Foreign aid criticism from 2009 and a shift to 2014 evidence based foreign aid

An article from 2009 discussed how international aid was hurting Africa Money from rich countries has trapped many African nations in a cycle of corruption, slower economic growth and poverty. Cutting off the flow would be far more beneficial. The writer is Dambisa Moyo. She is a former economist at Goldman Sachs, is the author of “Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa.”

Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades.

Even after the very aggressive debt-relief campaigns in the 1990s, African countries still pay close to $20 billion in debt repayments per annum, a stark reminder that aid is not free. In order to keep the system going, debt is repaid at the expense of African education and health care. Well-meaning calls to cancel debt mean little when the cancellation is met with the fresh infusion of aid, and the vicious cycle starts up once again.

There is a 15 page interview with Dambisa Moyo

Foreign Affairs reviews the book. “Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa.”

In 2014, Tom Murphy of the Brookings Institute indicates that an era of evidence based foreign aid is here

GiveDirectly is a new standard because it has proof that evidence-based aid works and what it can actually accomplish. Nongovernmental organizations (NGOs) have often talked about the potential of a given intervention and tell the stories of the people who benefited. Now they will have to talk about evidence.

The charity evaluator, GiveWell, gives charity recommendations based on cost-effectiveness and whether there is proof that what is being done has an impact. It has analyzed 136 charities and has recommended only four: GiveDirectly, Deworm the World, the Against Malaria Foundation and the Schistosomiasis Control Initiative.

Building a well in the middle of a village and claiming that thousands of people were helped is not enough. How does that well improve the health of the community? Are children going to school more often because they are healthier? Is digging a well the best solution to the problem? Research in Kenya for example, has shown that installing a chlorine dispenser near a water point helped reduce the incidence of diarrhea by 40 percent. Costing only $0.50 per person per year, it is a cheap and effective way to ensure people in rural areas get clean water.

The problems with free money at the country level

A constant stream of “free” money is a perfect way to keep an inefficient or simply bad government in power. As aid flows in, there is nothing more for the government to do — it doesn’t need to raise taxes, and as long as it pays the army, it doesn’t have to take account of its disgruntled citizens. No matter that its citizens are disenfranchised (as with no taxation there can be no representation). All the government really needs to do is to court and cater to its foreign donors to stay in power.

Stuck in an aid world of no incentives, there is no reason for governments to seek other, better, more transparent ways of raising development finance (such as accessing the bond market, despite how hard that might be). The aid system encourages poor-country governments to pick up the phone and ask the donor agencies for next capital infusion. It is no wonder that across Africa, over 70% of the public purse comes from foreign aid.

In Ethiopia, where aid constitutes more than 90% of the government budget, a mere 2% of the country’s population has access to mobile phones [in 2009]. (The African country average is around 30%. [2009]

To advance a country’s economic prospects, governments need efficient civil service. But civil service is naturally prone to bureaucracy, and there is always the incipient danger of self-serving cronyism and the desire to bind citizens in endless, time-consuming red tape. What aid does is to make that danger a grim reality. This helps to explain why doing business across much of Africa is a nightmare. In Cameroon, it takes a potential investor around 426 days to perform 15 procedures to gain a business license. What entrepreneur wants to spend 119 days filling out forms to start a business in Angola? He’s much more likely to consider the U.S. (40 days and 19 procedures) or South Korea (17 days and 10 procedures).

Even what may appear as a benign intervention on the surface can have damning consequences. 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. They’ll have to get more aid. And African governments once again get to abdicate their responsibilities.

In a similar vein has been the approach to food aid, which historically has done little to support African farmers.

Proponents of aid are quick to argue that the $13 billion ($100 billion in today’s terms) aid of the post-World War II Marshall Plan helped pull back a broken Europe from the brink of an economic abyss, and that aid could work, and would work, if Africa had a good policy environment.

The aid advocates skirt over the point that the Marshall Plan interventions were short, sharp and finite, unlike the open-ended commitments which imbue governments with a sense of entitlement rather than encouraging innovation. And aid supporters spend little time addressing the mystery of why a country in good working order would seek aid rather than other, better forms of financing. No country has ever achieved economic success by depending on aid to the degree that many African countries do.

The good news is we know what works; what delivers growth and reduces poverty. We know that economies that rely on open-ended commitments of aid almost universally fail, and those that do not depend on aid succeed. The latter is true for economically successful countries such as China and India, and even closer to home, in South Africa and Botswana. Their strategy of development finance emphasizes the important role of entrepreneurship and markets over a staid aid-system of development that preaches hand-outs.

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