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Criticisms of Official Development Aid

Criticism 1 – The most vociferous recent critiques of Official Development Aid comes in the form of Dambisa Moyo’s recent book (2009) Dead Aid: Why Aid is not Working And How there is another way for Africa. At root, her most basic criticism  is that Official Development Aid hasn’t actually generated significant economic growth in recipient countries. According to Moyo

‘Over the past thirty years, the most aid-dependent countries have exhibited growth rates of minus 0.2% per annum.  Looked at as a whole, Africa has had over $1 trillion dollars of aid money pumped into it over the last 60 years and not much good to show for it.’

Criticism 2 (Neoliberalism) – Aid stifles the development of small businesses.

Moyo explains how this works as below…..

‘There’s a mosquito net maker in Africa. He manufactures around 500 nets a week. He employs 10 people, who each have to support upwards of 15 relatives. However hard they work, they cannot make enough nets to combat the malaria-carrying mosquito.

Enter vociferous Hollywood movie star who rallies the masses, and goads Western governments to collect and send 100, 000 mosquito nets to the affected region, at a cost of $1 million, The nets arrive, the nets are distributed and a good deed is done.

With the market flooded with foreign nets, however, our mosquito net maker is promptly out of business. His ten workers can no longer support their dependents.

Now think of what happens 5 years down the line when the mosquito nets are torn and beyond repair, we have now mosquito nets, and no local industry to build any more. The long term effect of the ‘aid injection’ has been to decimate the local economy and make the local population dependent on foreign aid from abroad.

Criticism 3 (Neoliberalism) – Aid Encourages Corruption

In 2004 the British envoy to Kenya, Sir Edward Clay, complained about rampant corruption in the country, commenting that Kenya’s corrupt ministers were ‘eating like gluttons’ and vomiting on the shoes of foreign donors. In February 2005 (prodded to make a public apology), he apologised, saying he was sorry for the ‘moderation’ of his language, for underestimating the scale of the looting and for failing to speak out earlier

According to Dambisa Moyo – If the world has one image of African statesmen, it is one of rank corruption on a stupendous scale. One of the best examples of this is Mobutu, who is estimated to have looted Zaire to the tune of $5 billion. He is also famous for leasing Concorde to fly his daughter to her wedding in the Ivory Coast shortly after negotiating a lucrative aid deal with Ronald Regan in the 1980s.

Moyo further argues that at least 25% of World Bank Aid is misused. One of the worst examples is in Uganda in the 1990s – where it is estimated that only 20% of government spending on education actually made it to local primary schools.

Moyo argues that growth cannot occur in an environment where corruption is rife. There are any number of ways in which corruption can retard growth.

  • Corruption leads to worse development projects – corrupt government officials award contracts to those who collude in corruption rather than the best people for the job. This results in lower-quality infrastructure projects.
  • Foreign companies will not invest in countries where corrupt officials might siphon off investment money for themselves rather than actually investing that money in the country’s future.
  • Aid is corrosive in that it encourages exceptionally talented people to become unprincipled – putting their efforts into attracting and siphoning off aid rather than focussing on being good politicians or entrepreneurs.

Criticism 4 – A final Neoliberal criticism of Aid is that too much aid money is spent on salaries, admin fees and conferences. Not only are these often secretive and not open to account, but this also means reduced money spent on actual development. The aid industry employs hundreds of thousands of people worldwide. For example, in the UK DEFA spent £248 million on administration in 2007/08. This has led to some referring to aid agencies as the lords of poverty – ironically, it is actually in the interests of these bureacractic agencies for poverty to exist, or thousands of people would be out of work.

Criticism 5 – Dependency theory argues there is a political agenda to aid

The allocation of US and UK aid has often depended on whether the political ideology of the developing country has met with Western Approval. Dependency theorists argue that the main point of aid is to make the recipients dependent on the donors. Many neo-marixsts argue that along with aid packages comes western values, advice, culture, and aid merely ensures that the interests of west are maintained.

