Foreign Aid Hinders Development. Discuss.

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  Babatunde Onabajo

via The Lucas Critique

In the same way that the ideological war between imperialism and Third World Socialism distinguished 20th century Africa, with the triumph of Third World Socialism seen from its rapid proliferation within the continent, it is apparent that a new war is to define Africa in the early parts of the 21st century. Namely, what development economist William Easterly – author of The White Man’s Burden – regarded as the standoff between “Planners” and “Searchers”. Planners advocate “top-down” solutions to alleviate poverty whilst Searchers operate through “bottom-up” solutions. Despite their opposing methodologies, both schools of thought share common ground on one notion: No serious emancipation of Africa, and more broadly LEDCs, from poverty can come to fruition in the absence of a market environment.

Onset by Sir John Cowperthwaite’s policy of “positive non-interventionism” (a policy similar to the doctrine of laissez-faire) in 1971, Hong Kong’s industrialization led the International Monetary Fund (IMF) to consider the nation as having progressed to an “advanced economy”, evident mainly from the dramatic increase in it’s per capita income. The case of Hong Kong – how it moved from an impoverished British colony to the global epitome of prosperity – has been heralded within the field of development economics as a success story that serves as a beacon of hope to developing countries. Yet although the ability of the market mechanism to lift nations out of poverty remains unparalleled, the often cited reason for its implementation is based on what Noble prize winner Amartya Sen considered as a misunderstanding of the term “development” in contemporary economic thought. Development should be seen, contrary to the modern emphasis on an increase in utilities and/or income, as an expansion of freedom. Sen perceives freedom to be composed of: political freedoms, economic facilities, social opportunities, transparency guarantees and protective security. The freedom-centred view of development has two advantages. On the one hand, it encompasses the mechanics of development, of which being the free agency of individuals to shape the world around them. On the other, such perspective is holistic in that it assigns equal importance to neglected aspects of development such as mortality rate (which measures the basic freedom to survive), indicating that development’s raison d’être should not, and can not, revolve solely around monetary issues. Synthesizing the views of Easterly and Sen, the question becomes not whether, but how markets can be brought to Africa. Such would advance utilities and incomes hitherto not seen in the continent, thereby adhering to the superficial view of development. Fundamentally, it would give Africans an inalienable right – the freedom to transact, which Sen alludes to as being as natural as the conversations between people – leading to an increase in their general freedom because of the linkage between the aforementioned instrumental freedoms, or as Austrian economist Ludwig von Mises lucidly said: “When men have gained freedom in purely economic relationships they begin to desire it elsewhere”.

The archetypes of the Planners – the IMF and World Bank – have averted from their original purposes and have instead aimed to institute liberalized markets from the top in the developing world. With their array of development aid monies and programmes, it is hoped that that the economies of the recipient nations will transition to a more open market economy – the economic system that has been proven historically as the most likely to bring about development in both its superficial and fundamental form.

But at the heart of the IMF and World Bank’s proposals resides what Easterly sees as the paradox of free markets: Free markets work, but the imposition of free market reforms on the developing world often do not. Indeed, according to Easterly, none of the African nations that were in the world’s top twenty list of structural adjustment loans recipients during 1980-1999 posted the macroeconomic objectives of economic growth and low inflation. At the end of the time period, for instance, Niger saw a per capita economic growth rate of -2.30%; Uganda experienced an inflation rate of 50%, sufficient enough to be classified as hyperinflation. Most significantly, the economic freedom of the twenty nations in 1999, as measured by The Heritage Foundation on a scale of 0-100 (with 100 being economically free) was 55, garnering the rating of “mostly unfree”. Given this rating, it is possible to reverse von Mises’ statement: When men have been deprived freedom in purely economic relationships they begin to be subdued elsewhere. Such truism has unfortunately manifested itself in Africa, which has not only led to a failure to achieve the macroeconomic objectives and a rise in incomes and utilities, but causally speaking, has led to a curtailment of freedom, and therefore, a hindrance on development.

