss-allocation of aid resources, slow disbursement of aid monies and corruption. But the fundamental reason is that aid creates the wrong incentives for growth.”

Despite the evidence The recent G8 Summit in Japan upheld earlier calls for doubling foreign financial aid to Africa as a solution to poverty on the continent.

Mwanda suggests that If the source of this revenue is the national economy, government would be driven by self-interest to listen to its citizens about policies and it would be necessary to increase the productivity of private enterprises. But, foreign id distorts the situation. Rather than forge a productive relationship with their own citizens, governments find it more profitable to negotiate for revenues from abroad.

Foreign aid that has saved incompetent governments from collapse. By providing them an external subsidy, governments in Africa have been able to retain power even when pursuing policies that impoverish their citizens. Cut the aid, and many of them will be forced to pursue economic growth or pay the political price of their economic folly.

Our View: Almost certainly Mwanda´argument is correct, but this should not lead to an ending of aid. Instead it is the responsibility of o private and public, to adopt policies that recognise and address these issues. That means supporting initiatives, such as those by Transparency International, to encourage the expansion of open and accountable governments, and continuing to expose those that under-perform on the Corruption Perceptions Index which ranks 180 countries by their perceived levels of corruption, as determined by expert assessments and opinion surveys. This index allows decision makers to adopt policies and make investment decisions accordingly.

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