  • During the cold war developing countries were rewarded with aid if they aligned themselves with the Capitalist west and against the Socialist regimes of Eastern Europe and China. Both the UK and U.S. governments refused aid to the Ethiopian government in the early 80s on the grounds that the government was Socialist.
  • A similar focus is also found in US military aid. Much military aid was sent to South America where it was used by right wing governments to repress socialist movements that were opposed to the interests of US multinationals.
  • Even with the fall of the cold war, countries are still rewarded for promoting western interests. Kenya was rewarded in 1991 for providing the US with port facilities during the gulf war while Turkey was denied US aid for not allowing them to lease its air bases.
  • In 2005 developing nations were rewarded for assisting the Bush regime’s war on terror.

NB Tied aid is now illegal in the UK by virtue of the International Development Act, which came into force on 17 June 2002. Other countries, however, still only provide aid on the basis that a proportion of the aid money is spent on products produced by the donor country.

Criticism 6 – (Dependency Theory) – World Bank aid has traditionally required countries to undertake ‘Structural Readjustment Policies’ (SAPs)

The World Bank and International Monetary Fund (IMF) are the largest and most influential of the International Financial Institutions (IFIs), and these have pursued a neoliberal development agenda since the 1980s. The damaging strings that the World Bank & IMF attach to aid, loans and debt relief often make it more difficult for poor countries to effectively tackle poverty. These strings often force poor countries to undertake Structural Adjustment Programmes – cut vital spending on health and education, or to privatise their public services, which provide opportunities for international companies to take these services over. Tanzania, Guyana and Bolivia have all been told that they must privatize their water supplies in order to get millions of pounds in aid from the world bank[1] [2]

Criticism 7 – (People Centred Development) – Top down aid is often irrelevant to the countries receiving it!

Much Official Development aid has focused on monstrous projects such as the building of dams and roads which have sapped local initiative harmed the environment and lead to social injustices[3].

Criticism 8 – (People Centred Development) –  Focusing on aid for developing countries suggests that Africans are helpless. Live Sid Yasmin Aibhai- Brown argues that concerts such as Live Aid perpetuate the idea of Africa as a helpless continent incapable of helping itself, whereas the opposite is actually true. [4]

[1] http://www.actionaid.org.uk/index.asp?page_id=1365 – extract about water privatization in Tanzania from Action Aid.

[2] See Chapter on Bolivia water privatisation, The Corporation DVD

[3]  See http://www.whirledbank.org/environment/dams.html for a critical look at the World Bank’s funding of dams in half a dozen developing countries.

[4] http://www.opendemocracy.net/globalization-G8/aid_2650.jsp – a critique of events such as Live Aid.

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Arguments for Trade as a Strategy for Development

‘Free’ trade* refers to the relative absence of government interference in the affairs of private businesses and the consumers who buy their products. Free trade depends on free trade agreements.

Free Trade agreements are policies established between countries and private businesses which make it relatively easy for companies to produce and sell goods in more than one country, so the ‘free’ in free trade means the freedom of businesses from the restrictive power of government.

Free trade.jpg
Free Trade – It’s about keeping goods circulating, and services of course!

Governments can restrict free trade across international boarders by doing the following:

  1. Imposing tariffs – which are taxes that nations impose on imports. Tariffs increase the cost of goods, and make it harder for companies to sell their goods abroad. (Quotas are similar but blunter instrument than tariffs, they are simply a limit which governments put on the number or value of imports they will accept from certain countries in any given time period)
  2. Subsidizing domestic industries – which are government hand-outs or tax breaks on domestic companies – if a government does this, then it makes domestic goods cheaper and foreign goods relatively more expensive – it’s effectively the opposite of tariffs.
  3. Imposing high taxes on profits – which reduces incentives for private companies to invest and produce goods.
  4. Having too many regulations – which require that companies pay workers minimum wages, do health and safety assessments, and take care of the environment.

It follows that Free trade agreements tend to focus on:

  1. Eliminating tariffs and quotas
  2. Eliminating government subsidies
  3. lowering taxes on profits
  4. Reducing regulation and protection.

