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Monday, March 12, 2012

Foreign aid: sop to conscience and bad policy


CANBERRA — When India selected 126 French Rafale fighter aircraft (£13 billion) over the U.K.-manufactured Typhoon involving a consortium of European countries, some British politicians and commentators demanded that aid to "ungrateful" India, a fast-rising economic power, be stopped.

The press dredged up Finance Minister Pranab Mukherjee's comment that the £280 million annual British aid is "peanuts." India's opposition parties called for U.K. aid to be rejected.

Britain's aid program will continue: The Cameron government has expended too much political capital to justify the aid policy (without cuts) to voters to risk the embarrassment of ending it.

No decision by this Indian government is final until actually implemented. Major defense platform acquisition decisions are made on a balance of several factors: technical specifications (payload, range, maneuverability), costs (initial, maintenance and total life-cycle), technology transfers, joint production, geopolitical partnerships, etc.

In ongoing discussions, Britain would be better off delinking the Typhoon pitch from aid, improving the price and arguing for the diplomatic advantages of having several European partners rather then just France.

That said, it might well be in both countries' interest to terminate the aid program quietly in due course.

The ambivalence on aid is well captured in three books. Jeffrey Sachs ("The End of Poverty") argues that aid will help the world's 1 billion poorest people, caught in a poverty trap, reach the first rung on the ladder of economic development.

But Dambisa Moyo ("Dead Aid") supports a tough-love policy that would stop the tide of well-intentioned money that promotes corruption in government and dependence among citizens.

William Easterly concurs in ("The White Man's Burden"): Successful poverty reduction programs are best achieved through indigenous, ground-level planning, not policy-distorting foreign aid that can sometimes worsen the plight of poor economies.

In theory, development aid fills the gap in capital needed for investment in growth-promoting activity and infrastructure. In reality, aid is often the transfer of money from middle-class taxpayers in rich countries to wealthy elite in poor countries.

For decades, Western aid crowded out private-sector investments and enabled despots to continue with poverty-perpetuating policies. Statistical graphs often show an inverse correlation between aid and growth. Easterly shows that moe than $2 billion in foreign aid to improve Tanzania's roads failed in that goal but did bloat its bureaucracy, with the government having to produce 2,400 reports for the 1,000 donor missions.

Foreign aid often reflects the geopolitical and commercial interests and values of donors. Last October, Britain threatened to cut aid to countries that did not repeal laws banning homosexuality. It gives an alibi to donor countries for subsidies, tariffs, quotas and labor-market restrictions that inflict significant harm on developing countries.

Even emergency humanitarian and disaster-relief operations, mostly above questioning, can have perverse consequences. For example, food delivery, arriving weeks and months after the worst of a famine, depresses food prices to such an extent that local farmers fail to make any profit for their produce and do not sow crops for the following year.

In August 2007, CARE, one of the world's biggest charities, walked away from around $45 million in annual federal financing because American farm products were displacing crops of struggling local farmers in Africa.

Remittances are second only to foreign direct investment as a source of external finance to developing countries. Almost 200 million migrant workers send home over $400 billion annually, three-fourths of it to developing countries. Remittances account for 22, 11, 11 and 4 percent of the respective GDP of Nepal, Bangladesh, Philippines and India. They reach the intended recipients in full without loss to corruption or leakage to the compliance costs of the bureaucracy.

Freeing up the global labor market would be far more beneficial to developing countries than so-called development aid. So would an end to such incidents as the January 2009 seizure of a shipment of generic medicines from India to Brazil by Dutch authorities to protect big European big pharmaceuticals.

Developed countries dole out five times as much in agricultural and manufacturing subsidies to their own farmers and industries as foreign aid. Up to 40 percent of aid is tied to overpriced goods and services from the donor country and the same proportion is eaten up by consultants. Thus the poor stay poor and earn the ire and contempt of politicians (U.S. Sen. Jesse Helms' notoriously described aid as money down a rathole) and citizens alike in the rich countries, while uncompetitive but well-connected businesses and middlemen consultants laugh all the way to the bank.

Instead of aid, we should advocate foreign investment, a deregulated international labor market, an end to trade-distorting production and export subsidies, lowered barriers to imports in international affairs, new bond markets, microfinancing, infrastructure, revised property laws in domestic governance, and confiscation of rulers' wealth in Western havens. The French government is trying to impound the ill-gotten gains of three serving African leaders parked in France. Bravo!

American analyst Christine Fair argues that "The massive infusion of [U.S.] foreign aid has allowed Pakistan to avoid having to choose between guns and butter" — choices that define the democratic process.

Cricketer-turned-politician Imran Khan agrees: U.S. aid "has been a curse for this country ... All [aid] does is stop us from making the reforms that are needed." The West helps to train Pakistan's military, who train and shelter the militants, who kill the West's soldiers. Go figure.

Aid corrupts: Much of the money disappears into the pockets of the well-connected. Aid softens the need for a government to forge a bond with its citizens by raising revenue and redistributing those funds as services. Such a social contract is fundamental to any country's emergence as a robust democracy.

Development depends less on foreign aid and more on reforming the tax code (Bangladesh and Nepal raise less through taxes than overseas remittances) and collecting what is owed from citizens, politicians, businessmen and feudal landlords alike.

Ramesh Thakur is professor of international relations at Asia-Pacific College of Diplomacy, Australian National University, and adjunct professor at the Institute of Ethics, Governance and Law, Griffith University.


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