Trade, Development, and Immigration

Debate: Does foreign aid work?

The topic of foreign aid is controversial amongst development economists and the general public alike.

Many view official forms of assistance as ineffective; more likely to foster corruption and dependency than alleviate poverty in the long term. The introduction of annual aid spending targets – such as those outlined by the United Nations in the 1970s – have fuelled these arguments, leading many to argue that the government should not be committing to help the poor overseas while domestic resources are stretched.

Yet others make the case that development aid, if done strategically, can still be effective. For all its faults, they argue, official assistance has helped accelerate GDP growth among the world’s poorest nations. Instead of clunky and potentially corrupting government-to-government financial transfers, advocates may call for funds to be channelled directly towards affected groups.

Today’s debate blog attempts to grapple with these arguments. Does foreign aid work?

YES, says the IEA’s Development Officer Morgan Schondelmeier

I share many of the concerns of critics of large scale development aid. All too often, funds are misallocated, wasted, or fall into the hands of corrupt governments. Combine this with arbitrary UN targets for foreign aid spending (0.7% of GDP annually), and it’s easy to argue that foreign aid is an expensive virtue-signalling project that achieves very little.

However, we should not give up on the idea of supporting the development of people around the world through aid – we simply need to be more critical of the ways in which aid is allocated.

Foreign aid is most effective when used as a ‘bottom-up’ development tool, which places power and agency in the hands of local communities. There are several reasons for this, rooted in the idea that resources can be most efficiently allocated and used by those who value them most and that increasing personal and economic freedom is a powerful force for growth.

Too often, top-down development schemes are poorly placed to deliver meaningful results in local communities. The very nature of transfer of money or resources from rich Western countries to less developed nations carries with it a sometimes insurmountable hurdle; recipient countries are incredibly distant from Western nations – in a literal, geographic sense and also a ‘metaphorical’, cultural and technological sense.

These differences only exacerbate the difficulties of centrally planning development programmes; there simply is not enough knowledge available to Western powers to determine what is best for local communities without engaging from the bottom up. Even further, continuous failures of development projects erode trust in governments and international agencies as communities are continuously let down or even negatively impacted.

By engaging with communities – from the beginning of a project through to implementation and hopefully eventually creating self-sufficient programmes – several benefits emerge. Projects are more likely to be sustainable, there are fewer unexpected consequences (such as products going to waste or being used for unintended reasons, as with mosquito nets), and community members gain agency by becoming drivers of change. Not only do bottom-up programmes increase general prosperity, provide jobs, and improve technologies, they can foster a valuable sense of personal worth and give individuals more agency and freedom to choose.

Although the rising tide of trade will undoubtedly lift all boats, another important reason for maintaining bottom-up aid development is that it serves as an intermediary between aid used for specific humanitarian responses and the larger benefits of increasing trade. There is still a need for concerted effort in areas such as health, sanitation, and education. Bottom-up development projects are effective at identifying need, creating change, and fostering sustainable growth.

For example, specific projects like those focusing on providing access to clean water or sanitation facilities, creating small enterprises in rural communities to bridge the rural-urban divide, and providing better access to schools, are important steps towards creating a healthier, more productive and prosperous society.

We should certainly reconsider our international development aid strategy. Too much goes to waste, and too little is accomplished. However, there are still tangible benefits from engaging local communities in their own development projects. Bottom-up development has the potential to create lasting economic and socio-political change.

NO, says our Head of Communications, Nerissa Chesterfield

Last week, it was reported that UK spending on overseas aid exceeded £14 billion for the first time. In the grand scheme of total government spending – predicted to exceed £816 billion by the end of this financial year – the amount we spend on foreign aid is fairly innocuous. So, what’s the problem?

Putting aside the question of whether this is sensible use of government funds – particularly when budgets in domestic areas like policing (roughly £460 million p/a) are heavily squeezed – we should also consider the effectiveness of overseas aid as a poverty eradication tool.

The example of Africa, home to the largest proportion of people living in extreme poverty in the world, should give us pause. Billions, even trillions, of pounds worth of aid has been channelled into the continent from Western nations over the past four decades. Some of it has, of course, been put to good use in education and disease prevention. But a much higher proportion has been used ineffectively, in some cases even counterproductively, towards the ultimate goal of lifting people out of poverty for good.

Our current aid strategy encourages dependence and perverse economic incentives. In Africa alone, more than a dozen governments derive more than half their revenue from foreign aid. Much of the aid given to countries like Nigeria – the second largest recipient of UK aid after Pakistan – makes the rich richer, the poor poorer and helps entrench corrupt regimes, while failing to improve the living conditions of millions below the poverty line.

Because the economies of recipient nations are fed by large sums of ‘free cash’, aid deters investment and the promotion of domestic businesses and industries. Large cash transfers politicise economies and centralise power, directing money towards governments – and away from profitable businesses. Instead of engaging in productive activity, interest groups instead compete to control aid funding. In practice, development aid is far more likely to be spent on military equipment or ‘white elephant’ projects than the promotion of economic freedom.

