Under pressure from the “Make Poverty History” campaign, Tony Blair and the other leaders of the world’s richest nations have now agreed a massive increase in aid to Africa. Most people believe that such aid will do good, even if some is syphoned off into luxury houses and Swiss bank accounts. But a new piece of research suggests that this could be wrong. It suggests that the increase in aid might actually make Africa’s problems worse.
A study of 86 developing countries by Dr Tomi Ovaska of Regina University in Canada shows a strong link between development aid and poor economic peformance. According to his work, every rise of one percentage point in the proportion of an economy’s dependance on aid is associated with a 3.6 per cent drop in that country’s output.
This does not necessarily prove that aid causes economies to fail. Statistics like this show a relationship and some will argue that the aid is the consequence of economic problems, not the other way around.
But people of good faith need to consider whether, instead, Western aid has unintentionally been a root cause of Africa’s economic misery and that the increase now announced could make the Continent’s suffering even worse.
Dr Ovaska looked at the economic record of developing countries around the world and studied how each one performed during five five-year periods between 1975 and 1998. He created various economic models to try to explain the enormously different rates of growth. Like many economists, he put in well-known factors that might help growth like investment, good government, education and so on. Among these variables, Dr Ovaska also put in increases and decreases in development aid.
He created ten different economic models – ten different bundles of assumptions and ways of measuring aid. Again and again, he found that development aid came out as a negative factor.
Dr Ovaska was saddened by the result. He had previously worked on foreign aid for the Finnish government. He was saddened, but not surprised.
He had seen how aid could misdirect effort and funds, how it created large bureaucracies. Now, through his painstaking economic analysis, he has seen that in many countries around the world, nations which have received more aid have not gone on to achieve more economic growth. On the contrary, they have done worse.
This may seem strange and perverse. It is difficult to understand why a country should do badly after being given a wad of cash. How could it happen?
One possibility is that big cash injections enable bad governments to survive. Take a government that is corrupt and has destroyed the business enterprise in its economy, thus causing economic failure. That government should collapse having lost all popular support. But if that same government is regarded, in the West, as a unfortunate case and given a great deal of money, suddenly it gets a new lease of life. The money can be spent rewarding those who have been faithful to the regime and perhaps buying arms to fight those who want to overthrow it. In that way aid can prop up a disastrous government and lead a country into even deeper poverty.
In half the countries he studied, Dr Ovaska found that foreign aid accounted for more than 5.4 per cent of their annual economic activity. In Africa the proportion was much higher. According to other research, the average reached a peak of 18 per cent in 1995. In places where aid plays such a major role, the ambitious and well-placed are tempted to think that the easiest way to get rich is by getting into government. Then, as ministers or civil servants, they will be able to get a slice of the cash coming in. In this way aid can have two bad effects. It can act as an encouragement to corruption and it can divert the most able people from building long-term enterprises which would create employment and economic wealth.
The long term story of Africa lends support to Dr Ovaska. Over the past thirty years, the aid given to Africa has more than tripled. But instead of this leading to an increase in the growth rate, it has been followed by the growth rate falling from an annual two per cent to virtually nil.
A small but growing minority of Africans are coming to the same conclusion that, paradoxically, government aid does Africa harm. “Far from fixing Africa’s problems, aid worsens it” says Thompson Ayodele of the Institute of Public Policy Analysis in Nigeria. The important things for growth, he says, are “protection for property rights, effective institutions, clear and enforceable rules, an efficient and prompt judicial system and, above all, freedom to trade”. Most of what he describes is good government. That is what gives businesses a chance to build up and create sustainable growth. His view is supported by Dr Ovaska’s economic analysis which shows good government as by far the biggest positive factor in creating economic success.
There is a real danger that the West’s heavy and now much- increased emphasis on aid could be worse than useless. Far from making poverty history, it could do damage. Africa has become like a welfare dependant – relying on hand-outs and, as a result, losing the resolve to make its own way in the world. The tragedy of Africa’s economic stagnation could be the result of welfare dependancy on the biggest scale the world has ever known.