Primarily due to vacuous conditionalities and the characteristic of fungibility, the Planners’ development aid supports the very governments it claims to oppose. Nowhere is this more egregious than the IMF’s history in financially supporting military dictators. In Zaire, Mobutu Sese Soko’s 32-year dictatorship was sustained by the $1.03 billion received in development aid, mostly funnelled by the IMF. The regime was noted for its heinous human rights offences, one amongst many being the execution of political opponents, which is antagonistic to Sen’s conception of political freedom as the “possibility to scrutinize and criticize authorities”. Given the public’s political means to give feedback on Mobutu’s reign was repressed, and if we agree with Clausewitz’s famous dictum that “war is merely the continuation of politics by other means”, it can be deduced that the Planners’ development aid – by it’s act of supporting despotic regimes – often ignites civil war in African nations (the First Congo War that followed Mobutu’s reign was the eventuation of this deduction). Altogether, the Planners’ failure to implement markets results at first, in the recipient nations devoid of economic freedom; ultimately, the disintegration of the social fabric because of a lack of political freedom and high mortality rates from conflicts derived from the issuance of development aid (over 200,000 civilians died in the First Congo War alone).

Since the Planners’ development aid contributes to social polarization in African recipient nations, it logically follows that those at the top of the social hierarchy within these nations have disproportionately higher incomes than those at the bottom (Namibia, for example, has a Gini Coefficient of 70.7; Sweden, 23). From the highly unequal distribution of income – a condition often overlooked in literature favouring free markets – the quantity of savings depends principally on those in the upper echelons of society. This is why studies have shown that savings has a negative correlation with aid. Savings decline as aid increases because the minority who receive aid to liberalize their economies tend to consume rather than save the obtained monies. Whilst economics textbooks laud such phenomenon as boosting aggregate demand, the notion that consumption is more beneficial than saving to an economy is absurd within the Austrian paradigm. Whereas consumer expenditure demands only final goods and services, productive expenditures (which entail savings) demands both capital goods – resulting in a greater quantity of goods and services that can now be produced – and labour – which, via the increased productivity from capital, corresponds into higher wages. A diminution in savings therefore causes a decline in material living standards. Even on the assumption that this financially endowed minority saved most received aid, as suggested by the “average propensity to save”, the absence of economic freedom stemming from their subsidized presence means that new loanable funds that emanate from savings are not utilized by entrepreneurs. It is in many respects, a Catch-22 scenario, with the poor of Africa hurt by the conundrum most.

Development economist Peter Bauer posited that aid was a transfer of money from “poor people in rich countries to rich people in poor countries”. But Bauer was lukewarm in his assertions. As savings diminishes with the issuance of aid, and the “financing gap” (an implication of the Planners’ Harrod-Domar growth model) widens, it is argued that more aid is required for it’s recipients to reach a specified rate of economic growth. The increase in aid from such argument can only lead to a world hindered from development via the deprivation of freedom: On the part of the recipients, with the intensification of the already mentioned consequences; on the part of the donor, an ever-increasing expropriation of incomes by an omnipotent state from its own citizens under the innocuous banner of altruism. The road to serfdom is paved with good intentions, and the Planners’ development aid has played a significant part in the curtailment of freedom in Africa and the entire world.

A consensus is slowly emerging that the global blueprints of the IMF and World Bank have failed to develop LEDCs. Searchers – through microfinance (a bottom-up solution) – have filled the void formed from the loss in the Planners’ popularity. But if history was to serve as any indication of the future, no methodology of development aid will be a panacea to poverty in the developing world. What distinguishes the Searchers’ microfinance, however, is that it lays out a prerequisite for free markets: the ideology of freedom. Herein resides the claim that development aid does not hinder development; on the contrary, the Searchers’ aid cultivates fertile ground for it.

