Welfare fails to save the world

The humanitarian case for aid has been based on an analogy with the Western welfare state. The idea was that many people favour welfare to transfer wealth from the relatively rich to the relatively poor within a country, so they will favour welfare to transfer wealth from relatively rich countries to relatively poor ones.

But many commentators not necessarily hostile to foreign aid, I.M.D. Little and J.M. Clifford for example, disagreed. They emphasised that the humanitarian motive for giving aid may have justified transferring Western taxpayers’ money to poor people, but not to poor governments: the latter may have no effects on the former.

With the likes of Ferdinand Marcos of the Philippines, Jean-Bedel Bokassa of the Central African Republic, Sani Abacha of Nigeria, Joseph Mobutu of the Congo, Robert Mugabe of Zimbabwe and a host of other kleptocratic tropical gangsters in power, aid money has simply been stolen. Many African rulers rely on aid to feed their people while they destroy their livelihoods through a neglect of, and even by destroying, infrastructure. According to New York University professor of economics William Easterly, despite more than $2billion in foreign aid being given to Tanzania for roads, the roads did not improve. What increased was the bureaucracy, with the government producing 2400 reports for the 1000 donor missions that visited each year.

Nor can the poor of the world claim a moral right for welfare transfers from the rich. While recipients of domestic welfare payments depend on the existence of a national society with some commonly accepted moral standard, there is no similar international society within which a right to aid can be established.

The vast majority of foreign aid has failed to alleviate poverty. There are a few cases where it has improved the lot of poor people. The people of Martinique, for example, are probably better off because the French Government provides a very high percentage of their gross domestic product. Also, foreign aid has helped wipe out river blindness in West Africa, keeping 18 million children safe from it.

But statistical studies of the effects of foreign aid on growth and poverty alleviation have not been favourable. A recent study found that foreign aid “appears to redistribute from the reasonably well-off in the West to most income groups in the Third World except the very poorest”. This is consistent with the evidence from both poor and rich countries that the middle classes tend to capture government transfers. Another study found that, after correcting for the link between aid and income levels and growth, the effect of aid on growth is often negative. A survey of other such studies concludes that “there is now widespread scepticism that concessional assistance does have positive effects on growth, poverty reduction or environmental quality”.

In badly run developing countries, governments channel aid to small elites. Poor people in villages and shanty towns never see any aid. Infant and child death rates remain high and women still die in unattended childbirth in countries on which aid is focused.

With the opening of the world’s capital markets to well-run developing countries, what incentives do these countries have to turn to the aid agencies — and their onerous procedures and conditions for loans — when they can borrow more easily from a syndicate put together by the likes of Goldman Sachs?

The foreign aid programs of the past half-century are a historical anomaly. They were a response to the disastrous breakdown of the 20th-century liberal economic order during the interwar period. It has taken a long time to repair the damage, but a new liberal economic order is gradually being reconstructed. The collapse of China’s communist economy and of the Soviet Union and its allies, and theirgrowing integration in the world economic order, have been milestones.

The various palliatives devised to deal with the dreadful woes bred by the past century’s economic breakdowns are becoming more and more redundant. Whether or not there was a time for foreign aid, it is an idea whose time has gone.

Deepak Lal is the professor of international development studies at University of California, Los Angeles, and professor emeritus of political economy at University College, London. He is in Australia to give the Productivity Commission’s Snape lecture and will be speaking to The Centre for Independent Studies tonight.