Free trade opens up foreign markets and lowers barriers for foreign companies that otherwise might not be able to compete against local businesses. Without free trade agreements, there would probably be less trading between countries.

The idea of free trade goes back a long way

One of the most well- known historic proponents of free trade was Adam Smith. In his 1776 book The Wealth of Nations Smith argued that the ‘invisible hand’ of the free-market would ensure that producers produced what consumers wanted as efficiently as possible.

David Ricardo expanded on Smith’s ideas arguing that countries tended to have a comparative advantage in providing different goods and services and should do what they do better and cheaper than other countries, and in this way everyone benefits. For example, the U.K. climate is well-suited to growing apples, but not sugar-cane, and vie-versa for Jamaica, so it makes sense that two countries specialize in each crop and trade, rather than trying to grow everything themselves.

Modernisation Theory and Neoliberalism both argue that developing countries need to increase their share of world trade (export and import more) in order to develop, and both recognize that most developing countries have enormous potential to increase exports, given that they have a two important ‘competitive advantages’ over the West –an abundance of natural resources, which the West no longer has, and abundance of cheap labour.

However, the two theories have very different ideas about how poor countries should increase trade – modernization theory prefers aid to encourage trade, whereas neoliberalism is suspicious of aid, believing that poor countries should move straight to opening up the markets to attract TNC investment.

Modernisation Theory

Modernisation theory argues that increasing trade with other countries is a crucial part of ‘climbing the ladder of development’.

Initially, in phase two, or ‘the pre-conditions for take-off’, developing countries themselves have very low levels of capital and expertise, and so they require aid from the West, in the form of capital investment and western advice, which could help countries establish an industrial base, for example.

In the ‘take off’ phase (phase three) of Rostow’s model, countries will start to manufacture goods for export to other countries, and the ‘drive to maturity’ phase (phase four) sees earnings from exports reinvested in public infrastructure such as education, which results in a higher skilled workforce and further integration into the global economy.

After 60 years, the ‘age of high mass consumption’ should have been attained which means that countries are equal trading partners in the global market place.

Neoliberalism

Reid-Henry (2012) argues that neoliberalists see global free-trade markets as both the means and desired end for development.

Neoliberal development policy argues that developing countries need to create a ‘business-friendly’ environment in order to encourage inward investment from wealthy individuals and Transnational Corporations.

Reid-Henry suggests there are four key organizing principles of neoliberal policy:

  1. The governments of developing countries are expected to pull down all barriers to Western investment
  2. Workers in the developing world are expected to work hard and cheaply for Transnational Corporations
  3. Public services need to be privatized
  4. Social life should be organized around the profit motive.

Many developing countries have actually set up huge Export Processing Zones, or Free Trade Zones In order to attract TNCs developing countries have set up. These are special areas in that country, typically close to ports, which offer incentives for Transnational Corporations to invest, including tax breaks, low wages, and lax health and safety legislation.

In Neoliberal theory, corporations will help a country develop by providing jobs and training. The money earned will be spent on goods and services at home and abroad creating more money to invest and (limited) tax revenue for further development.

Evaluations 

It is true that there is an obvious relationship between trade and economic growth. The world’s top five countries, ranked by GDP, export (and thus profit from) 40% of the world’s goods. Meanwhile, the bottom 50 GDP countries export less than 1% of the world’s goods.

However, dependency theorists argue that ‘free-trade’ has historically brought more benefits to wealthy countries and corporations compared to developing countries.

Further Reading:

What is Free Trade? – quite a useful intro blurb from study.com

The case for free trade is as strong as ever – Bloomberg View, March 2016

IMF study warns free trade seen as benefiting only a fortunate few – Guardian article, 2016.

The impact of free trade agreements on the economies of developing countries – DFID 2015 – based on a ‘rapid assessment’ of 144 studies of FTAs between developed and developing countries, this recent report concludes that (a) in most cases the evidence isn’t strong enough to say what the effects of free trade are and (b) where the evidence is strong enough, it’s mixed.