Reconciling the difference in aims between humanitarian and development aid, the Searchers’ aid focuses on the lowest stratum of society and also sets the objective of ensuring that its clients achieve self-sufficiency. In microcredit’s case, where clients are often women (97% with the Grameen Bank), the common tradition amongst African LEDCs of women being “seen and not heard” is rendered void as they become agents of economic and social change. Economic, in that female entrepreneurs disequilibrate market equilibriums (deriving from the Schumpeterian view of entrepreneurship) through the introduction of new goods and services. Social, from the fact that economic change is occurring. The overarching consequence is a greater participation of a segment of African society in their respective nation’s economies development, in turn negating criticisms from the political left of the Planners “creating a world in the image of the West”.

The Planners’ structural adjustment policies, when they are implemented, result in the immediate eradication of social safety nets. Consequently, those adversely affected by the measures (usually women) support the populist rhetoricians who advocate socialism (away from Africa, such can be seen with Venezuela’s Hugo Chavez who refers to Capitalism as an “evil model”) – counterproductive to the Planners’ intentions. The ideology of freedom is therefore advanced through microcredit on multiple fronts. On one front, because clients experience freedom first-hand and associate this with the means to exchange, the case for such economic system is solidified. From this, because clients are in effect, borrowing loans to start a business, microcredit is not an imposition of what is sometimes derisively referred to as “neoliberalism” but rather, a voluntary exchange between two parties, emphasizing the inseparable mechanism of the free market. Just as how the Meiji Emperor of Japan was influenced by Western technology, the range of financial services and freedoms associated with its usage has the greatest potential to cause African citizens to embrace and press for free markets – bringing development in its superficial and fundamental form. It is ideas that endure in the long run, and von Mises himself remarked that LEDCs can not be led to development through mere aid: “What the underdeveloped countries need first is the ideology of economic freedom and private enterprise”.

Contrary to their free market phrase-mongering, the Planners’ aid has made the transition to free markets an almost impossible goal for African nations and many LEDCs, hindering development by curtailing freedom. It is in Africa, as clichéd as some may consider it to be, that the victory of the Planners or Searchers will be most important, not only because it would be the deciding factor of whether the “riddle of history” (why Africa remains poor despite enormous factor endowments) is resolved, but as well as being the continuation of a long-line of struggles, from the abolition of slavery to decolonization, to have an equal footing with the rest of the world.


Bibliography:
Ayodele, Thompson, Franklin Cudjoe, Temba Nolutshungu, Charles Sunwabe, “African Perspectives on Aid: Foreign assistance will not pull Africa out of poverty”
Bandow, Doug, “Economic Freedom or Foreign Aid”
Carden, Art, “Why are wages low in developing countries?”
Central Intelligence Agency, “The World Factbook”
Clausewitz, von Carl, On War (New York, United States: Oxford Press, 2007) pp.10.
Collins, J.L. Carole, “Zaire/Democratic Republic of Congo”
Easterly, William, The White Man’s Burden: Why the west’s efforts to aid the rest have done so much ill and so little good (United States: Penguin Press, 2006)
Freidman, Milton, “The Hong Kong Experiment”
Hazlitt, Henry, The Conquest of Poverty (New York, United States: Arlington House, 1973)
Holcombe, G. Randall, “Entrepreneurship and Economic Growth”, The Quarterly Journal of Austrian Economics 2 (1998), pp.45-60
Ludwig von Mises Institute, “The Quotable Mises”
Moyo, Dambisa, Dead Aid: Why Aid makes things worse and how there is another way for Africa (Penguin Group)
Koopman, Roger, “The cause of freedom begins with me”
Kraus, Wladimir, “The Fallacies of Underconsumptionism”
Sen, Amartya, Development as Freedom (United States: Oxford Press, 1999) pp.3-35.
The Heritage Foundation, “Explore the data”
The Heritage Foundation, “The Keys to an African Economic Renaissance”

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