These are hardly recipes for long-term prosperity, which is ultimately borne out of economic growth. And long-lasting growth occurs through free enterprise and free trade.

Take Asia. The World Bank reports show that the vast majority of those lifted out of poverty over the course of the 1980s and 1990s lived in China. The amount of foreign aid China received in that period pales in comparison to that of Africa.

Correlation, not causation, you might say. But pursuing free trade has demonstrably positive effects on global prosperity.

China’s experience proves this, as does the case of South Korea. After the Korean War, the country’s GDP per capita was lower than that of Somalia. Yet today, it is an OECD member and one of the 30 richest countries in the world. It has managed this largely by embracing free trade, and other countries being willing to trade as freely as possible with it.

The Copenhagen Consensus Centre estimates that completing the Doha Round trade negotiation objectives of lowering trade barriers around the world could reduce the number of people living in poverty by 145 million in just over a decade.

Citizens of wealthy countries do, of course, have a moral duty to set aside emergency funding for humanitarian aid and crisis situations. Yet while handing money over might make us feel good in the short term, it will prove an insufficient strategy for long-term poverty alleviation. Only trade liberalisation can do that.

Development Officer

Morgan is Development Officer at the Institute of Economic Affairs. She graduated from the University of Tampa in 2016 with a double major in Government and World Affairs and Economics. While at UT she was an active member in many organisations including the Adam Smith Society, President’s Leadership Fellows, and Alpha Chi Omega. After graduating, she moved to London and achieved a Distinction in her Master’s degree in International Political Economy at King’s College London. Prior to starting with the development department, Morgan worked as an IEA operations intern.

Head of Communications

Nerissa is Head of Communications at the IEA. Prior to joining the IEA, Nerissa was the Development Manager at Business for Britain, and then at Vote Leave where her responsibilities were primarily focused on recruiting support for the campaigns by organising events, and taking the lead on focussed regional and sector specific initiatives. She studied English Literature at the University of Southampton and then went on to obtain an MSc in Public Policy from UCL.

3 thoughts on “Debate: Does foreign aid work?”

  1. Posted 04/12/2018 at 23:10 | Permalink

    I don’t like either of the arguments advanced. Morgan seems to conflate Foreign Aid with governmental Foreign Aid, and Nerissa seems to think that domestic governmental priorities should be considered.
    Surely the free market part or philanthropic part of foreign aid ( typically workers sending remittances to their home countries ) should get some analysis here from Morgan, after all it seems to exceed governmental foreign aid. And if domestic priorities are important ( I don’t think so, but the argument is being advanced ) then Nerissa needs to consider the case for banning or taxing foreign remittances.
    No. For me, governmental foreign aid needs to be decoupled from foreign aid in general and then further broken down into work on communicable diseases ( clearly an externality ), humanitarian or disaster relief, and governmental development aid in general. And then an analysis done as to whether each makes the recipient countries more prosperous. I think that Montalvo, Reynal-Querol, and Besley have already done the analysis, and on development aid it looks bad.

  2. Posted 10/12/2018 at 07:12 | Permalink

    We definitely should not give up on the idea of foreign aid because we know that helping poorer countries can help increase their GDP per capita and gain more wealth, which is beneficial to wealthier nations.

    Foreign aid, in fact, does work, but it does depend on how the help is given. Hans Rosling himself argues that “extreme poverty produces diseases.” Therefore, the majority can easily assume that providing wealth and money to a third world country in extreme poverty would be the solution. However, it must be noted that wealthier countries have access to educational opportunities, leisure, etc, meaning that they are also much likely more politically stable and have fewer conflicts. On the other hand, poor nations usually lack what wealthier countries have, so they are more likely to have corrupt political systems that can potentially misuse the given funds. This is exactly why in the end people from wealthier nations do not see the purpose. Nerissa Chesterfield argues that “much of the aid given to countries … makes the rich richer, the poor poorer and helps entrench corrupt regimes, while failing to improve the living conditions of millions below the poverty line.”However, Chesterfield is making her argument based on the fund being given directly to the government.

    Morgan Schondelmeier makes a better point that “there simply is not enough knowledge available to Western powers to determine what is best for local communities without engaging from the bottom up,” emphasizing that simply handing over funds is not sufficient enough.

    For example, the ELIMIN8 Project by UNICEF focuses on fundraising money in order to provide $1.80 shots that will prevent maternal and neonatal tetanus. There clearly has been a success from this, as this project has successfully eliminated the disease in 45 countries, including many third world countries. This is the appropriate way to aid other countries, where there is direct interaction within need and the local community.

  3. Posted 27/12/2018 at 11:33 | Permalink

    Very energetic article, I enjoyed that bit. Will there be a part 2?

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