*The reason I typically parenthesize the ‘free’ in ‘free trade’ is that for free trade to happen effectively it actually requires a substantial legal framework, which requires government and a legal system to which all parties agree – the most obvious aspect of which is the protection of private property – which basically says that if you make a profit, you can keep it, rather than having someone come and simply take it off you.  

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Jeffry Sachs – Summary of The End of Poverty, Chapters 12-16

This is a brief summary of the case Jeffry Sachs made for International Development Aid in his 2005 book ‘The End of Poverty’. Taken mainly from chapters 12-16

(1) Why is Aid needed?

Sachs argues that injections of aid are needed to break the poverty trap –because there is no where else money is going to come from when there is insufficient income to tax or save.

Sachs uses a description of a visit to Sauri village in Western Kenya to describe the poverty trap – the villagers face a range of poverty related problems including poor food yields due to lack of fertilisers and nitrogen-fixing trees, the fallout from diseases such as AIDS and malaria and the fact that children cannot concentrate in school because of malnutrition. All energies and money are basically spent on combating disease and staying alive.

As a result of the poverty trap the village faces under investment in the following five areas

  1. Agriculture
  2. Health
  3. Education
  4. Power, transport and communications infrastructure
  5. Sanitation and water.

Aid needs to be spent boosting whichever of these areas are undeveloped (and all of them, all at once, if necessary) because a weakness in one can mean money is wasted on another (it’s pointless spending billions on education if disease means kids can’t concentrate in school, or lack of roads means they can’t get to school.). This should be based on what Sachs calls a ‘clinical diagnoses‘ of a countries requirements.

(2) How much aid is needed?

There’s a number of ways of looking at this>

$70 per person per year for at least 5 years would being sufficient to provide suitable investment in these five areas for the poorest regions on earth (basically the bottom billion who are stuck in the poverty trap). After an initial 5 year period, Sachs believes that this figure should reduce considerably and that 10 years should be sufficient for a country to be self-sustaining financially.

Looked at globally The World Bank estimates that meeting basic needs costs $1.08 per person per day – 1.1 billion people lived below this with an average income of 77 cents. Making up the short fall would mean $124bn/ year, or 0.7% of rich world GNP.

(3) Arguements for providing International Development Aid

Firstly, using aid to eradicate poverty will make the world a more secure place

The US spends 30 times as much on its military as it does on aid (for the UK it’s about 8 times as much, 2002 figures), but spending money on military solutions is not going to make an insecure world more secure.

A CIA task force examined 113 cases of state failure between 1957 and 1994 and found that three explanatory variables are the most common:

  1. High infant mortality rates (which indicate low levels of material well-being)
  2. Openeness of the economy – the more open, the less stable
  3. Democracy – the more democratic, the more stable.

Sachs rounds off by listing 25 countries which America has intervened in following State Failure since 1962. His point is that state failure typically leads to US intervention, which is more costly than the price of providing aid which would prevent such interventions.

Secondly, Official Development Aid  is crucial to provide health, education and infrastructure, and because it makes up a significant part of the total income of many countries.

Thirdly,The  public will support a massive increase in aid if there’s leadership on the issue – nearly 90% of the US public support food aid (it depends how you frame the question). Also, broad support was garnered for The Marshall Plan, The Jubilee Drop the Debt Campaign and The Emergency AIDS campaign.

Fourthly – There is evidence that Aid can work:

Besides the usual green revolution and eradication of smallpox examples Sachs also cites…

  • The Global Alliance for Vaccines and Immunisation
  • The Campaign against Malaria
  • The Eradication of Polio
  • The spread of family planning
  • Export Processing Zones in East Asia
  • The Mobile Phone Revolution in Bangladesh

Five – the West can easily afford it 

Sachs points out that the richest 400 individuals incomes stand at just under $70 billion dollars, and the first two years of the Iraq War, which was an unexpected cost, was $60 bn a year, so basically yes. He also recommends a 10% additional tax on the richest for the purposes of development.

