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Foreign aid and poverty
International aid efforts are not the answer to the poverty crisis
Article by Johannes Koch added on January 31, 2007

Ban Ki-moon, the newly appointed UN Secretary-General, has just recently announced and reaffirmed the centrality of the Economic and Social Council (ECOSOC) in helping the 198 signatories of the Millennium Development Goals (MDG) to achieve their aims.

This will require renewed commitment from the richer Member States to provide the necessary development assistance to bring the poorer countries out of poverty and into the fold of economic progress and to achieve the eight goals outlined under the MDG by 2015.

At this year’s World Economic Forum (WEF), the elite have noted that efforts to achieve the MDGs by 2015 are faltering badly. At the discussions in Davos, both practitioners and academics alike, agreed that the MDGs are over-ambitious. There was also some agreement that in the past these goals were attached to alleviating poverty through large amounts of aid and that now, the way to achieve these goals has shifted towards aid for economic development.

Economic development, it seems, is the answer to alleviate poverty. But, what looks like a simple equation is in fact tied to a serious problem. John Page, Chief Economist for Africa, and Director of the Poverty Reduction Group of the World Bank, noted at the WEF that between 1960 and 2005, per capital incomes in Africa rose 25%, while in East Asia they rose 850%.

“Economic growth is fundamental to the achievement of the Millennium Development Goals, and providing the resources and domestic accountability. We are talking about a growth crisis in Africa that has to be addressed,” he said.

What this amounts to is the deeper question over whether African problems require African solutions and whether foreign aid, and development programmes under the World Bank can actually achieve economic progress. Is foreign aid in the form of World Bank development, funded and organised by the UN and its sister organisations the answer to African and the other poorest of the poor living under $1 a day?

The Big Push

Aid does many good things. It certainly helps build schools, provide vital medicines and fills gaps where governments of impoverished countries fail to act or cannot act. Indeed, foreign aid is believed to be essential to help nations out of the so-called ‘poverty trap’.

In this poverty trap, large families are connected to economic success. A large family in a poor country is the basis of a economic security. This is then coupled to a demographic problem and a downward cycle in which large families have no possibility of saving for a future because the incomes of all those in the family are used instantaneously to provide sustenance.

Here the idea of a ‘big push’, advocated most notably by development economist Jeffrey Sachs, in which foreign aid is substantial and lasts over a long period eventually turns the plight of the impoverished country around by increasing the stock of capital and lifting the country out of poverty and into sustained growth. The families can begin to save.

If this is the case and the MDGs are funded and run by the UN Member States through the ECOSOC and the UN sister institutions and the World Bank, then where is the problem with this aid?

Collective Foreign aid is limited

It is the World Bank’s (International Bank for Reconstruction and Development (IBRD)) structural adjustment programmes that are frequently attacked by international development practitioners because they are top-down, hierarchical systems in which the developing nation must adopt to the structural adjustment or lose out on these massive aid donations.

Whilst the World Bank has moved away from its mega projects to a more smaller and locally based project structure, the structural adjustment programmes are still static and stringent. It might be beneficial to note here that there is nothing wrong with asking for conditions as development assistance can be understood in terms of a loan to which certain conditions are attached. There is nothing inherently wrong with this as, one would agree, no-one lends money for free.

The problem is not the structural adjustment itself but the very nature of foreign aid donations. The World Bank is a large planning agency and its planners and bureaucrats, although well-informed and well-intentioned, suffocate local entrepreneurial initiation.

The free-market has an in-built feedback system: an entrepreneur launches a product and if the product fails to satisfy the consumer it is discontinued. Foreign aid on the other hand is used by planners who don’t have a feedback mentality and implement their notions of what might work. So, the planning and the ingenuity of the market and the entrepreneurs is lost. Ignorance in the absence of a market easily leads to bad development programmes, wasted money and failed or unfinished projects.

According to William Easterly, well-known Professor at the Economics Department at the New York University, it is a false notion of the free-market that is attached to the structural adjustment programmes. The notion that free-markets operate under the organisation of foreign aid and the development planning of large umbrella organisations like that of the UN and World Bank which are the cause of the inefficiency and waste.

The structural-adjustment programmes of the World Bank became synonymous with market liberalisation. Hence, “Markets did not lead to good results in the areas where it was most intensively practiced – Africa, the Middle East, Latin America. This led to the unfortunate backlash against free markets that we are seeing toady in many parts of those regions,” Easterly writes in the most recently published The Economic Freedom of the World 2006 Annual Report  published by the Fraser Institute.

The centrality of the problem is that foreign aid has been irrevocably tied to benefits in recipient nations in the absence of any hard facts to support this claim. Especially a collective approach to the delivery of foreign aid is being called into question, according to Easterly.

In his empirical findings he concludes that foreign aid can help provide some of the essentials like medicines, education and infrastructure but it needs to move away from the restrictive planning models and allow individuals to become accountable in their own four corners. This individual accountability is where economic progress lies and ultimately will help alleviate poverty.

“Collective responsibility is to accountability what collective farms are to individual property rights,” he states in the Report. In the absence of individual accountability of a state, no one and everyone is to blame and so the failure persists as the developments programmes continue unbridled.

Instead of a “Berlin Wall, we have an ‘Aid Wall’, behind which poor nations are supposed to achieve their escape from poverty through a collective, top-down plan”, says Easterly.

If the collective plan has failed in the past - as the fall of the centrally planned market under the Soviet Union demonstrates - is it not time to rethink our strategy on aid and its ability to alleviate poverty? In light of this, is Ban Ki-moon’s strategy the right one to achieve the MDGs? Quixotically, international efforts might not be the answer to the poverty crisis.


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