What's the Problem with Aid?

Simon Roughneen

April 27, 2010

On April 9 and 10, seven of the world's poorest countries met in Timor-Leste (East Timor) to discuss how wealthy aid donor countries are failing in their attempts to help. Calling themselves the g7, in a takeoff of the better-known G7 (comprising the United States, Japan and other wealthy countries), the group discussed how aid could be improved.

Timor-Leste's President Jose Ramos-Horta slammed donors for believing they can do no wrong. A study last year showed that over $8 billion in aid had been spent in his country­Asia's poorest­since 1999. He joked that if this had gone to ordinary Timorese, everyone would have a PhD. However, he did acknowledge that corruption has increased in Timor-Leste, hinting that aid failures cut both ways.

Most of the aid money ultimately comes from Western taxpayers, though this is changing as countries like China get involved. So should the leaders of g7 countries just be grateful and not bite the hands that feeds them?

Not really. Western taxpayers do not always know or care much about aid given by their governments. They are generally more clued-in to one-off donations made in response to disasters or famines, known as "emergency assistance." Often this goes to specialist charities or NGOs, like Oxfam, that provide food, shelter and medical assistance.

This type of "fire fighting" is not being questioned, though it could use some fine-tuning, as seen in Haiti where many destitute earthquake survivors waited for days and weeks to receive help. More controversial is the "development" aid given by wealthy countries to poorer ones, in the form of loans or grants from one government to another, or channeled through the World Bank with aggressive interest.

Development aid aims to help countries overcome poverty, but it has arguably done little to improve the economic well-being of a billion of the world's poorest people, mostly in Africa where aid spending has been highest, measured per head of population. So after an estimated $2.3 trillion of worldwide outlay in the last half-century, the g7 might be doing donors a favor by pointing out their mistakes.

The 29 wealthiest countries have pledged to spend 0.7 percent of their GDP on aid every year by 2012. This aims to help poor countries reach targets known as the Millennium Development Goals by 2020: better education, access to clean water, etc. While this will not be met, due to insufficient political will and the global economic downturn, some say it wouldn't have worked anyway.

One school of thought holds that the "law of diminishing returns" applies to aid: that while the first million dollars has X impact, you get increasingly less of a return for each million spent after that.

Others say that Western countries owe a moral and financial debt to former colonies, and that just as most western countries have a domestic social welfare system, they should apply a similar set of policies to assist poor countries.

Many argue that countries in Africa and elsewhere have become poorer since independence, due to corruption and war, citing examples of aid being siphoned-off into Swiss bank accounts or diverted into military spending.

Others view aid as a form of welfare-pampering, saying that it undermines entrepreneurship. And while some see it as the only hope for poor countries, others believe that is just gets in the way and should be abolished.

Another criticism of aid is that it benefits companies and personnel from the wealthy donor countries more than the people it is intended to help, hence the mocking term "aid industry." Ramos-Horta pointed out the lavish salaries paid to aid consultants working in his country, often exceeding his own or those within the government.

Furthermore, some countries say aid must be conditional, requiring political or economic changes to be made. This can have a positive impact, depending on the recipient (some simply resort to creative accounting).

In any case, donor countries usually have stringent conditions on how aid is used, requiring time-consuming monitoring and evaluation. However, in some cases these conditions push countries with little or no local industry into opening up prematurely to world trade.

In other cases it means aid money must be used to buy goods from the donor country. This might not be a problem, if the donor country is producing the best and cheapest form of the product. But sometimes the donor sends goods, like rice for example, to a country that could produce the same thing locally at a cheaper price. In terms of helping the economy grow, this simply defeats the purpose.

To conclude, perhaps the safest thing to say about this complex and thorny issue is that some well-targeted, corruption-free aid is useful. However, by itself aid will never transform a poor country into a wealthy one.

This article was originally published by The Casual Truth: www.thecasualtruth.com.

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