(4) Sach’s view of why Aid Doesn’t Always Work – Poor Countries Aren’t Getting Enough Aid! (**This can be used to criticise Dambisa Moyo”s views on aid. )

Poor countries are receiving no where need enough aid to make a difference to development – To demonstrate this he uses the West African Water initiative as an example – Worth $4.4 million over 3 years, but this only worked out at less than a penny per person per year, no where near enough to make a difference.

He also cites the case of Ethiopia – in 2003 it would have needed approx $70 billion to kick start development – half for health and most of the rest split between food productivity and infrastructure. It was then receiving $14 per head per year which was well short of the money needed. At the time the IMF acknowledged in private that this was not sufficient but in public made no mention of this.

Another way of outlining how limited current ODA is lies in the following:

in 2002 of $76 billion total assistance….only $12 billion amounted to what might be called development support to the poorest countries (most of the rest was emergency aid, with $6 billion being debt relief and $16 billion going to middle income countries.

As a result of this countries often don’t get anywhere near what they need – Sachs cites Ghana as an example – it requested $8 billion over 5 years in 2002 and got $2 billion. His point is that $2 billion is no where near enough to kick-start development.

(5)) Myths about why aid doesn’t work (**these could be used to criticise Dambisa Moyo)

He actually lists 10, but I’ve only included the first three!

Myth One – Giving aid is ‘money down the drain’

It is common to hear Americans bemoaning the fact that there is nothing to show for the amount of aid given to Africa. This is, however, unsurprising. The total amount of aid per Africa works out at $30 per head, but of this $5 goes to consultants, $4 was for food aid, $4 went to servicing debts and $5 for debt relief, leaving $12 per African.

Of the $3 of US aid to Africa, approximately 6 cents makes it on the ground African projects.

Myth Two – Aid programmes would fail in Africa because of backward cultural norms

Sachs points out that he frequently encounters prejudiced views based on African stereotypes even among those in senior positions in the aid industry – Such as the idea that Africans don’t understand western concepts of time. He dispels this by simply drawing on his own experiences telling him different things.

Myth 3 – Aid won’t work because of corruption

Nearly all low income level countries have poor levels of governance. However, corruption is not a reason to not invest in a country because the causal relationship runs in the direction of wealth reduces corruption. This is because when incomes increase people have more of an interest in keeping governments in check and there is more money to invest in good governance through better communication systems and a more educated civil service for example.

Looking at cross national comparisons reveals two things – Firstly that African countries governance levels are similar to similarly poor countries. That is to say that governance is not especially poor in Africa, and secondly there must be something else going which results in poverty other than poor governance – there are still some very poor countries in Africa with good governance yet high poverty, he cites Ghana as one such example.

Statistical indicators reveal that African countries grew at 3% percentage points slower than countries with similar levels of governance and income between 1980 and 2000. The reason for their low growth is geography and poorly developed infrastructure.

(6) A more ambitious approach to Development Aid

Ultimately Sachs believes we should be spending more on aid rather than less!

Sachs outlines ‘a needs assessment approach’ to development which basically involves identifying a package of basic needs, figuring out the investments required,, figuring out what poor countries can pay and then working out the finance gap which is what rich countries should meet. The list of basic needs includes such things as:

  • Primary education for all children, including teacher pupil ratios
  • universal access to antimalarial bednets
  • I kilometre of paved road per person
  • nutrition programmes for all vulnerable populations
  • access to modern cooking fuels
  • Access to clean water and sanitation.

To establish these poor countries would need $110 per person per year for 10 years (calculated by the UN for five countries – Bangladesh, Ghana, Cambodia, Tanzania and Uganda.

Of this Sachs believes that households and poor country governments could pay $10 and $35 dollars respectively meaning that $65 per person per year is the finance gap

Who should pay? Basically it breaks down like this…

USA – 50%
Japan – 20%
UK, Germany, France, Italy – 20%.