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Monday, May 18, 2009

rethinking foreign aid

Does foreign aid benefit Africans? Dambisa Moyo says no.

Few will deny that there is a clear moral imperative for humanitarian and charity-based aid to step in when necessary, such as during the 2004 tsunami in Asia. Nevertheless, it's worth reminding ourselves what emergency and charity-based aid can and cannot do. Aid-supported scholarships have certainly helped send African girls to school (never mind that they won't be able to find a job in their own countries once they have graduated). This kind of aid can provide band-aid solutions to alleviate immediate suffering, but by its very nature cannot be the platform for long-term sustainable growth.

Moyo's concerns are threefold: Foreign aid props up corrupt dictators, it undercuts local industry, and it promotes rampant inflation.

The corruption is the most severe problem:

As recently as 2002, the African Union, an organization of African nations, estimated that corruption was costing the continent $150 billion a year, as international donors were apparently turning a blind eye to the simple fact that aid money was inadvertently fueling graft. With few or no strings attached, it has been all too easy for the funds to be used for anything, save the developmental purpose for which they were intended.

But even aid that reaches its intended recipients has a cost:

Say there is a mosquito-net maker in small-town Africa. Say he employs 10 people who together manufacture 500 nets a week. Typically, these 10 employees support upward of 15 relatives each. A Western government-inspired program generously supplies the affected region with 100,000 free mosquito nets. This promptly puts the mosquito net manufacturer out of business, and now his 10 employees can no longer support their 150 dependents. In a couple of years, most of the donated nets will be torn and useless, but now there is no mosquito net maker to go to.

Finally, free money has a devastating effect on an economy:

Then there is the issue of "Dutch disease," a term that describes how large inflows of money can kill off a country's export sector, by driving up home prices and thus making their goods too expensive for export. Aid has the same effect. Large dollar-denominated aid windfalls that envelop fragile developing economies cause the domestic currency to strengthen against foreign currencies. This is catastrophic for jobs in the poor country where people's livelihoods depend on being relatively competitive in the global market.

The big problem, it seems to me, is that foreign aid agencies are going to Africa as competitors to local industry. That's maybe not their intention, but it's the end result.

A better plan would be to try to work within the local economy, building it up rather than tearing it down. Instead of importing 100,000 free nets, buy them from the local manufacturers. Instead of donating food and clothing, donate money to buy these things at the local market, THEN distribute them to the poor.

This might not be as effective in the short term, because the capacity isn't there to produce the quantity that aid agencies bring. But in the long term, the influx of income for local producers is the type of stimulus that is needed to bring real economic growth to impoverished countries.

Microloans are another piece of the puzzle. Small loans enable local producers to expand their businesses or to start new ones. And when the money is paid back, it becomes available to loan to someone else. Through repeated turnover, a small loan goes a lot further and makes a much bigger difference than a one-time gift, plus it strengthens the economy rather than undermining it, plus loan money is harder for corrupt officials to steal. And it's becoming easier for the average person to participate in this kind of direct aid. Kiva helps match lenders with entrepreneurs via a website.

African poverty is not an insoluble problem. Even the poorest nations have many hard working people who just need some seed capital to get going. In the richer nations, both the money and the will exist to solve the problem. All that is now needed is to replace the old distribution channels with something that can make a real difference.

It seems like such a small thing. How long will it take?

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